Negotiable Instruments

PRELIM

Hector de Leon, 2004 Edition

Questions AnswersWhat constitutes a negotiable instrument (requirements)?

Mnemonic: WUPPaW

Section 1 of NIL:

1. It must be in writing and signed b the maker or drawer2. Must contain an unconditional promise or order to pay a

sum certain in money3. Must be payable on demand, or at a fixed or determinable

future time4. Must be payable to order or to bearer5. Where the instrument is addressed to a drawee, he must

be named or otherwise indicated therein with reasonable certainty.

How to determine the negotiability of an instrument?

To determine the negotiability of an instrument, the following must be considered:

1. The whole of the instrument2. Only what appears on the face of the instrument3. The provisions of the NIL, especially Section 1.

Define Negotiable Instrument Section 1

What is a maker? Person issuing a promissory note

What is a drawer? Person issuing a bill of exchange

Distinguish Promissory Note from Bill of Exchange

Promissory Note Bill of Exchange1. Requirements: Section

1, Items 1, 2, 3, and 4

2. Issuer: Maker

3. The instrument must contain an “unconditional promise”

1. Requirements: Section 1, Items 1 to 5

2. Issuer: Drawer

3. The instrument must contain an “unconditional order”

Why negotiable instrument should be in Nothing could be negotiated or passed from hand to hand if it

writing? is not in writing.

Note: Writing includes not only that which has been written on paper and with a pen or pencil but also that which is in print.

Why is there a need to affix the signature in the instrument?

It shall serve as a prima facie evidence of his intention to be bound as either drawer or maker.

Who has the burden of proof if the signature of the maker or drawer is denied?

The burden of proof is on the holder to show it.

Why an instrument must contain an unconditional promise or order to pay?

Section 3 of NIL

See comments in preceding pages.

Why the instrument must be payable in a sum of money?

Negotiable instruments must be payable in money because money is the one standard of value in actual business. It does not fluctuate in value.

What is a legal tender? Legal tender is that sort of money in which a debt, or other obligation calling for money, may be lawfully paid, if the contract does not specify the medium of payment.

Why the instrument must be payable at a fixed or determinable future time or on demand?

Section 4 and 7 of NIL:

Why the instrument must be payable to order or bearer?

Section 8 and 9 of NIL:

Why is there a need to name the drawee? To enable the payee or holder to know upon whom he is to call for acceptance or payment.

What is a non-negotiable instrument? A non-negotiable instrument is an instrument which is not negotiable, that is, an instrument which does not meet the requirements laid down to qualify an instrument as negotiable one, or an instrument which in its inception was negotiable but has lost its quality of negotiability.

Example: A check payable only to a specified person.

Note: A non-negotiable instrument may not be negotiated but

it may be assigned or transferred.

Define Money Money means what is coined or stamped by public authority and has value fixed by public authority.

Money means cash.

It is a medium of exchange authorized or adopted by a government as part of its currency.

It includes all legal tender.

What is a promissory note? Promissory note is an 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 of certain money to order or to bearer.

A promise to pay a sum of money.

Who are parties to a promissory note? The one who makes the promise and signs the instrument is called the maker, and the party to whom the promise is made or the instrument is payable is called the payee.

What is a holder? Every person to whom an instrument is delivered is a HOLDER.

Sample of promissory note payable to order. August 30, 2004Manila

P10,000.00 For value received, I promise to pay to the order of Piolo Pascual the sum of Ten Thousand (Php 10,000.00) Pesos on or before September 30, 2004 at his house at Pateros, Metro Manila.

(Sgd.) Sam Milby

Sample of promissory note payable to bearer. August 30, 2004Manila

P10,000.00 Two months after date, I promise to pay to Piolo

Pascual or bearer the sum of Ten Thousand (Php 10,000.00) Pesos.

(Sgd.) Sam Milby

If no time of payment expressed on the note, what does it mean? Can it be negotiated?

Yes, it can be negotiated. Where no time for payment is expressed, an instrument is payable on demand.

What is a bill of exchange? A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed determinable future time a sum certain in money to order or to bearer.

An order made by one person to another to pay money to a third person.

Who are original parties to a bill of exchange? 1. Drawer2. Drawee3. Payee

Sample Bill of Exchange October 30, 2004Manila

P10,000.00 Thirty days after date, pay to Piolo Pascual or order the sum of Ten Thousand (Php 10,000.00) Pesos. Value received and charge the same to the account of

(Sgd.) Sam Milby

To Lolita SolisQuezon City

What constitutes certain as to sum? Section 2 of NIL:

The sum payable is a sum certain within the meaning of this Act, although it is to be paid:

a. With interest; orb. By stated installments; orc. By stated installments, with a provision that upon default

in payment of any installment or of interest the whole amount shall become due; or

d. With exchange, whether at fixed rate or at the current rate; or

e. With costs of collection or an attorney’s fee, in case payment shall not be made at maturity.

Examples of Sum to be paid with interest 1. Interest at fixed rate : I promise to pay Piolo or order P10,000.00, with interest at 15% per annum.

2. Interest at increased or reduced rate : I promise to pay Piolo or order P10,000.00 with interest at 18% per annum from date until paid; 15% if paid when due.

