Negotiable Instruments Law 2003

8/3/2019 Negotiable Instruments Law 2003

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COMMERCIAL LAW REVIEWERSAINT LOUIS UNIVERSITY BAR OPERATIONS

NEGOTIABLE INSTRUMENTSLAW

(Act No. 2031)

Negotiable Instruments definedA negotiable instrument is a writtencontract for the payment of money whichcomplies with the requirements of Sec. 1of the Negotiable Instruments Law, which,by its form and on its face is intended as asubstitute for money and passes fromhand to hand as money, so as to give theholder in due course the right to hold theinstrument free from defenses available toprior parties.

Functions

The commercial functions of a negotiablepaper are:

1. To supplement the currency of thegovernment;2. To substitute for money andincrease the purchasing medium.

* Note: A negotiable instrument is nota legal tender.

Principal Features and Characteristics

Negotiability1. Accumulation of secondarycontracts

Distinguished from a Non negotiableinstrument

BasisNegotiableInstrument

Non-negotiableInstrument

1.Requisit

es

-contains allthe requisites

of Sec. 1 ofthe NIL.

-does not haveany, some or allof the

requisitesmentioned inthe N.I.L.

2.Transfer

- bynegotiation

- by assignment

3.Rightsacquired

-A holder induecourse canhaverights betterthan histransferor

- A transfereeacquiresrights nobetter thanhis transferor

4.Warranty

- prior partieswarrantpayment

- a prior party

does notwarrantpayment butmerely thelegality of histitle.

5. Lawthatgoverns

- NegotiableInstrumentsLaw

- New CivilCode

Classes of InstrumentPrincipal Classes:a. Promissory Note is an unconditional

promise in writing by one person to anothersigned by the maker engaging to pay ondemand or at a fixed or determinablefuture time, a sum certain in money, toorder or to bearer. (Sec. 184)

b. Bill of Exchange- is an unconditionalorder in writing addressed by one person toanother, signed by the person giving it,requiring the person whom it is addressedto pay on demand or at a fixed ordeterminable future time a sum certain inmoney to order or to bearer. (sec 126)

c. Check - is a bill of exchange drawn on abank payable on demand. (Sec. 185);

- A check is a bill of exchange drawnon a bank payable on demand. Thus, acheck is a written order addressed to abank or person carrying on the business ofbanking, by a party having money in theirhands, requesting them to pay onpresentment, to a person named therein orto bearer or order, a named sum of money.(Moran v. CA, 230 SCRA 799).

Differences between a Promissory Noteand a Bill of Exchange:

Promissory Note Bill of Exchange

1. It contains anunconditional promise

1. It contains anunconditional order

2. There are two (2)original parties, viz;maker and payee

2. There are three (3)original parties, viz;drawer, drawee andpayee

3. The original issuer(maker) is primarilyliable

3. The original issuer(drawer) issecondarily liable

4. Only one

presentment (forpayment) is needed

4. At least two (2)presentments (for

acceptance and forpayment) aregenerally needed.

Differences between a Bill ofExchange and a Check:

BILL OF EXCHANGE CHECK

1. Not necessarilydrawn on a deposit.

The drawee need notbe a bank.

1. It is necessary thata check is drawn on abank deposit. Thedrawee is always a

bank.2. Death of a drawerof a BOE, with theknowledge of thebank, does notrevoke the authorityof the payee to pay.

2. Death of the drawerof a check, with theknowledge of thebank revokes theauthority of thebanker to pay.

3. May be presentedfor payment within a

3. Must be presentedfor payment within a

Prepared by the COMMERCIAL LAW SECTION ChiefMARLON CORPUZ Assistant Chief MA. LOURDES COMTIAG MembersMARLONBACUNO, VOLTAIRE GARCIA, JEANNYLENE ISIP, BEVERLY MANZANO, KATHRYN BOLINAS, LOTTA OBADO, GRESIL SANTOS,

and VENUS DUGAYON. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS 2003.

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COMMERCIAL LAW COMMITTEEChief: Marlon S. Corpuz Assistant Chief: Maria Lourdes L. Comtiag Members: Jennylene T. Isip, Beverly T. Manzano, Voltaire B. Garcia, Marlon P.Bacuno, Kathryn G. Bolinas, Gresil G. Santos, Lotta B. Obado, Venus G. Dugayon


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reasonable time afterits last negotiationbecause it may befurther negotiated.

reasonable time afterits issue.

4. May be payable ondemand or at a fixedor determinablefuture time

4. Always payable ondemand.

OTHER FORMS OF NEGOTIABLEINSTRUMENTS:1. Certificate of deposit issued by banks,

payable to the depositor or his order,or to bearer (CALTEX v. CA, 212 SCRA471)

2. Trade Acceptance;3. Bonds, which are in the nature of a

promissory notes;4. Drafts which are bills of exchange

drawn by one bank upon another;

All of these comply with Sec. 1NIL.

Letters of Credit are notnegotiable.

NON-NEGOTIABLE DOCUMENTS ANDINSTRUMENTS:

- There are some documents verysimilar to, but not, negotiable instruments,because they lack one, some, or all therequirements of a negotiable instrument

under Section 1 of the Negotiable InstrumentsLaw.Examples:

1. Treasury Warrants2. Money Orders3. Warehouse Receipts4. Bills of Lading5. Trust Receipts

LEGAL TENDER- That kind of money which the law compels acreditor to accept in payment of his debtwhen tendered by the debtor in the right

amount.- a negotiable instrument is not a legal tender.

INCIDENTS IN THE LIFE OF ANEGOTIABLE INSTRUMENT(INPADPDND)1. Issue2. Negotiation3. Presentment for acceptance, in certain

kinds of bills of exchange4. Acceptance5. Dishonor for non-acceptance6. Presentment for payment

7. Dishonor by non-payment8. Notice of dishonor9. Discharge

FORM AND INTERPRETATION OFNEGOTIABLE INSTRUMENTS

Requisites of Negotiability in General

An instrument to be negotiable must conformto the following requirements:

1. It must be in writing and signed by themaker or drawer;

2. It must contain an unconditionalpromise or order to pay a sum certainin money;

3. It must be payable on demand or at afixed or determinable future time;

4. It must be payable to order or tobearer;

5. Where the instrument is addressed toa drawee, he must be named orotherwise indicated therein withreasonable certainty.

The validity and negotiable characterof a negotiable instrument are NOTaffected by the fact that:1. It is not dated;2. It does not specify the place where it is

drawn or where it is payable;3. It bears a seal;4. It designates a particular kind of

current money in which payment is tobe made (Sec. 6)

Requisites of a Negotiable PromissoryNote:

1. It must be in writing and signed by themaker;(Relate with Sec. 191)

2. It must contain an unconditionalpromise or order to pay a sum certainin money;

3. It must be payable on demand, or atfixed or determinable future time; and

4. It must be payable to order or tobearer.

Requisites of a Negotiable Bill ofExchange:

1. It must be in writing and signed by themaker;

2. It must contain an unconditional order

to pay a sum certain in money;3. It must be payable on demand or at a

fixed or determinable future time;4. It must be payable to order or to

bearer; and5. The drawee must be named or

otherwise indicated therein withreasonable certainty.

MEANING OF PARTICULARREQUISITES:

UNCONDITIONAL PROMISE OR ORDER- Where the promise or order is made

to depend on a contingent event, it isconditional, and makes the instrument non-negotiable.



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COMMERCIAL LAW COMMITTEEChief: Marlon S. Corpuz Assistant Chief: Maria Lourdes L. Comtiag Members: Jennylene T. Isip, Beverly T. Manzano, Voltaire B. Garcia, Marlon P.Bacuno, Kathryn G. Bolinas, Gresil G. Santos, Lotta B. Obado, Venus G. Dugayon

COMMERCIAL LAW COMMITTEEChief: Marlon S. Corpuz Assistant Chief: Maria Lourdes L. Comtiag Members: Jennylene T. Isip, Beverly T. Manzano, Voltaire B. Garcia, Marlon P.

Bacuno, K

athryn G. Bolinas, Gresil G. Santos, Lotta B. Obado, Venus G. Dugayon


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The conditional nature ofthe promise or order is not effectedby:a. An indication of a particularfund from which the acceptorreimburses himself after paying theholder;b. A statement of thetransaction which gives rise to theinstrument.

Distinction

FUND FORREIMBURSEMENT

PARTICULARFUND FORPAYMENT

1. Drawee pays the

payee from his ownfunds; afterwards,the drawee payshimself from theparticular fundindicated.