3. Accrual/rate of interest not specified : If no date from which interest is to run – computed from the date of the instrument; if no date in the instrument – computed from the issue. If rate is not specified – the legal rate is 6% (Article 2209, civil code, now 12%)

4. Interest usurious - can still be negotiated, the contract remains valid as to the principal only.

What is the meaning of “stated installments”? Stated installments means that:

a. The interest of each installments, andb. The due date of each installment must be fixed in the

instrument.

Example:

I promise to pay Piolo or order the sum of P10,000.00 in two installments as follows: P500.00, on or before November 1, 2004 and P500.00, on or before December 1, 2004.

What are the different forms of stated installments?

1. With an acceleration clause – if installment or interest is not paid, the whole amount shall become due.

2. Acceleration dependent on maker – I promise to pay Piolo or order P10,000.00 with interest at 15% per annum in four equal monthly installments beginning December 1, 2004.

3. Acceleration at option of holder – this is non-negotiable.

What does “with exchange means? Exchange is the charge for the expense of providing funds at the place where the instrument is payable to cover such instrument which is issued at another place.

1. Payment in foreign currency2. Payment with exchange rate

Moses promises to pay Hana or order $1,000.00 with exchange at ¾%

3. Exchange not applicable to inland or domestic bill.

When is a promise or order unconditional? Section 3: An unqualified order or promise to pay is unconditional if:

a. There is an indication of a particular fund out of which reimbursement is to be made, or a particular account to be debited with the amount, or

b. There is a statement of the transaction which gives rise to the instrument

Note: It contains a promise or order to pay.

1. It must be payable absolutely and it is not subject to any condition or contingency.

2. It has the ability to circulate freely from one person to another.

When promissory note contains a promise to pay?

There is an unconditional promise to pay:

1. Implied promise to pay

a. I promiseb. Payablec. To be paidd. I agree to paye. I guaranty to pay

2. Bare acknowledgement of indebtedness does not imply negotiability

3. Use of words of negotiability

When bill of exchange contains an order to pay?

There is an unconditional order to pay

Note: Mere request to pay does not constitute an order, but the word “please” implies a polite command.

When does an instrument becomes payable at a determinable future time?

Section 4:

An instrument is payable at a determinable future time which is expressed to be payable:

a. At a fixed period after date or sight, or1. I promise to pay P or order the sum of P1,000.00 on

September 1, 20042. Sixty days after date, I promise to pay P or order the

sum of P1,000.00.

b. On or before a fixed or determinable future time specified therein, or1. On or before September 1, 2004, I promise to pay P or

order P1,000.002. On or before the start of the next school semester, I

promise to pay P or order P1,000.00

c. On or at a fixed period after the occurrence of a specified event, which is certain to happen, the time of happening be uncertain, or1. Thirty days after the death of his father, I promise to

pay P or order P1,000.00

What is payable upon a contingency mean? Is it negotiable?

It is not negotiable because the order is conditional. The payment is not certain. The event may or may not happen.

Example: Pay P or order the sum of P1,000.00 upon his reaching the age of maturity.

Enumerate exceptions to the non-negotiability clause

Section 5: Provisions with --

1. Sale of collateral securities2. Confession of judgment3. Waiver of benefit granted by law4. Election of holder to require some other act

Enumerate omissions which do not affect the validity and negotiability of instruments.

Omissions Effect1. It is not dated The time it was issued is to

be considered.

No date in the calendar – the nearest date in the

month specified.

2. Does not specify the value given or that any value has been given therefor

3. Does not specify the place where it drawn or the place where it is payable

It is presumed to be the maker’s or drawer’s place of business or his home.

4. Bears a seal

5. Designates a particular kind of current money in which payment is to be made.

When is an instrument considered payable on demand?

Section 7:

An instrument is payable on demand:

a. When it is expressed to be payable on demand or at sight, or on presentation; or

b. In which no time for payment is expressed.

When is an instrument payable to order? Section 8:

The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of:

1. A payee who is not maker, drawer, or drawee2. The drawer or the maker3. The drawee4. Two or more payees jointly5. One or more several payees6. The holder of an office for the time being.

What is the effect when the payee is not named?

There is nobody who could give the order or authority to collect. There would be nobody who could indorse the instrument, and, therefore, there is not point considering it negotiable.

When is an instrument payable to the bearer? Section 9:

The instrument is payable to bearer:

1. When it is expressed to be so payable2. When it is payable to a person named therein or bearer3. When it is payable to the order of a fictitious or non-

existing person, and such fact was known to the person making it so payable

4. When the name of the payee does not purport to be the name of any person

5. When the only or last indorsement is an indorsement in blank

Note: 1 and 2 are bearer instrument. 3, 4, and 5 are called order instrument

What is a bearer instrument? Instrument payable to the bearer which can be transferred by mere delivery without indorsement.

What is the effect of an instrument payable to a dead person?

It shall become an instrument payable to the bearer.

Sample of blank indorsement payable to bearer

Pay to P or order P1,000.00

(Sgd.) R

To WManila

At the back of the endorsement, sign the instrument:

(Sgd.) P

Define Ante-dated An instrument is ante-dated when it contains a date earlier that the true date of its issuance.

Example: Instrument is issued on June 30, 2004 but dated

June 15, 2004.

Define Post-dated Instrument An instrument is post-dated when it contains a date later than the true date of its issuance.

Example: Issued on June 15, 2004 but dated June 30, 2004

When does ante-dated or post-dated instrument takes effect?

On the date it is delivered.

Can date be inserted in case it is omitted in the instrument?

Yes. According to Section 13 of NIL, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly.

What is the effect of inserting a wrong date (material alteration)?

The instrument will become void with respect to the holder or any one claiming under the holder, but not to the subsequent holder in due course.

Note: Kapag holder in due course – pwede niyang ienforce ang instrument as if it has a true date.

What constitutes the insertion of wrong date? It constitutes a material alteration.

What are the steps involved in the issuance of a negotiable instrument?

Section 14:

1. The mechanical act of writing the instruments completely in accordance with the requirements

2. The delivery of the complete instrument by the maker or drawer to the payee or holder

Distinguish Section 14 from Section 15; from Section 16.

Section 14 applies only to incomplete instrument which has been delivered. It raises a personal defense.

Section 15 applies to and incomplete instrument which are undelivered. It raises a real defense.

Section 16 applies to complete instrument which are undelivered.

What are two classes of instruments contemplated in Section 14?

1. FIRST CLASS: Those in which obvious blanks are left at the time that are made or indorsed, of such a character as manifestly to indicate that the instruments are incomplete until such blanks shall be filled up;

2. SECOND CLASS: Those which are apparently complete, containing blanks only because the written matter does not so fully occupy the entire paper as to preclude the insertion of additional words or figures, or both.

Distinguish the two classes of blank instruments.

First class: One who signs or indorses is liable to the bona fide holder on the doctrine of implied authority.

Second class: One who signs or indorses is liable to the bona fide holder on the doctrine of negligence.

What is the rule with regard to Section 14: When instrument is incomplete but delivered?

1. Authority to fill-up the blanks : The holder or the person in possession has prima facie authority to complete an incomplete instrument by filing up the blanks therein.

Suppose M issues a note to P with the space for the date left blank in payment for goods purchased by M from P. This gives prima facie authority to fill-up the blanks.

2. Authority to put any amount

Suppose that M just delivered a blank paper containing his signature to P. There must be a proof of M’s signature.

3. Right against party prior to completion: The instrument may be enforced only against a party prior to completion if filled up strictly in accordance with the authority given and within a reasonable time.

Not a holder in due course cannot recover if the

instrument is filled up in accordance with the authority given and within the reasonable time.

4. Right of holder in due course. Real defense

What is the rule when the instrument is incomplete but not delivered?

Section 15 of NIL:

Where an incomplete instrument has not been delivered, it will NOT, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery.

What are the defenses available to parties? 1. Defenses even against a holder in due course.

M makes a note with the name of the payee in blank. P steals it. P – A – B – C – D, holder in due course.D cannot enforce the note against M. constitutes a forgery.

2. Defenses available to parties prior to delivery.

D can enforce the note against P, A, B, and C because their signature appear on the instrument after delivery, the instrument is valid as to them.

When does delivery become effectual? Section 16 of NIL:

Delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument.

But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed.

And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved.

Define delivery. Define issue. Delivery means transfer of possession, actual or constructive, from one person to another with intent to transfer title thereto.

Issue is defined as the first delivery of the instrument, complete in form, to a person who takes it as holder.

What are the rules when the instrument is mechanically complete?

An undelivered instrument is inoperative because delivery is a prerequisite to liability.

M – P, M keeps it in his drawer.

M is not liable

P cannot acquire rights

M – P, M keeps it in his drawer, P stole it, P – A – B – C – D (has knowledge)

P and D are immediate parties Delivery may be presumed but subject to rebuttal.

M – X – P (for safekeeping, but P has no idea)

P can enforce the instrument as he is not an immediate party with the meaning of Section 16.

M – X – P (for safekeeping, but P has idea)

P cannot enforce it against M because the delivery is conditional or for a special purpose only and not for purpose of transferring the title to the instrument.

Note: If delivery was made or authorized, it may be shown to have been conditional, or for special purpose only, and not for the purpose of transferring the property (title) to the instrument.

What is the rule on conclusive presumption? When the instrument is found in the hand of a person who is a holder in due course, it is conclusively presumed that the delivery thereof is valid and intentional.

However, this does NOT apply to an instrument which is INCOMPLETE.

The defense is only a personal defense NOT a real defense (incomplete instrument).

What is the rule if the construction of the instrument is ambiguous or has omissions?

Section 17 of NIL:

Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply:

a. Where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be had

to the figures to fix the amount;b. Where the instrument provides for the payment of

interest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof;

c. Where the instrument is not dated, it will be considered to be dated as of the time it was issued;

d. Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail;

e. Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election;

f. Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same intended to sign, he is to be deemed an indorser;

g. Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon.

What is the rule if the sum expressed in words and the figures are different?

Example: Pay to the order of P the amount of Five Hundred Pesos (Php 5000.00)

The amount in WORD controls.

What if the words are ambiguous or uncertain?

The marginal figures control.

What of the date when stipulated interest to run is not specified?