1. There is only one

act- the draweepays directly fromthe particular fundindicated. Paymentis subject to thecondition that thefund is sufficient.

2. Particular fundindicated is not thedirect source ofpayment but onlythe source of reimbursement.

2. Particular fundindicated is thedirect source ofpayment.

3. Indication in theinstrument does notaffect theunconditional of thepromise or order

3. Indication in theinstrument makesthe promise ororder conditional.

CERTAINTY OF SUM- The sum is certain if the amount fixed.- The certainty is HOWEVER NOT affectedalthough to be paid:

1. with interests;2. by stated installments;3. by stated installments with

acceleration clause;4. with exchange;5. with cost of collection or attorneys

fees.

Escalation Clause an agreementpertaining to a loan or increased in theevent that the applicable maximum rateof interest is increased by law or by theMonetary Board.

De-escalation Clause an agreementpertaining to a loan or forbearance ofmoney, goods or credits may stipulatethat the rate of interest agreed uponmay be reduced in the event that theapplicable maximum rate of interest isdecreased by law or by the MonetaryBoard.

The presence of an escalation clause or a de-escalation clause or both in the instrument

does not affect the negotiable character ofthe instrument.

Acceleration clause - it is a provision thatupon default in payment of any installment orof interest, the whole shall become due.

PAYABLE IN MONEY

General Rule: If some other act besidespayment of money is promised or ordered,the instrument becomes non-negotiable.

Exceptions:a. Authorizes the sale of collateral securities on default;b. Authorizes confession of

judgment on default;c. Waives the benefit of lawintended to protect the debtor;d. Allows the creditor theoption to require something to be donein lieu of money.

PAYABLE ON DEMANDAn instrument is payable on demand:

a. Where it is expressed to be payable ondemand, at sight or on presentation;

b. Where no period of payment is stated;c. Where the instrument has been issued,

accepted or indorsed after maturity.

DETERMINABLE FUTURE TIME- Future time is determinable in the followingcases:

a. At a fixed period after date or sight;b. On or before a specified fixed or

determinable future time;c. On or at a fixed period after the

occurrence of a specified event,certain to happen, although the exactdate is not certain.

PAYABLE TO ORDER- The instrument is payable to order where

drawn payable to the order of a specifiedperson, or to him or his order.- The payee must be named or otherwiseindicated therein with reasonable certainty.

PAYABLE TO BEARERa. Where it is expressed to be so payable;b. When payable to a person named

therein or bearer;c. When payable to the order of a

fictitious or non-existing person, andsuch fact was known to the drawer ormaker;

d. When the name of the payee is not thename of a person;e. When the only and last indorsement is

an indorsement in blank.

An original bearer instrument remains tobe a bearer instrument even if indorsedspecially and thus can be negotiated bymere delivery.



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COMMERCIAL LAW REVIEWER SAINT LOUIS UNIVERSITY BAR OPERATIONS

When the payee is vaguely designated,the loss will be borne by the party whocaused it the drawer. (Equitable Bankv. IAC, 161 SCRA 518).

RULES AS TO DATESThere are several important principles as todates in negotiable instruments. These are:

1. Where theinstrument, its acceptance, orindorsement is dated, such date ispresumed to be the corresponding truedate; Date is important -2. Where the instrument is payablewithin a specified period after date, orafter acceptance, in which case the dateof the instrument and the date of maturityof the instrument; in these cases, theholder may insert the true date;

a. when the instrument ispayable on demand, the date isnecessary to determine whetherthe instrument was presentedwithin a reasonable time from issuein the case of notes or from lastnegotiation in the case of bills, asthese factors will show whether thelast holder is a holder in due courseor not; andb. when the instrument is aninterest-bearing one, to determinewhen the interest starts to run.

3. Antedating or postdating aninstrument does not affect validity ornegotiability, unless done for an illegal orfraudulent purpose.

Rules on Interpretation of Instruments

1. Discrepancy between the Amount inFigures and that in Words

- the words prevail, but if the wordsare ambiguous, reference will be made to thefigures to fix the amount.

1. Instrument NOT dated

- considered dated on the date of issue2. Conflict between Written and

Printed Provisions- written provisions prevail

3. Interest Provided for, but Nostarting Date was specified- starting date is the date of theinstrument, in the absence of saiddate, from date of issue

4. Instrument Ambiguous- if the instrument is ambiguous suchthat there is doubt whether it is a billor note, the holder may treat it as a

note or a bill at his option.5. Signature on Instrument Does not

Indicate Capacity in Which Made- Where it cannot be determined inwhat capacity a person affixed hissignature to a negotiable instrument,he is deemed to have signed as anindorser. As indorser, his liability underthe instrument is secondary, meaning

that if the party primarily liable cannotpay, the indorser can be made to payby the holder of the instrument.

6. Where Promissory Note wordedPromise to Pay is signed by two(2) makers- Under Section 17 (g) of the NIL andArticle 1216 of the Civil Code, wherethe promissory note was executed

jointly and severally by two or motepersons, the payee of the promissorynote had the right to hold any one ofthe two (2) signers of the promissorynote responsible for the payment ofthe whole amount of the note.(Philippine National Bank v.Concepcion Milling Co., 5 SCRA745).

REAL DEFENSES Those that attach tothe instrument itself and are availableagainst all holders, whether in due courseor not.(WAD FIMMU WIFE)

1. Want of delivery of incompleteinstrument;

2. Alteration;3. Duress amounting to forgery;4. Fraud in factum or fraud in esse

contractus;5. Insanity where the insane person

has a guardian appointed by the

court;6. Minority;7. Marriage in the case of a wife;8. Ultra vires acts of a corporation;

where the corporation is absolutelyprohibited by its charter or statutefrom issuing any commercial paperunder any circumstances;

9. Want of authority of agent;10. Illegality of contract where it is the

contract or instrument itself whichis expressly made illegal bystatute;

11. Forgery;12. Execution of instrument between

public enemies

PERSONAL DEFENSES/ EQUITABLEDEFENSES Those which are availableonly against a person not a holder in duecourse or a subsequent holder who standsin privity with him. (W2A4F2I4N2MU)

1. Want of delivery of completeinstrument;

2. Want of authority of agent where

he has apparent authority.3. Absence or failure of consideration,

partial or total;4. Acquisition of the instrument by

force, duress or fear;5. Acquisition of the instrument by

unlawful means;



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6. Acquisition of the instrument for anillegal consideration;

7. Filling up of blank contrary toauthority given or not withinreasonable time, where theinstrument is delivered;

8. Fraud in inducement;9. Insertion of wrong date in an

instrument, where it is payable at afixed period after date and it isissued undated or where it ispayable at a fixed period after sightand the acceptance is undated;

10. Intoxication;11. Insanity where there is no notice of

insanity on the part of the onecontracting with the insane person;

12. Illegality of contract where theform or consideration is illegal;

13. Negotiation in breach of faith;14. Negotiation under circumstances

that amount to fraud;15. Mistake;16. Ultra vires acts of corporations

where the corporation has thepower to issue negotiable paperbut the issuance was notauthorized for the particularpurpose for which it was issued.

ABNORMAL AND SIMILARLY DEFICIENTNEGOTIABLE INSTRUMENT

A. Causes for Abnormality and Deficiency1. Lack of Essential Requisitesto a contract which are

a. Lawful subject matterb. Considerationc. Consent

2. Lack of regularity in issueby absence of

a. The material particulars of thequestioned instrument, or in theircorrectness;b. Delivery of instrument made

with the knowledge and/orconformity of the maker or thedrawer and with intention ofmaking the transferee a holder ofthe instrument.

EFFECTS OF DEFENSES:A. Effects of Incomplete but delivered NI(Sec 14)

1. Holder has prima facie authority tocomplete the instrument;

2. Completion to be done within a

reasonable time and according to theauthority given;

3. Holder in due course of the instrumentpreviously completed in breach ofinstructions can enforce the same as ifregularly completed.

B. Incomplete and undelivered NI (Sec15)

- If completed and delivered withoutauthority, not a valid contract against aperson who has signed before delivery even inthe hands of HIDC but subsequent holders areliable.

C. Complete but Undelivered Instrument(Sec 16)- Between immediate parties and a remoteparty not a holder in due course, delivery tobe effectual must be made by or under theauthority of the maker, drawer, acceptor orindorser, as the case may be;

a. If the instrument is in the handsof a holder in due course, all priordeliveries are conclusively presumedvalid;b. If the instrument is out of the

hands of the person who signed it, avalid and intentional delivery isdisputably presumed.