The instrument will earn interest from the date of the note or the date of its issue.

If no rate of interest is mentioned, it will draw interest at the legal rate.

What if the date is not stated in the instrument?

An undated instrument is considered dated as of the date of issue (first delivery).

Example: No date, but delivered on October 15, 2005 – the note will be considered dated as of the same time.

What if the written and printed provisions are in conflict?

The WRITTEN provisions control.

What if the instrument was signed by two or more persons?

“I promise to pay” – the two are solidarily liable

“I or we promise to pay” – joint and severally liable

“We promise to pay” – joint liability

What is the liability of a person signing in trade or assumed name?

As a general rule, only persons whose signatures appear on the instrument are liable thereon.

However, there are exceptions: 1. Where a person signs in a trade or assumed name (par. 2,

Section 18).2. The principal is liable if a duly authorized agent signs on

his behalf (Sec.19).3. Forger is liable even if his signature does not appear on

the instrument.4. Where the acceptor makes his acceptance of a bill on a

separate paper.5. Where a person makes a written promise to accept a bill

before it is drawn.

What is the effect of forged signature? A forged indorsement prevents any subsequent party from acquiring any right as against any party whose names appears prior to the forgery.

Exemplify Section 23.

M makes a note payable to the order of P

P – A – X – fraud – B – C.

Can C claim from M and P?

NO.

C cannot claim from M and P because his rights against them are cut-off by a forged signature.

Note: If the note states “in any order” C can claim from M.

Can C go after A?

Can C go after B?

Can B and C go after X?

Can A go after M and P?

C cannot claim from A.

C can claim from B because his signature is genuine and valid.

B and C have a right of recourse against X.

A can recover from M and P because his right against them were not affected by the forgery.

What is the exception to Section 23? 1. If the party against whom it is sought to enforce such is precluded from setting up the forgery or want of authority.

2. Where the forged signature is not necessary to the holder’s title in which the case the forgery may be disregarded.

Who are precluded from setting up the forgery?

1. Those who by their acts, silence, or negligence, are estopped from setting up the defense of forgery.

2. Those who warrant or admit the genuineness of the signature in question.

What defense may be availed under Section 23? (Forgery)

Real defense – even against a holder in due course.

The party alleging forgery has the burden of proof.

What are the two cases of forgery? 1. Forgery of bearer instrument a. The possessor can collect even though it is stolen.b. The owner is liable to a holder in due course.

2. Forgery of order instrument a. Prior parties can claimb. Subsequent parties cannot claimc. The owner is not liable to any person, even to a holder in

due course.

Define value. Section 25 of NIL:

Value is any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time.

Define Consideration. Consideration means an inducement to a contract, that is, the cause, price or impelling influence which induces a contracting party to enter into the contract.

Is it necessary that the consideration must be adequate to be considered valuable?

A valuable consideration need not be adequate. It is sufficient if it is a valuable one.

Are antecedent or pre-existing debt considered a valuable consideration?

Yes. An antecedent or pre-existing debt is a valuable consideration.

What constitutes a holder for value? Section 26 of NIL:

Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time.

A holder for value is one who has given a valuable consideration for the instrument issued or negotiated to him.

Example of holder for value M – P (without consideration) – A (without consideration) – B (with value).

B is deemed a holder for value.

M – P (without consideration) – A (without consideration) – B (with value) – C (as a gift).

C is the holder for value.

What is the rule if the holder for value has lien on the instrument?

Section 27 of NIL:

Where the holder has a lien on the instrument arising either from contract or by implication of law, he is deemed a holder for value to the extent of his lien.

What is the effect of want of consideration? Section 28 of NIL:

Absence or failure of consideration is a matter of defense as against any person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise.

What is the meaning of Absence of Consideration?

Absence of consideration means a total lack of any valid consideration for the contract.

Example:

M – P (promissory note) in payment for a parcel of land which does not exist.

P – A (a holder in due course)

P cannot recover from M because of absence of consideration BUT A can recover from M because absence of consideration

is only a PERSONAL DEFENSE not available against a holder in due course.

What is the meaning of Failure of Consideration?

It means the failure or refusal of one of the parties to do, perform or comply with the consideration agreed upon.

Meaning, there was a consideration but such agreed consideration failed to materialize.

What is an accommodation party? What is the liability of the accommodation party?

Section 29:

An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person.

Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party.

What is the liability of the accommodation party to a holder in due course?

Accommodation party is in effect solidary co-debtor. Therefore, he is liable to a holder in due course.

What are the different kinds of accommodation party?

1. Accommodation maker – promissory note2. Accommodation drawer – bill of exchange3. Accommodation acceptor – accepts promissory note 4. Accommodation indorser – signs in blank a bill or note

What is the difference between an accommodation party and a regular party?

Accommodation party Regular partySigns the instrument without receiving value therefor

Signs the instrument for value

Signs the instrument for the purpose of lending his name to some other person

Not for the purpose of lending his name.

May always show a parol evidence

Cannot limit his personal liability by parol evidence.

Cannot avail the defense of absence or failure of consideration against a

Can avail the defense of absence or failure of consideration against a

holder NOT in due course holder NOT in due course

May sue for reimbursement the subsequent party

May not sue any subsequent party.

What constitutes a negotiation? Section 30:

An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof.

If payable to bearer, it is negotiated by delivery;

if payable to order, it is negotiated by the indorsement of the holder and completed by delivery.

What are the three methods of transferring a negotiable instrument?

1. Issue – the first delivery of the instrument2. Negotiation – involves indorsement3. Assignment

Define Negotiation The transfer of negotiable instrument from one person to another in such a manner as to constitute the transferee the holder thereof.

What are the methods of negotiation for an order instrument?

1. Indorsement of the payee to the holder2. Delivery

What are the methods of negotiation for a bearer instrument?

A mere delivery without indorsement is enough.

Is the payment of a check by the drawee bank constitutes a negotiation?

No. It is not a negotiation and it does not make the bank a holder. The bank is neither the payee not an indorsee.

Define Assignment. Transfer of the title to the instrument.

What happens if an order instrument is delivered without indorsement?

It cannot be negotiated unless indorsed.

Distinguish Negotiation from Assignment. Negotiation AssignmentRefers only to negotiable instruments

Generally refers to an ordinary contract

The transferee is a holder The transferee is an assignee

A holder in due course is subject only to a real defenses

An assignee is subject to both real and personal defenses.

A holder in due course may acquire a better title than that of a prior party.

Assignee merely steps on the shoes of the assignor

Example: A entered into a contract with B. B issued a promissory note that is non-negotiable (the contract is without consideration) to A. B failed to deliver the goods.

Subsequently, B indorsed the note to C. Can C collect from A?

NO. C cannot collect from A because the transfer of the note is not thru negotiation (kasi non-negotiable instrument) but by way of assignment. In assignment, C merely steps on the shoes of B (the assignor).

What are the different kinds of delivery? 1. Constructive delivery 2. Actual delivery

What is the rule if the delivery is conditional? 1. Condition precedent – parol evidence is admissible2. Condition subsequent – parol evidence is not admissible.

How an indorsement is made? Section 31 of the NIL:

Indorsement must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement.

Writing at the back of the instrument.

It is completed by means of delivery.

Is an indorsement to two or more indorsees valid?

No. An instrument which purports to transfer the instrument to two or more indorsees severally is not valid and does not operate as a negotiation of the instrument (Section 32).

Example:

Pay to A P500 and Pay to B P600 – invalidPay to A and B – valid

Is partial indorsement allowed? Yes. Partial indorsement is allowed however, the indorsee must acknowledge receipt or payment of the amount previously paid.

What is a special indorsement? What is a blank indorsement?

Section 34 of the NIL:

A special indorsement specifies the person to whom, or to whose order, the instrument is to be payable, and the indorsement of such indorsee is necessary to the further negotiation of the instrument.

An indorsement in blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be negotiated by delivery.

How to change a blank instrument into a special instrument?

Section 35 of NIL:

The holder may convert a blank indorsement into a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement.

What is a restrictive indorsement? Section 36 of NIL:

An indorsement is restrictive which either:

a. Prohibits the further negotiation of the instrument; orb. Constitutes the indorsee the agent of the indorser; orc. Vests the title in the indorsee in trust for or to the use

of some other persons.

But the mere absence of words implying power to negotiate does not make an indorsement restrictive.

Example of restrictive indorsement. a. Prohibits the further negotiation of the instrument- Pay to A only- Pay to A and to no other person

b. Constitutes the indorsee the agent of the indorser- Pay to A for collection- Pay to A for collection only

c. Vests the title in the indorsee in trust for or to the use of some other persons. - Pay to A for my use- Pay to A for the use of B

What is a qualified indorsement? Section 38 of NIL:

A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument.

It may be made by adding to the indorser's signature the words "without recourse" or any words of similar import. Such an indorsement does not impair the negotiable character of the instrument.

What is the effect of qualified indorsement? It limits the liability of the indorser.

What is a conditional indorsement? Absolute indorsement?

Absolute indorsement is one by which the indorser binds himself to pay, upon no other condition than the failure of prior parties to do so, and of due notice to him such failure.

Conditional indorsement is one by which the indorser adds some other conditions to his liability, that is, where there is some condition in the indorsement.

Example:

Pay to A on completion of the construction by him of my house.

Examples of indorsements Special and restrictive

Pay to A only. (Sgd) P

Special and qualified

Pay to A without recourse.

(Sgd) P

Special and conditional

Pay to A if he marries before he reaches the age of 25.

(Sgd) P

Blank and restrictive

For collection only. (Sgd) A

Blank and qualified

Without recourse. (Sgd) A

Blank and conditional

Payable upon completion of my house in Pateros. (Sgd) A

Special, unrestrictive, unqualified

Pay to A (Sgd) P

What is the effect of special indorsement if the instrument is originally payable to bearer?

Section 42 of NIL:

Where an instrument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to only such holders as make title through his indorsement.

M issues a promissory note to payable to P or bearer and delivers it to P. How can P

By mere delivery.

negotiate the instrument to A? Take note that in Bearer Instrument, mere delivery is enough.

How can A negotiate the instrument to B? Also, by delivery.

Can B recover from P? No, because B did not obtain his title through the indorsement of P.