D.Absence or Failure of Consideration1. Absence of consideration is the total

lack of consideration, no consideration,or illegal consideration.

2. Failure of consideration is failure ofagreed consideration to materialize.

3. Both absence and failure of consideration are defenses personal tothe prejudiced party, and available

against any person not a holder in duecourse.

E. Forgery - Forgery is the counterfeitmaking or fraudulent alteration of any writing.It may consist of:

1. Signing of anothersname with intent to defraud.2. Alteration of aninstrument in the name, amount,description of payee, etc. with intent todefraud.

General Rule: The signature is whollyinoperative, and no right to retain theinstrument, or to give a dischargetherefore, or to enforce payment thereofagainst any party to it, is acquired throughor under such signature.Exception: The party against whom it issought to enforce such right is precludedfrom setting up the defense of forgery orwant of authority. (Sec. 23)

1. Those who warrant or admit thegenuineness of the signature inquestion. This includes indorsers,

persons negotiating by deliveryand acceptors.2. Those who, by their acts,silence, or negligence are estoppedfrom setting up the defense offorgery.



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F. MATERIAL ALTERATION OFINSTRUMENT- Any alteration which changes the:

1. date,2. sum payable,3. time or place of payment,4. number or relation of the parties,5. medium or currency of payment,6. adds a place of payment wherenone is specified,7. which alters the effect of theinstrument in any respect.

Effect:1. Alteration bya party -- material alteration avoids theinstrument EXCEPT as against the partywho made, authorized or assented to thealteration, and subsequent indorsers.

--Where the altered instrument, however,is in the hands of a holder in due course,not a party to the alteration, he mayenforce payment thereof according to itsoriginal tenor regardless of whether thealteration was innocent or fraudulent.2. Alteration bya stranger (Spoliation) same effect withthat alteration made a party. (Sec. 124)

Accommodation Accommodation is a

legal arrangement under which a personcalled the accommodation party lends hisname and credit to another called theaccommodated party, withoutconsideration.

Effect: A person to whom the instrument thusexecuted is subsequently negotiated, has aright of recourse against the accommodationparty inspite of the formers knowledge thatno consideration passed between theaccommodation and accommodated parties.

Requisites of Accommodation:1. The accommodation party must sign

as maker, drawer, acceptor orindorser;

2. No value is received by theaccommodation party from theaccommodation party; and

3. The purpose is to lend the name. (Josev. CA, 177 SCRA 594).

Accommodation Party Is one who hassigned the instrument as maker, drawer,acceptor, or indorser, without receiving value

therefore, and for the purpose of lending hisname to another person.

A corporation cannot act as anaccommodation party. Such is an ultravires act. (Crisologo v CA, 117SCRA594)

Liability of the Accommodation Party:-The accommodation party is liable on

the instrument to a holder for value

notwithstanding that such holder at the timeof taking the instrument knew him to be onlyan accommodation party. It is a valid defensethat the accommodation party did not receiveany valuable consideration when he executedthe instrument. He is liable to a holder forvalue by virtue of his being anaccommodation party.

*** An accommodation party to anegotiable instrument, inspite of the lack ofconsideration between him and theaccommodated party, is liable to any otherholder NOT to the accommodated party.(Travel-On, Inc. v. CA, et al, 210 SCRA 351).

*** An accommodation partys liabilityas a solidarily party is unconditional party isunconditional and is not affected by an

extension of payment granted by the creditorto the debtor. HOWEVER, where the holderallowed payments by the drawer direct to thecontractor without availing of the deed ofassignment in its favor, said holder is a badfaith holder, NOT a holder in due courseagainst whom an extension to pay granted bythe drawer is a defense by theaccommodation party. (Prudencio v. CA, 143SCRA 6).

*** The liability of an accommodationparty does not extend to corporate

accommodation because the act of thecorporate officers is ultra vires. However,these officers are personally liable. ( Jose v.CA, 177 SCRA 594).

*** A promissory note, with anaccommodation co-maker, used to settle anEstafa case, has an illegality of cause, anddoes not make the accommodation co-makerliable. (United General Industries v. Paler, 112SCRA 404)

***A promissory note with anaccommodation maker, utilized to settle an

estafa case, has an illegal consideration, anddoes not make the co-maker liable. (UnitedIndustries v. Paler, 112 SCRA 404)

RIGHTS OF AN ACCOMMODATIONPARTY

1. Against the Accommodated Party- the accommodation party, if obliged topay to a holder of value, can seekreimbursement from the accommodatedparty.

2. Against the Co-accommodation Party- where a solidary accommodation makerpaid to the bank the balance due on apromissory note, he may seek contributionfrom the other solidary accommodationmaker, in the absence of a contraryagreement between them. This rightssprings from an implied promise betweenthe accommodation makers to share



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equally the burdens resulting from theirexecution of the note. They are jointguarantors of the principal debtor.(Sadaya v. Sevilla).

A solidary accommodation maker may:a. demand from the principal debtor

reimbursement of the amount which hepaid on the promissory note and

b. demand contribution from his co-accommodation maker, without firstdirecting his action against the principaldebtor, PROVIDED that:

b.1. he made the payment by virtueof a judicial demand, or

b.2. the principal debtor is insolvent.

FORGERY IN CHECKS:A. Forgery in Signature of the Drawer ona Check- the drawer is NOT liable and his draweebank cannot charge the drawers account forsaid check because a bank is supposed toknow the signatures of its customers, andbears the damage in case it pays under aforged signature of its drawer-customer.

- the drawee bank is considered as paying outof its own funds and cannot charge thedrawers account. (PNB v. CA, 25 SCRA693)

*** N.B Doctrine of ComparativeNegligence the party whose negligence isthe proximate cause of loss bears the loss.

- the risk of loss must perforce fall on thedrawee bank. However, if the drawee bankcan prove a failure by the customer/drawer toexercise ordinary care that substantiallycontributed to the making of the forgedsignature, the drawer is precluded fromasserting the forgery. If at the same time thedrawee bank was also negligent to the pointof contributing to the loss, then such loss from

the forgery can be apportioned between thenegligent drawer and the negligent bank.(Associated Bank v. CA, 252 SCRA 620).

B. Forgery in the Signature of IndorsersAs a matter of practical significance, problemsarising from forged indorsements of checksmay generally be broken into two (2) types ofcases:

1) where forgery wasaccomplished by a person notassociated with the drawer- forexample a mail robbery; and

2) where the indorsementwas forged by an agent of the drawer.(Gempesaw v. CA, 218 SCRA 682).

As a rule, a drawee bank who has paid acheck on which an indorsement has beenforged cannot charge the drawers account forthe amount of said check. An EXCEPTION tothis rule where the drawer is guilty of such

negligence which causes the bank to honorsuch a check or checks. If a check is stolenfrom the payee, it is quite obvious that thedrawer cannot possibly discover the forgedindorsement by mere examination of hiscancelled check.

EXECUTION AND NEGOTIATION OF THEINSTRUMENT BY AGENTS AND OTHERS

A. By Agents

a. The agent must be authorized.b. He must disclose his principal.c. He must sign for and in behalf of hisprincipal.

Signature per ProcurationA signature per procuration is one made

by an agent with a limited authority tosign, and the principal is bound only ifthe agent acts within the limits of theauthority.- It is made by adding per

procuration, per proc, p.p.under the agents signature.

B. Under a Trade Name or AssumedName

The person signing his trade name orassumed name is liable as if the name werehis own.

C. Indorsements by Minors andDisqualified CorporationsMinors and disqualified corporations, althoughincapacitated to make or draw instruments,can negotiate instruments, transferring validtitles thereto, but are not liable as indorsersunder the said signatures.

LIABILITIES OF PARTIES:

A. Parties PRIMARILY Liable1. Makera. Engages to pay according to the tenor

of the instrumentb. Admits the existence of the payee and

his capacity to indorse.2. Acceptor or the Drawee who

Accepts the Instrumenta. Engages to pay according to the tenor

of his acceptance.b. Admits the existence of the drawer,

the genuineness of his signature, andhis capacity and authority to draw theinstrument.

c. Admits the existence of the payee andhis capacity to indorse.

B. Parties Secondarily Liable1. The Drawer

a. Admits the existence ofthe payee and his capacity toendorse.



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b. Engages that the instrumentwill be accepted or paid by theparty primarily liable.c. Engages that if the instrumentis dishonored and properproceedings are brought, he willpay to the party entitled to be paid.

2. The General Indorsera. Warrantsthe genuineness of the instrumentand in all respects what it purportsto be,

i. his good title to it,ii. the capacity to contract

prior parties, andiii. the instrument is valid

and subsisting.b. Engages that the instrumentwill be paid by the party primarily

liable.c. Engages that if the instrumentis dishonored, and properproceedings are taken, he will payto the other party entitled to bepaid.

*** The collecting bank or last endorsergenerally suffers the loss because it hasthe duty to ascertain the genuineness ofall prior indorsements considering that theact of presenting the check for payment tothe drawee is an assertion that the party

making the presentment has done its dutyto ascertain the genuineness of theindorsements.

***Aside from the warranties as anindorser, the collecting bank is made liablebecause it is privy to the depositor whonegotiated the check because it knowshim, his address and history for being aclient thereof. Thus, it is in a betterposition to detect forgery or irregularity inthe indorsement. (Associated bank v. CA,252 SCRA 620). aka Doctrine of

Comparative Negligence

3. The Irregular Indorser - an irregularindorser is one who affixes his signature inblank on an instrument before delivery.a. Instrument payable to order of third

person irregular indorser liable topayee and to subsequent parties;

b. Instrument payable to order of makeror drawer liable to all partiessubsequent to the maker or drawer;

c. Irregular indorser signs foraccommodation of payee he is liable

to all parties subsequent to the payee.

C. PARTIES WITH LIMITED LIABILITY

1. The Qualified IndorserWarranties of a Qualified Indorsera. 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 tocontract;

d. That he has no knowledge of any factwhich would impair the validity of theinstrument, or render it valueless.

- A qualified indorsement constitutes theindorser a mere assignor of the title to theinstrument. It may be made by adding tothe indorsers signature the wordswithout recourse, sans recourseor any other word of similar import.

- Recourse means resort to aperson who is secondarily liable afterthe default of the person who isprimarily liable. Appellant, by indorsingthe note with recourse, does notmake itself a qualified indorser but a

general indorser who is secondarilyliable because of such indorsement.

2. Person Negotiating by DeliveryA. Warranties

a. That the instrument is genuine andin 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 validityof the instrument, or render it

valueless.B. Warranties extended to immediate

transferee only.

When Secondary Liability Attaches1. Acts needed before secondary liabilityattaches

a. Presentment for payment innotes and presentment for acceptanceand/or payment in bills of exchange;b. Dishonor by non-payment innotes and dishonor by non-acceptanceand/or non-payment in bills of

exchange;c. Notice of dishonor to secondaryparties.

2. Order in which the Indorsers- They are liable in the ORDER in which theirindorsements appear in the instrument thelatter ones having a right of recourse againstthe prior ones.

INCIDENTS IN THE LIFE OF ANINSTRUMENT AFTER ITS

ISSUEA. Negotiation

Negotiation is the transfer of a negotiableinstrument from one person to another as toconstitute the transferee the holder thereof.

1. Negotiation of the wholeinstrument



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As a rule the whole instrument must beindorsed EXCEPT when it was partiallypaid in which case the remainder canbe indorsed.

2. Rights Transferred byNegotiation- Negotiation constitutes the transfereea holder of the instrument. A holder isentitled to collect the instrument fromthe party primarily liable, and ifdishonored, from the secondary parties.He can sue in court on the instrument. Ifthe holder is a holder in due course, hetakes the instrument from the defects oftitle of prior parties, free from defensesof prior parties among themselves, andhe can enforce the instrument for thefull amount thereof against all parties

liable thereon.

Classes of Negotiationa. By Delivery of the Instrument Alone

Negotiation of negotiable instrumentmay be effected by the delivery aloneof the instrument to the transferee inthose negotiable instruments whichare:

originally payable to bearer, or

originally payable to orderinstruments where the lastindorsement is an indorsementin blank.

b. By Indorsements Followed byDelivery

A negotiable instrument payable to theorder of a specified person, or to himor his order, may be negotiated by thepayee by indorsement followed bydelivery of the instrument to theindorsee. Subsequent negotiation maybe made in this manner if the holderwho indorses acquired the instrumentunder a special indorsement.

The payee of the negotiableinstrument acquires no interest withrespect thereto until its delivery tohim. (Development Bank of Rizal v.Sima Wei)

INDORSEMENT legal transactioneffected by the writing of ones own nameat the:

1. back of the instrument or2. upon a paper (allonge) attached

thereto with or without additional

words specifying the person towhom or to whose order theinstrument is to be payablewhereby one not only transferslegal title to the paper transferredbut likewise enters into an impliedguaranty that the instrument willbe duly paid. (sec 31)

General Rule: Indorsementmust be of the entire instrument.

Exception: Where instrumenthas been paid in part, it may beindorsed as to the residue. (Sec 32)

Classes of Indorsements:1. Special the name of the indorsee is

specified.2. Blank is an indorsement which does

not specify the name of the indorsee,and usually consists of the indorserssignature and nothing else, found atthe back of the instrument.

3. Restrictive limits the right of theindorsee by

a. restricting further negotiation,or

b. making the indorsee thecollecting agent of the indorser,or

c. making him (indorsee), atrustee of a person in theindorsement

4. Qualified A qualified indorsement isone where the indorser places underhis signature the words withoutrecourse or the like. The qualifiedindorser does not become liablesecondarily under his indorsement.

5. Conditional the right of the indorseeunder the instrument is made todepend on the happening of thecontingent event stated in theinstrument. Said indorsee mayhowever negotiate the instrumentsucceeding indorsees acquiring right toit subject to the condition in theoriginal indorsement.

6. General7. Regular a regular indorsement is

one placed after the issue of theinstrument.

8. Irregular is one placed in blankbefore issue of the instrument

Effect of Indorsement on InstrumentNegotiable by DELIVERYWhere an instrument negotiable by delivery isindorsed by the holder, he becomes liable asan indorser.



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Effect of Lack of Indorsement on anInstrument Negotiable byIndorsement Followed byDelivery.

Where a holder of an instrumentpayable to order transfers it for valuewithout indorsing it, the transferee isvested with the title, and acquires theright to have the indorsement of thetransferor. For the purpose ofdetermining whether the transferee isa holder in due course or not, thenegotiation takes effect on the date ofindorsement was actually made.

STRIKING OUT OF INDORSEMENTS The holder may STRIKE OUT indorsementsNOT NECESSARY TO HIS TITLE. The indorserwhose indorsement is struck out and allindorsers subsequent to him are relieved fromliability on the instrument.

RIGHTS OF HOLDER:The holder of a negotiable instrument maysue thereunder in his own name, andpayment to him in due course discharges theinstrument.If a promissory note is non-negotiable,subsequent holders can never be holders indue course, but are mere assignees againstwhom defenses may be raised by priorparties. (Consolidated Plywood v. IFC Leasing,149 SCRA 448).

CLASSES OF HOLDERS1. Holder in due Course

- Section 52 (c) provides that aholder in due course is one who takesthe instrument in good faith andfor value; and Section 52 (d)provides that in order that one may bea holder in due course it is necessarythat at the time the instrumentwas negotiated to him he had nonotice of any xxx defect in thetitle of the person negotiating it,

and lastly Section 59 provides thatevery holder is deemed providesthat every holder is deemed primafacie to be a holder in due course.(Vicente R. de Ocampo & Co. v.Gatchalian, 3 SCRA 596).

However, when it is shown that thetitle of any person who has negotiatedthe instrument was defective, theburden is on the holder to prove thathe or some person under whom heclaims acquired the title as holder in

due course. (Bataan Cigar andCigarette Factory, Inc. v. CA, 230 SCRA647).

What constitutes a holder in duecourse?

A holder in due course is a holder who hastaken the instrument under the followingconditions:

1. That it is complete and regular upon itsface;

2. That he became the holder of it beforeit was overdue and without notice thatit had been previously dishonored ifsuch was the fact;

3. That he took it for value and in goodfaith;

4. That at the time it was negotiated tohim he had no notice of any infirmity inthe instrument or defect in the title ofthe person negotiating it.

What constitutes NOTICE OF DEFECT:- To constitute notice of defect in the

title of the person negotiating the same, the

person to whom it is negotiated must haveactual knowledge of such facts that his actionin taking the instrument amount to bad faith.(Constructive knowledge).

Rights of Holder in Due Course:- Like any other holder, a holder in due

course may enforce the instrument and suethereon in his own name.- He also holds the instrument free any defectof title of prior parties, free from defenses ofprior parties among themselves, and he mayenforce payment of the instrument for full

amount thereof, against all parties liablethereon.