But B can recover from A (indorser) and M (maker).

What if A indorses the note to B who later delivers it to C, then P is liable to whom?

P is liable to A and B, and A is liable to B.

P and A are liable to C because he obtained his title through delivery and not through indorsement of P and A.

B is also liable to C.

When a holder may strike out his indorsement?

Section 48 of NIL:

The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are thereby relieved from liability on the instrument.

Example:

M – P – X – Y – Z – W (struck out by X)

W can go after M, P and X – all prior indorsers

Because subsequent indorsers are free from liability

What is the effect if the instrument is delivered but not indorsed?

M – P – A (without indorsement)

A is a mere assigneeA should ask P to indorse it – to clean the defect.

A must be a holder in due course – determine the time of actual indorsement.

What is the effect if the prior party renegotiates an instrument?

If a prior party renegotiates an instrument before maturity, he can negotiate the same further. But after paying the holder, he may NOT claim payment from any of the intervening parties.

Example:

M to PP to AA to B ==== prior party

B to C Intervening parties; B cannot collect from themC to D

D to B ==== prior partyB to E

B can only collect from M, P and AE can collect from M, P, A and B

What are the rights of a holder? 1. To sue2. To receive payment

What constitutes a holder in due course? Section 52 of the NIL:

A holder in due course is a holder who has taken the instrument under the following conditions:

a. That it is complete and regular upon its face;b. That he became the holder of it before it was overdue,

and without notice that it has been previously dishonored, if such was the fact;

c. That he took it in good faith and for value;d. That at the time it was negotiated to him, he had no

notice of any infirmity in the instrument or defect in the title of the person negotiating it.

What constitutes a complete and regular instrument?

It is complete if all the requisites for its completeness are present.(Note: An instrument is incomplete when it is wanting in any material particular/s proper to be inserted in a negotiable instrument without which the same will not be complete).

An instrument is regular if it has no defects. To render the instrument irregular, alteration, tampering or erasure must be visible or apparent on the face of the instrument.

Who is a holder in due course? Refers to bona fide holder or bona fide holder for value without notice.

Can a holder of non-negotiable instrument attain the status of a holder in due course?

No, he is a mere assignee.

The fact that the instrument is non-negotiable is a sign of warning to a prospective purchaser and places him on his guard and on inquiry (like caveat emptor).

Who has the burden of proof in a case against a holder in due course?

The one who claims has the burden of proof. (It lies on the person who disputes the presumption.

As a rule, every holder is generally deemed prima facie (prima facie presumption) a holder in due course (Sec. 59).

If a holder has proof of being a holder- the presumption accrues on his favor, he does not have to prove it.

If the indorser’s title is defective – the holder must prove it that he is a holder in due course

Exemplify and state your analogy on Section 59.

P obtained the note of M through fraudP – A – B – C – D

D is presumed to be a holder in due course

If M raised the issue of fraud – the burden is shifted to D – he has to prove that he is a holder in due course.

For example:

M – P –fraud – A – B – C – D

D is presumed to be a holder in due course, because C is a holder in due course. D can recover from M.

M – P – A – fraud – C – D

D can recover from M and P

What is a holder through a holder in due course?

A person who acquires a title from a prior holder who is a holder in due course.

Can a drawee become a holder in due course? No, a drawee cannot be a holder in due course (only the payee – by paying the bill).

What is meant by overdue instrument? An instrument is overdue after the date of maturity.

What is the reckoning date if the instrument is payable on demand?

The date of maturity is determined by the date of presentment.

Promissory note: within the reasonable time after its issue

Bill of exchange: after the last negotiation

Are overdue instruments negotiable? Can it be negotiated?

Yes, an overdue instrument is still negotiable, and although it is subject to defenses existing as a time of transfer.

What is the effect if the instrument is partly overdue and partly not (as in the case of installments)?

It depends.

a. If the instrument became due before transfer, the transferee is not a holder in due course.

b. If the transferee had no notice of payment, he is holder in due course as to the installments to mature in the future.

c. If there is a notice of non-payment, the purchaser cannot be a holder in due course.

Differentiate dishonor by non-acceptance and dishonor by non-payment.

Dishonor by non-acceptance refers only to a bill of exchange and it may occur before the date of its maturity. While dishonor by non-payment can only take place at the time of maturity.

Can overdue or dishonored instrument be negotiated? How? What is its effect?

Yes, it can be negotiated either by indorsement or by delivery to the same extent as before maturity, but:

a. In the case of overdue instruments – the holder cannot be a holder in due course.

b. In the case of dishonored instruments – the holder without notice can be holder in due course.

What is the rule on holders not in due course? Under Section 53, If the negotiation of the instrument is made

outside the reasonable time after its issue, the holder cannot be deemed a holder in due course.

What constitutes a “reasonable time”? The law provides that “regard is to be had to the instrument, the usage of trade or business (if any) with respect to such instruments and the facts of the particular case (Standard –

usually 6 months).

What is the effect of notice of infirmity (defect) before full payment?

Section 54 gives to instances:

1. If no amount has yet been paid – he is relieved from the obligation to make payment.

2. If an amount has been paid – he can be considered holder in due course only to the extent of the amount theretofore paid by him.