*N.B. The fact that the postdated checkswere merely issued as security is not a groundfor the discharge of the instrument as againsta holder in due course. The only grounds arethose outlined in Section 119 of the NIL.(State Investment House, Inc. v. CA, 217SCRA 32).

2. Holder NOT in Due CourseA holder not in due course is one who

became a holder of an instrumentwithout any, some, or all of therequisites under Section 52 of theNegotiable Instruments Law.- Where a holders title is defective orsuspicious, it cannot be stated that thepayee acquired the check without theknowledge of said defect in theholders title and for this reason thepresumption that it is a holder in duecourse or that it acquired theinstrument in good faith does not exist.(Vicente R. Ocampo v. Gatchalian, 3

SCRA 596).

A HOLDER FOR VALUE is one who has allthe requisites for a holder in due courseEXCEPT notice of want of consideration. He isnot necessarily a holder in due course, hence,prior parties may avail of defenses againstsaid holder. (Prudencio v. CA, 143 SCRA 7).



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-In a sale on installment, financed by afinancing company, the latter is not a holderin due course, and the defense of failure ofconsideration may be invoked against it, if thegoods bought are defective and cannot beused by the buyer for the purpose for whichhe bought it. (Consolidated Plywood v. IFCLeasing, 149 SCRA 448).

- A person who became a holder of a cashierscheck indorsed by the person who stole it, isnot a holder in due course, and the issuingbank may refuse to pay the same. (Mesina v.IAC, 145 SCRA 497).

- Where the payee acquired the check undercircumstances which should have put it toinquiry, why the holder had the check andused it to pay his own personal account, the

duty devolved upon it to prove that it actuallyacquired said check in good faith.

- Where a note is acquired by the contract ofmerger or sale between two banks, and thenote is subject to a Holdout Agreement, theholder of that note is NOT a holder in duecourse. (BPI v. CA, 232 SCRA 305).

- The indorsee of a crossed check is a holderNOT in due course, and is subject to thedefenses as if the instrument is non-negotiable.

- The only disadvantage of a holder who is nota holder in due course is that the instrumentis subject to defenses as if it were non-negotiable. (Bataan Cigar and CigaretteFactory, Inc. v. CA, 230 SCRA 647).

Rights of Holder Not in Due Course- A holder not in due course can enforce theinstrument and sue under it in his own name.Prior parties, however, even through remote,can avail against him any defense amongthese prior parties and prevent the said

holder from collecting in whole or in part theamount stated in said instrument.***That a holder is not a holder in due coursedoes not mean that he cannot recover underthe instrument.

DEFENSES OF PRIOR PARTIESAGAINST THE HOLDER

Classes of Defenses1. Real or Absolute Defenses

- a real or absolute defense is adefense which attaches to theinstrument irrespective of the parties

and is predicated on the principle thatthe right sought to be enforced hasnever existed or has ceased to exist.

- A real defense is available againstALL HOLDERS, whether in due courseor not.

2. Personal or Equitable Defenses

- a personal or equitable is a defensegrowing out of an agreement orconduct of a particular person inregard to an instrument which rendersit inequitable for him although ownerof it, to enforce it against thedefendant.

- The defense is available against allholders NOT in due course EXCEPTthose who derive their rights fromholders in due course and who are notparties to any fraud or illegalityaffecting the instrument.

PRESENTMENTA. In Promissory NotesPurpose:

Not necessary to make the maker liable, butis necessary to make the secondary partiesliable.Requisites:For a valid presentment for payment of apromissory note, the following are necessary:

a. made within a reasonable time afterissue;

b. by the holder or his agent;c. to the party liable under it;d. at a reasonable hour on a business

day; ande. at the proper place.

***The holder must exhibit the instrumentto the debtor and should deliver it to saiddebtor if the latter pays.

When NOT requiredPresentment is NOT required:

1. when after due diligence presentmentcannot be made;2. when presentment is waived, and3. when the indorser is an accommodatedparty.

When Instrument Considered DishonoredThe instrument is considered dishonored:

1. when after due presentment for

payment, payment is refused, and2. when presentment being excused, theinstrument is overdue and unpaid.

B. In Bills of ExchangePresentment for AcceptancePurpose:

To get acceptance of the drawee for thepurpose of making him liable primarily as anacceptor. It is also a pre-requisite to theaccrual of secondary liability against thedrawer and the indorser.When necessary

It is necessary in the following cases, viz:a. to fix the maturity date;b. where the bill expressly stipulated

presentment;c. where the bill is drawn payable

elsewhere than at the residence orplace of business of the drawee.

Requisites.



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- Presentment for acceptance must be madewithin a reasonable time, by the holder, or hisagent, to the drawee or his agent at areasonable hour on a business day, before thebill is overdue.When excused

a. where the drawee is dead, hides or is afictitious or incapacitated person;

b. when after due diligence presentmentcannot be made;

c. when acceptance is refused on anothergrounds although presentment isirregular.

When Instrument Dishonored By Non-AcceptanceThe instrument is considered dishonored bynon-acceptance:

a. where such acceptance is refused orcannot be obtained, and

b. where acceptance being excused, thebill is not accepted.

B. Presentment For Payment OfAccepted Bill

PurposeThe purpose of presentment for payment ofan accepted bill is to collect from theacceptor; and if refused, to collect from thesecondary parties.Requisites

- The accepted bill must be presented forpayment within a reasonable time from thelast negotiation by the holder or his agent, tothe acceptor or his agent, at a reasonablehour on a business day, and at the properplace as defined. The bill must be exhibited tothe acceptor and surrendered to him when hepays.When excusedPresentment for payment is excused;

a. when after due diligence, it cannot bemade,

b. when the drawee is a fictitious person,

andc. where there is a waiver of

presentment.

ACCEPTANCE IN BILLS OF EXCHANGE1. Definition: Acceptance is the significationby the drawee of his assent to the order of thedrawer.2. Requisites:- The acceptance must be in writing, signedby the drawee, and must not express that thedrawee will perform his promise by meansother than money payment.

3. How made- The acceptance may be on the bill, on aseparate paper (allonge), and may even be inwriting before the bill is drawn.

- The drawee, if he wants to dishonor,must do so expressly within twenty-four (24) hours from presentment tohim. If he refuses to act, tears the bill,or refuses to return the bill within said

period of twenty-four hours, he isdeemed to have accepted the bill implied acceptance.- A sight draft (usually accompanying aletter of credit in importations) ispayable on demand and needs noacceptance by the drawee. (PrudentialBank v. IAC)

A. Classes of Acceptance1. General and QualifiedGeneral Acceptance a general acceptanceassents without qualification to the order ofthe drawer.Qualified Acceptance it varies the effectof the bill as drawn. The acceptance isqualified if it is:

a. Conditional;b. Partial;

c. Local;d. Qualified as to time;e. Accepted by some or more of the

drawees but not by all.2. Express and Constructive- Acceptance is express if written on theinstrument by the drawee; and constructive, ifdrawee, within twenty four hours frompresentment to him of the instrument,destroys the same, or refuses or fails to returnthe bill accepted or unaccepted.

DISHONOR

1 .In PROMISSORY NOTE- In a promissory note, dishonor by non-payment takes place when it is dulypresented for payment and payment isrefused or cannot be obtained; or ifpresentment is excused, the instrument isoverdue and unpaid.2. In BILLS OF EXCHANGE- In bills of exchange, where the bill ispresented for acceptance and is returneddishonored, or within twenty four hours frompresentment, is not returned accepted orunaccepted, there is a dishonor by non-

acceptance.-There is a dishonor by non-payment if thebill, after it has been accepted is not paidwhen presented for payment, or presentmentbeing excused, is no paid on the date ofmaturity.

MATURITY OF NEGOTIABLEINSTRUMENT:

1. Every negotiable instrument is payable atthe time fixed therein without grace.2. When the day of maturity falls on a Sundayor a Holiday, the instrument is payable on the

next succeeding business day.3. Instruments falling due or payable on aSaturday are also to be presented forpayment on the next succeeding businessday, except when the instrument is payableon demand where it may be the option of theholder to present the instrument for paymentbefore 12:00 noon on Saturday when theentire day is not a holiday. (Sec. 85)



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REQUISITES OF PAYMENT IN DUECOURSE

1. Made at of after maturity.2. Made to the holder.3. In good faith and without notice that theholders title is defective. (Sec. 88)

Good faith refers to the maker or acceptorand not to the holder.

NOTICE OF DISHONORREQUISITES:1. Given by a holder or his agent, or by anyparty who may be compelled by the holder topay. (Sec. 90)2. Given to a secondarily liable party or hisagent. (Sec. 97)3. Given within the periods provided by law.

(Sec. 102)4. Given at the proper place (Secs. 103 & 104)

WHEN NOTICE OF DISHONOR ISDISPENSED WITH:

1. When the party to be notified knows aboutthe dishonor, actually or constructively (Secs.114-117)2. If waived (Sec. 109)When after due diligence, it cannot be given(Sec. 112)

DISCHARGE OF NEGOTIABLE

INSTRUMENT- A release of all the parties liable fromobligations arising thereunder. It renders theinstrument without force and effect and,consequently, it can no longer be negotiated.

WHEN A NEGOTIABLE INSTRUMENT ISDISCHARGED1. By payment in due course by or on

behalf of the principal debtor;

2. Payment by accommodated party;

3. Intentional cancellation by the holder;

4. By any act which will discharge asimple contract for the payment ofmoney. (Sec. 119)

5. When the principal debtor becomesthe holder of the instrument at or aftermaturity in his own right.

BILLS OF EXCHANGE

Bills of Exchange- it is an unconditional order in writing,addressed by one person to another, signed

by the person giving it, requiring the personto whom it is addressed to pay on demand orat a fines or determinable future time a sumcertain in money to order or to bearer.

TYPES OF BILL OF EXCHANGE:

1. Draft a common term for all billsof exchange and they are usedsynonymously.

N.B. In bank drafts, DRAWERand DRAWEE are liable to purchaser of

draft for not complying with hisinstructions.2. Trade Acceptance a bill of

exchange payable to order and at acertain maturity, drawn by a selleragainst the purchaser of goods asdrawee, for a fixed sum of money,showing on its face the acceptanceof the purchaser of the goods andthat it has arisen out of a purchaseby goods by the acceptor.

3. Bankers Acceptance a draft ora bill of exchange of which theacceptor is a bank or bankerengaged generally in the businessof granting bankers acceptancecredit. It is similar to a tradeacceptance, the fundamentaldifference being that the bankersacceptance is drawn against a bankinstead of the buyer.

4. Trust Receipt the written orprinted document signed by theentrustee in favor of the entrustercontaining terms and conditionssubstantially complying with theprovisions of PD 115 (Trust ReceiptLaw, which took effect on January21, 1973). No further formality ofexecution or authentication shallbe necessary to the validity of thetrust receipt.

-N.B. It is the ENTRUSTEE NOT theENTRUSTER is the real owner of thetrust receipt.

The liability of the entrustee to theentruster is EX CONTRACTU not exdelicto.

5. Treasury Warrants a treasurywarrant bearing on its face thewords payable from theappropriation for foodadministration is actually anorder for payment out of aparticular fund and is NOTUNCONDITIONAL, and does notfulfill the one of the essentialrequirements of a negotiableinstrument. (Abubakar v. AuditorGeneral)

6. Money Order a species of draftdrawn by the post-office uponanother for an amount of moneydeposited at the first post office bythe person purchasing the moneyorder and payable at the secondoffice to a payee named in theorder.



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N.B. Money order is NOTnegotiable.

7. Clean and Documentary Bills ofExchange Clean bill ofexchange is one to which are notattached to documents of title tobe delivered to the person againstwhom the bill is drawn when heeither accepts or pays the bill.

Documentary Bill of Exchange is one to which areattached documents of title to bedelivered and surrendered to thedrawee when he accepts or paysthe bill.

8. D/A and D/P Bills of Exchange -Documents Against PaymentBill D/P Bill is a sight or time

bill to which are attacheddocuments to be delivered andsurrendered to the drawee when hehas paid the corresponding bill.

Documents Against Acceptance Bill D/A Bill is a time bill to which areattached documents to be delivered andsurrendered to the drawee when heaccepts the bill.

9. Time or usance bills- Sightbills are bills which are payableupon presentation or at sight or ondemand.

Time or usance bills are billswhich are payable at a fixed futuretime or at a determinable futuretime.

Inland Bill of Exchange is a bill whichis or on its face purports to be BOTHdrawn and payable within the PhilippineIslands.

Foreign Bill of Exchange- is a bill whichis, or on its face purports to be, drawn orpayable outside the Philippine Islands.

a. to be drawn in the Philippines butpayable outside thereof; or

b. to be payable in the Philippines butdrawn outside thereof.

Importance of the distinction:

The distinction is important in1. That foreign bills are required to be

protested. Failure to protest foreignbills will discharge persons secondarilyliable thereon.

2. The distinction is also important forthe determination of the lawapplicable.

When bill may be treated as promissorynote.

1. Where the drawer and the drawee arethe person such as, in a draft drawn byan agent on his principal by authorityof the principal.

2. Where the drawee is a fictitiousperson.

3. Where the drawee has no capacity tocontract.

Referee in case of need is the personwhose name was inserted by the drawer ofthe bill and any indorser to whom the holdermay resort in case of need that is in casethe bill is dishonored by non-acceptance or bynon-payment.

N.B. It is the option of the holder to resort tothe referee in case of need or not as he maysee fit.

ACCEPTANCEAcceptance the signification by the draweeof his assent to the order of the drawer.

HOW?- The acceptance must be in writing andsigned by the drawee. (It may be on theinstrument or in a separate paper attached to

the instrument, aka, allonge)- It MUST NOT express that theDRAWEE will perform his promise byany other means than the payment ofmoney.

KINDS OF ACCEPTANCE:1. Actual;2. Constructive;3. General; or4. Qualified.

REQUISITES OF ACTUAL ACCEPTANCE:

- Actual acceptance must be1. in writing, and2. signed by the drawee,3. it must not express that thedrawee will perform his promise byanother means than the payment ofmoney, and4. it must be communicated ordelivered to the holder.

ACCEPTANCE, HOW MADE?- It is usually done by writing across the faceof the bill the word ACCEPTED or words of

similar import, e.g. HONORED, I WILL PAYTHE BILL, SEEN followed by the signatureof the drawee.

- The drawee must sign because without hissignature he would not be bound SeeSection 18, NIL.



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- Acceptance by telegram has been heldsufficient.

N.B. Acceptance is NOT required forCHECKS for the same are payable ondemand.

EFFECT OF ACCEPTANCE:Upon acceptance, the drawee becomes

liable on the bill. The bill becomes in effect anote, the acceptor standing in the place of themaker, and the drawer, in the place of thefirst indorser.

But should the drawee refuse to accept,the payee or the holder has no recourseagainst him but only against the drawer andindorsers, if any.

Is payment equivalent to acceptance?NO, - the payment of a check does not includeor imply its acceptance in the sense that thisword is used in Section 62, NIL.

WHERE BILL MAY BE WRITTEN:- Acceptance may be made

1. on the bill itself, or2. on a separate paper; and if on a

separate papera. it may be acceptance as to an

existing bill; orb. it may be acceptance as to a

non-existing bill.

- If the bill is non-existent, theacceptance on a separate papermust comply with followingrequirements:

i. That the contemplateddrawee shall describethe bill to be drawn andpromise to accept it.

ii. That the bill shall bedrawn within areasonable time after

such promise is written;andiii. That the holder shall

take the bill upon thecredit of the promise.

Section 136.- The drawee is allowed twenty-

four hours after presentment inwhich to decide whether or nothe will accept the bill; theacceptance if given, dates as ofthe day of presentation.

- NOTE: The time allowed beginsfrom the time of delivery andnot after demand for a return ofthe bill and the time forreturning the bill to the holderdoes not begin to run from thedemand for its return but fromthe date of its delivery.

- Drawee bank is NOT entitled to 24hours to decide whether forpayment NOT acceptance. But, ifthe check is presented forcertification, this ruling will notapply, as certification is equivalentto acceptance.

Constructive Acceptance: - this class ofacceptance is NOT in writing.

1. Where the drawee to whom the billis delivered for acceptance,destroys it; or

2. Where the drawee refuses, within24 hours after such delivery orwithin such time as is given him, toreturn the bill accepted or notaccepted.

- If the holder should demandits return before twenty-fourhours, the drawee would berequired to comply on pain ofbeing held as an acceptor; butreturn within twenty-four hoursunaccepted would not be adishonor.

- In all the foregoing, the draweewill be deemed to haveaccepted the bill even if there is

NO ACTUAL WRITTENACCEPTANCE by him.