What is the meaning of defective title? What constitute a defective title?

Section 55 of NIL:

A title is defective when the instrument, or any signature thereto is obtained:

1. by fraud, duress, or force and fear, or 2. other unlawful means, or 3. for an illegal consideration, or 4. when he negotiates it in breach of faith, or 5. under such circumstances as amount to a fraud

It covers personal or equitable defenses.

What is the objective of Section 55 in connection with Section 56?

To prevent one from becoming a holder in due course who takes the instrument with notice that his transferor is not acting honestly.

To require a thoroughly honest and fair transaction to continue one a holder in due course.

What constitute notice of defect? Section 56 of NIL:

To constitutes notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith.

What other things to be considered under Section 56?

1. Mere negligence to make injuries is not sufficient.2. Knowledge of the infirmity amounts to bad faith.

What is the effect of notice of defect? 1. Destroys the status of a holder as a holder in due course.

2. Opens all defenses

What are the rights of holder in due course? Section 57:

The following are the rights of a holder in due course:

1. He may sue on the instrument on his own name;2. He may receive payment and if the payment is in due

course, the instrument is discharged;3. He holds the instrument free from any defect of title prior

parties;4. He may enforce payment of the instrument for the full

amount Hereof against all parties liable thereon.

What is the importance and foundation of due course holding?

1. A holder in due course acquires a right better than any of his predecessors because he takes the instruments free most of defenses available to prior parties among themselves.

2. Protection for those who holds the instrument in due course – Estoppel.

What defenses are available for a holder in due course? How about for holder not in due course?

Real defenses are available against all persons even as against a holder in due course.

A holder not in due course – subject to all defenses, whether personal or real. (Why? Because he is treated as a mere assignee of the non-negotiable paper.

What are the different types of defenses? 1. Real or absolute defenses2. Personal or equitable defenses

Differentiate Real and Personal Defenses. Real Defenses Personal DefensesReal defenses are those that are available against all parties, both immediate and remote, including the holder in due course.

They are real because they are attached to the res, that is, the instrument itself regardless of the merits or demerits of the holder or

Personal defenses are those which grow out of the agreement or conduct of a particular person in regard to the instrument which renders it inequitable for him, though holding the legal title, to enforce it against the party sought to be made liable but which are not available against a

the conduct or agreement of the parties to it.

Note: It cannot be enforced by the holder because there is not contract to enforce.

Applied to “only” to the person who has made or drawn the instrument.

Usually applied in VOID contracts or instruments.

holder in due course.

They are called personal defenses because they are available only against that person or subsequent holder who stands in privity with him.

In other words, they can be used only between ORIGINAL PARTIES or immediate parties, or against one who is NOT A HOLDER IN DUE COURSE

Examples:

1. Incapacity as far as the incapacitated person is concerned.

2. Want of delivery of incomplete instrument

3. Forgery4. Illegality of contract

when declared by law.5. Duress amounting to

forgery (signature)6. Fraud in factum or fraud

in esse contractus7. Fraudulent alteration by

the holder8. Prescription9. Discharge at or after

maturity10. Other infirmities

appearing on the face of the instrument

Examples:

1. Filing the wrong date2. Filling up of blanks not in

accordance with the authority given and within reasonable time.

3. Want of delivery of complete instrument.

4. Absence or failure of consideration

5. Simple fraud or fraud of inducement

6. Acquisition of instrument (not signature) by duress or force and fear

7. Usury

Differentiate Immediate, Remote, and Prior Parties.

M – P – A – B

Immediate parties: in direct contractual relations to each other.

M makes and delivers his promissory note to P and P endorses it to A, and A to B. M and P are immediate parties.

Pero kapag may intermediary, (example, may inutusan si P to deliver it to M, let say si X), M and P are not immediate parties.

M – P – A – B

Remote parties: is one who takes title to an instrument by negotiation from either the original payee or any subsequent holder.

M and B M and A P and B

M – P – A – B

Prior parties:

M, P and A are prior parties with respect to B

What defenses available to the following persons, if the flow of negotiation is this: M – P – A – B?

A holder in due course is free from personal “defenses available to prior parties among themselves”

M and P - RealP and A - RealA and B – Real

M and A – the prior party can set up real defenses but if A is not a holder in due course, the instrument is subject to ALL defenses.

In such a case, A is a mere assignee and the general rules on contract would apply.

What defenses available to a holder not in due course?

What are their rights?

Only those defenses available under ordinary contracts.

A holder not in due course has the following rights:

1. He may sue on the instrument on its own name2. He may receive payment and if the payment is in due

course, the instrument is discharged

Example: B purchases from A an overdue promissory note signed by M, B is not a holder in due course, but B may recover from M or A, if both has no valid excuse for refusing payment.

3. He is entitled to the instrument but holds it subject to the same defenses as if it were non-negotiable

4. He has all the rights of the holder in due course from whom he derives his title in respect of all the parties prior to such holder, provided he is not a party to any fraud.

Are defenses subject to estoppel? Why? Yes, real and personal defenses are subject to estoppel since the rules and principles governing estoppel generally are applied to commercial instruments.

Example: Forgery may be precluded by estoppel.