Instances when a bill may beaccepted:1. Before the bill has been signed by the

drawer;2. Even when the bill is otherwise

incomplete;3. Even when the bill is overdue;4. Even after it has been dishonored by

non-acceptance or by non-payment.

Kinds of Acceptance:

1. General Acceptance assents withoutqualification to the order of the drawer.

Section 140:- An acceptance to pay at a

particular place is a generalacceptance unless it expresslystates that the bill is to be paidthere only and not elsewhere.

2. Qualified Acceptance if in expressterms varies the effect of the bill asdrawn.

Kinds of Qualified Acceptance:

a. Conditional one whichmakes payment by theacceptor dependent on thefulfillment of a condition thereinstated;

b. Partial an acceptance to paypart only of the amount forwhich the bill is drawn;



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c. Local an acceptance to payonlyat a particular place;

d. Qualified as to timee. The acceptance of some or

more drawees but NOT ALL.

- The holder of the bill has theright to require GENERAL

ACCEPTANCE thus he mayREFUSE to take qualifiedacceptance and if he DOES NOTobtain an unqualifiedacceptance he may treat thebill as DISHONORED BY NON-ACCEPTANCE accordingly theholder must give notice ofdishonor.

- Effect of taking qualified

acceptance:

- Where a qualified acceptance istaken THE DRAWER andINDORSERS are dischargedfrom liability on the bill unlessthey have expressly orimpliedly authorized the holderto take qualified acceptance orsubsequently assents thereto.

* When the drawer or indorserreceives notice of qualified

acceptance he must within aREASONABLE TIME express hisdissent to the holder or he will bedeemed to have assented thereto.

PRESENTMENT FOR ACCEPTANCE

Definition: It is the production of a bill ofexchange to the drawee for his acceptance.

GENERAL RULE:

Presentment for acceptance is NOTNECESSARY to render any party to the billliable.

EXCEPTIONS:1. Where the bill is payable aftersight, or in any other case, wherepresentment for acceptance is necessaryin order to fix the maturity of theinstrument; or2. Where the bill is expresslystipulates that it shall be presented foracceptance; or

3. Where the bill is drawn payableelsewhere than at the residence or placeof business of the drawee.

NOTE: In those instances found inSection 143 it is NECESSARY inorder to charge personssecondarily liable to (Section144)

i. to make presentment foracceptance or

ii. to negotiate the billwithin a reasonabletime.

Presentment, how made:-Presentment MUST be made by or onbehalf of the holder:

Requisites:1. It must be presented ata reasonable hour;2. It must be presented ona business day; and3. It must be presentedbefore the bill is overdue.

To WHOM will it be presented?1. To the DRAWEE or some person

authorized to ACCEPT orREFUSE ACCEPTANCE on hisBEHALF; and

2. Where a bill is addressed to twoor more drawees who are notpartners; presentment must bemade to them all unless onehas authority to accept orrefuse acceptance for all, inwhich case presentment may

be made to him only;

3. Where the drawee is deadpresentment may be made tohis personal representative;

4. Where the drawee has beenadjudged a bankrupt or aninsolvent or has made anassignment for the benefit ofcreditors, presentment may bemade to him or to his trustee orassignee.

Days when presentment may be made:

A bill may be presented for acceptanceon ANY DAY on which negotiableinstruments may be presented forpayment.

When SATURDAY is NOT OTHER WISEA HOLIDAY presentment forACCEPTANCE may be made beforetwelve oclock noon on that day.

N.B. The only difference betweenSection 72 and 85 is that underSection 146 there is no distinctionbetween the instruments payable at afixed or determinable future time andinstruments payable on demand.

Where the holder of a bill drawnpayable elsewhere other than the



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place of business or the residence ofthe drawee has no time, with theexercise of reasonable diligence topresent the bill for acceptance beforepresenting it for payment on that dayit falls due THE DELAY CAUSED BYPRESENTING THE BILL FORACCEPTANCE BEFORE PRESENTING ITFOR PAYMENT IS EXCUSED AND DOESNOT DISCHARGE THE DRAWERS ANDINDORSERS.

Instances when PRESENTMENT FORACCEPTANCE IS EXCUSED and A BILLMAY BE TREATED AS DISHONORED BYNON-ACCEPTANCE:

1. Where the drawee is dead, or hasabsconded, or is a fictitious person or aperson not having capacity to contract

by bill;2. Where, after the exercise of

reasonable diligence, presentment cannot be made;

3. Where, although presentment hasbeen irregular, acceptance has beenrefused on some other ground.

When dishonored by non-acceptance.1. When it is duly presented for

acceptance and such an acceptance asis prescribed by this Act is refused orcan not be obtained; or

2. When presentment for acceptance isexcused and the bill is not accepted.

Duty of the holder where bill is notaccepted.

Where a bill is duly presented foracceptance and is not accepted within theprescribed time, the person presenting itmust treat the bill as dishonored by non-acceptance or he loses the right ofrecourse against the drawer andindorsers.

HOW? By giving NOTICE OFDISHONOR or by making a PROTEST whenrequired.

Rights of holder where bill is NOTaccepted:

- An immediate right of recourseagainst the drawer and indorsers accruesto the holder and NO PRESENTMENT forpayment is necessary.

PROTESTIt is a formal statement in writing made

by a notary under his seal of office at therequest of the holder of a bill or note, in whichit is declared that the same was on a certainday presented for payment (or acceptance asthe case may be), and such payment (oracceptance) was refused, whereupon thenotary protests against all parties to such

instrument and declares that they will be heldresponsible for all loss or damage arising fromits dishonor.

It means all the steps or acts accompanyingthe dishonor of a bill or note necessary tocharge an indorser,

Necessity of Protest:Protest is required only for FOREIGN BILLS,

but not for inland bills or notes. HOWEVER,they may also be protested if desired.OMISSION OF PROTEST, where protest isrequired, will DISCHARGE the DRAWER andthe INDORSERS.

Instances when protest is required:

1. Where the foreign bill is dishonoredby non-acceptance;2. Where the foreign bill is dishonoredby non-payment, it not having beendishonored by non-acceptance;3. Where the bill has been acceptedfor honor, it must be protested for non-payment to the acceptor for honor; or4. Where the bill contains a referee incase of need, it must be protested fornon-payment before it is presented forpayment to the referee in case ofneed.

Protest, how made:The protest must be annexed to the bill or

must contain a copy thereof, and must beunder the HAND AND SEAL of the NOTARYmaking it and must specify:

1. The time and place of presentment;2. The fact that presentment was made

and the manner thereof;3. The cause or reason for protesting the

bill;4. The demand made and the manner

given, it any, or the fact that thedrawee or acceptor could not befound.

Reason for requiring protest:- Protest is required:

1. for uniformity in internationaltransactions because most countriesrequire it and2. in order to furnish authenticand satisfactory evidence of thedishonor to the drawer who, from hisresidence abroad, may experiencedifficulty in verifying the matter and

may be forced to rely on therepresentation of the holder.

-Protest may be made by a. A notary public; prb. By any respectable resident of theplace where the bill is dishonored, in



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the presence of two or more crediblewitnesses.

Protest, when made:Protest MUST be made on the day of its

dishonor UNLESS delay is excused*.

* When a bill has been DULY NOTED theprotest may be subsequently extended asof the date of the noting.

DULY NOTED means that a notarypublic jots down on a note on the bill or anpaper attached thereto, or in his registrybook, consisting of his initials or signatureand those matters required to be stated inSection 153.

Protest where made:GENERALLY the protest must be madeat the place where the instrument isdishonored.

EXCEPTION: - where that when the billdrawn payable at the place of business orresidence of some person other than thedrawee has been dishonored by non-acceptance IT MUST BE PROTESTEDFOR NON-PAYMENT AT THE PLACE

WHERE IT IS EXPRESSED TO BEPAYABLE, AND NO FURTHERPRESENTMENT FOR PAYMENT TO, ORDEMADNN ON, THE DRAWEE ISNECESSARY.

A bill MAY BE PROTESTED BEFOREMATURITY aka PROTEST FORBETTER SECURITY

Requisites for Protest for bettersecurity:

- A protest for better security must be made:a. After acceptance;b. But before the date of maturity;andc. When the acceptor has beenadjudged bankrupt and insolvent orhas made an assignment for thebenefit of creditors.

NOTE: Protest is dispensed with by anycircumstances which would dispense withnotice of dishonor.When a - PROTEST MAY BE MADE ON A

COPY OR WRITTEN PARTICULARSTHEREOF.

1. bill is lost or destroyed ; or2. is wrongfully detained from the person

entitled to hold it

ACCEPTANCE FOR HONORAcceptance of a bill made by a stranger to

it before maturity, where the drawee of the

bill refused to accept it, and the bill has beenprotested for non-acceptance or where the billhas been protested for better security.

Purpose for acceptance for honor:An acceptance for honor is done to save

the credit of the parties to the instrument orsome party to it, as the drawer, drawee, orindorser, or somebody else.

Requisites for acceptance for honor:1. The bill must have beenpreviously protested (a) for non-acceptance or (b) for better security;2. The bill is not overdue at thetime of the acceptance for honor;3. The acceptor for honor must bea stranger to the bill.4. The holder must give his

consent.

Acceptance for honor: - acceptancesupra protest how made:

1. It must be in writing;2. It must indicate that it is anacceptance for honor; and3. It must be signed by the acceptorfor honor.

NOTE:It is necessary that the acceptor for

honor MUST APPEAR before a notarypublic and declare that he acceptsthe protested bill in honor of thedrawer or indorser, as the case maybe, and that he will pay it at theappointed time.

The LIABILITY OF THE ACCEPTOR FORHONOR is SECONDARY NOT primary orabsolute.

ACCEPTOR FOR HONOR agrees to pay if:1. presentment for payment has been

made;2. the drawee does not pay;3. the bill is protested for non-payment;

and4. notice of dishonor is given to him.

MATURITY OF A BILL PAYABLE AFTERSIGHT which has been accepted forhonor:Maturity is calculated from the date ofNOTING of the NON-ACCEPTANCE and NOTfrom the date of the acceptance for honor.

Bills which MUST BE PROTESTED FORNON-PAYMENT before it will be

presented for payment:1. Where a dishonored bill has beenaccepted for honor supra protest; or2. Where a dishonored bill contains areferee in case of need.



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Presentment for payment to acceptor forhonor, how made:

1. It must be presented in the placewhere the protest for non-paymentwas made it must be presented NOTLATER than the day following itsmaturity;

2. If it is to be presented in some otherplace other than the place where itwas protested, then it must beforwarded within the time specified inSection 104.

Delay in making presentment is excusedwhen the delay was caused by eventswhich are BEYOND HIS CONTROL andNOT IMPUTABLE TO DEFAULT,MISCONDUCT or NEGLIGENCE.

When a bill is DISHONORED by the ACCEPTOR FOR HONOR it must beprotested for non-payment by him.

Reason:- In order to fix the liability of the indorsers.

PAYMENT FOR HONOR

Requisites for payment for honor:1. The bill has been protested for non-

payment;2. ANY PERSON, even a party thereto

may pay supra protest.

NOTE:As distinguished from acceptancefor honor the acceptor for honorMUST BE A STRANGER. In paymentfor honor the PAYOR SUPRAPROTEST may even be a PARTY tothe instrument.

Form for payment for honor:1. The payment must be attestedby notarial act appended to the protest,

or form an extension to it; and2. The notarial act must be basedin a declaration by the payer for honor.

Procedure for payment for honor:1. The payer or his agent goes toa notary public and declares hisintention to pay the bill and for whosehonor he pays.2. The notary then records thedeclaration in the protest or in aseparate paper attached to it.3. The payor then notifies the

person for whose honor he pays withinreasonable time.

Purpose of payment for honor:Instead of simple negotiation to the

person desiring to pay, payment for honormay be availed of when the holder does notwant to indorse the bill and thereby incur the

liabilities of an indorser or of one negotiatingby mere delivery.

Preference of parties offering to pay forhonor:- The person WHOSE PAYMENT willDISCHARGE MOST PARTIES to the bill is to begiven the preference.

Effects on subsequent parties where billis paid for honor:

1. All parties subsequent to the partyfor whose honor it is paid aredischarged.2. The payer for honor is subrogatedfor and succeeds to both the rights andduties of the holder as regards the partyfor whose honor he pays and all partiesliable to the latter.

Effect if the holder REFUSES to receivepayment supra protest?He losses his right of recourse against anyparty who would have been discharged bysuch payment.

Rights of payer for honor:1. He acquires the rights of theholder under Section 175; and2. He has also the right to receiveboth the bill and the protest.

BILLS IN SET

Bills in set one composed of various parts,each part being numbered and containing areference to the other parts, all of which partsconstitute but one bill.

Purpose of bill in set:In order to increase the probability of the billreaching its destination.

Right of holders where different partsare negotiated:Where two or more parts are negotiated todifferent HOLDERS IN DUE COURSE theHOLDER whose title FIRST ACCRUES ASBETWEEN SUCH HOLDERS is the TRUEOWNER of the bill.

Liability of holder who indorses two ormore parts of a set to different persons:

- He is liable on EVERY SUC HPART; and- EVERY INDORSER SUBSEQUENT

to him is LIABLE on the part he hashimself indorsed AS IF SUCH PARTSWERE SEPARATE BILLS.

Acceptance of bills in set:- The acceptance may be writtenon any part and it must be written onONE PART only.



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Effect if the drawee accepts more thanone part:

- If the drawee ACCEPTS MORE THAN ONE PART and such acceptedparts are negotiated to different holdersin due course he is liable on every partas if it were a separate bill.

Payment by acceptor of bills drawn insets:

- When the acceptor of a billdrawn in a set pays it without requiringthe part bearing his acceptance to bedelivered up to him, and the part atmaturity is outstanding in the hands of aholder in due course he is liable to theholder thereof.

Effect of discharging one of a set:- Where ONE PART OF A BILLDRAWN in a set is discharged bypayment or otherwise THE WHOLE BILLis DISCHARGED except as otherwiseprovided.

PROMISSORY NOTES AND CHECKS

Promissory Note is an unconditionalpromise in writing made by one person toanother, signed by the maker, engaging topay on demand, or at a fixed or determinable

future time, a sum certain in money to orderor bearer.

NOTE:Where a note is drawn to the makersown order, it is NOT complete untilindorsed by him.

Special types of promissory notes:1. Certificate of deposit

- is a written acknowledgment bya bank of the receipt of money

on deposit which the bankpromises to pay to thedepositor, bearer, or to someother person or order.

- It is NOT ipso facto negotiable it must first comply with therequirements provided underSection 1, NIL.

2. Bonds- A promise, under seal, to pay money.- The bond certifies that the issuingcompany is indebted to the bondholderfor the amount specified on the face of

the bond, and contains an agreementof the company to pay the sum at aspecified time in the future, andmeanwhile to pay a specified intereston the principal amount at regularintervals, generally six months apart.

They are negotiable if it the requisitesin Section 1, NIL are complied with.

Classes of Bonds:1. Mortgage bonds;2. Equipment Bonds;3. Collateral trust bonds;4. Guaranteed bonds;5. Debentures; and6. Income bonds;7. Convertible bonds;8. Redeemable Bonds;9. Registered Bonds; and

- Coupon Bonds those which areattached a sheet of dated,numbered and similarly printedcoupons which the bondholder maycut off when due or thereafter.Such coupons may be served anddeposited in a bank, negotiatedbefore the maturity of the interestthey represent, and transferred just

like any commercial paper. Theyare negotiable if it the requisites inSection 1, NIL are complied with.

10.Bank Notes- Are promissory notes of theissuing bank payable to bearer ondemand and intended to circulateas money. They are regarded ascash and pass from hand to handwithout any evidence of titled inthe holder than that which arisesform possession. However, they are

not money.

11.Due Bills- is an instrument whereby oneperson acknowledges hisindebtedness to another.

CHECK is a bill of exchange drawn on abank payable on demand.

NOTE:- Acceptance is NOT required forchecks for the same are PAYABLE ON

DEMAND.

- BP 22 took effect on June 29, 1979.

Special types of checks:1. Cashiers check it is a checkdrawn by the cashier of a bank in thename of the bank against the bank itselfpayable to a third person or order.2. Managers Check a drawnby the manager of a bank in the name ofthe bank against the bank itself payableto a third person. It is similar to the

cashiers check as to effect and use.3. Memorandum Checks acheck on which is written the wordmemorandum, memo, and mem,signifying that the drawer engages topay the bona fide holder absolutely andnot upon a condition to pay uponpresentment and non-payment.



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- If it bounces the drawer can becharged for violation of BP 22.

4. Certified Checks a check onwhich the

Negotiable Instruments Law 2003

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Transcript of Negotiable Instruments Law 2003