Distinguished fraud in factum and fraud in inducement

Fraud in the execution or fraud in factum – it exists in those cases in which a person, without negligence, has signed an instrument which was in fact a negotiable instrument, but was deceived as to the character of the instrument and without knowledge of it.

A tells B that he need the signature of the latter for an autograph, but in fact, the paper was a negotiable instrument.

Fraud in the inducement or simple fraud – it is that which relates to the quality, quantity, value or character of the consideration of the instrument. (Deceit in the its amount or its terms, not its character).

What defenses are available in fraud in factum and fraud in inducement?

Fraud in the execution or fraud in factum – Real defenses because there is no contract (but negligence is not included)

Fraud in the inducement or simple fraud –

What are the rights of purchaser from a holder in due course?

If he acquires the instrument from a person not a holder in due course – the PURCHASER is like those of a transferee of a non-negotiable instrument (he is NOT free from personal defenses)

If he acquires it from a holder in due course – the PURCHASER can have all the rights available to a holder in due course.

Example:

P induced M in its favor P indorsed it to A A has a notice of fraud but indorsed it to B B indorsed it to C

Analogy: C is not a holder in due course but has all the rights (of a holder in due course) kasi he acquires the note from B who is a holder in due course. C is a holder in due course relative to M, P, and A.

B indorsed it to P

P cannot recover because he is a party to the fraud. P is remitted to his original position kahit na B is a holder in due course.

C indorsed it to D, who knows the defect but was not a party to the fraud.

D cannot recover from M, because he did not acquire his title from a holder in due course (C).

Assuming C is a holder in due course, then A reacquires the note.

A cannot recover because he is remitted to its original position. This is not allowed under Section 55.

B (holder in due course) negotiates it to C B reacquires it from C

B will hold the instrument in due course, he is remitted to his original position as a holder in due course.

What are the liabilities of the maker? Section 60:

The maker of a negotiable instrument, by making it, engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse.

What are the classifications of parties 1. Primarily liable

according to their liabilities? a. Maker of a promissory noteb. Acceptor of a bill of exchangec. Certifier of a check

2. Secondarily liablea. Drawer of the billb. Indorser of a note or a bill

3. Not liablea. Drawee until he accepts the instrument

Distinguished primary party from secondary party.

Primarily liable – person who by the terms of the instrument is absolutely required to pay. Unconditionally bound.

Secondarily liable – conditionally bound to pay. Will pay the instrument only after certain conditions have been fulfilled:

1. Due presentment for payment or acceptance to primary party.

2. Dishonor by such party3. Taking of proceedings required by law after dishonor.

Note: maging primary liable sila kapag they sign the instrument (Section 68).

GENERALLY, the liability of the secondary parties ends when the primary party pays the full amount of the instrument.

What is the liability of the drawer? Section 61:

He will pay the amount of the instrument to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder.

What is the liability of the acceptor? Section 62:

The acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance and admits:

a. The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the

instrument; andb. The existence of the payee and his then capacity to

indorse.

Who are deemed indorsers? Section 63:

A person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor, is deemed to be indorser unless he clearly indicates by appropriate words his intention to be bound in some other capacity.

What is the liability of the irregular endorser? Section 64:

Where a person, not otherwise a party to an instrument, places thereon his signature in blank before delivery, he is liable as indorser, in accordance with the following rules:

a. If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent parties.

b. If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all parties subsequent to the maker or drawer.

c. If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee.

What are the warranty of negotiations if done by delivery or indorsement?

Section 65:

Every person negotiating an instrument by delivery or by a qualified indorsement warrants:

a. That the instrument is genuine and in all respects what it purports to be;

b. That he has a good title to it;c. That all prior parties had capacity to contract;d. That he has no knowledge of any fact which would

impair the validity of the instrument or render it valueless.

But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee.

The provisions of subdivision (c) of this section do not apply to a person negotiating public or corporation securities other than bills and notes.

What is the liability of general endorser? Section 66:

Every indorser who indorses without qualification, warrants to all subsequent holders in due course:

a. The matters and things mentioned in subdivisions (a), (b), and (c) of Section 65;

b. That the instrument is, at the time of his indorsement, valid and subsisting.

And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it.

Distinguish General Indorser from Irregular Indorser.

General Indorser Irregular IndorserMakes either special or blank indorsements.

Blank indorsements only

Indorses the instrument after its delivery.

Indorses the instrument before delivery to the payee.

Liable only to subsequent parties

Liable to the payee and subsequent parties

What is the liability of indorser when the paper negotiable is done by delivery?

Section 67:

Where a person places his indorsement on an instrument negotiable by delivery, he incurs all the liability of an indorser

What is the liability of the indorser if negotiation is done by negotiation?

If he indorses specially, he is liable to only the holders who make title through the indorsement

If he indorses without qualification, he incurs liability of a general indorser (liable only to subsequent parties).

What order does a holder becomes liable? Section 68:

As respect one another, indorsers are liable prima facie in the order in which they indorse; but evidence is admissible to show that, as between or among themselves, they have agreed otherwise. Joint payees or joint indorsees who indorse are deemed to indorse jointly and severally.

What is the liability of the broker or agent? Section 69:

Where a broker or other agent negotiates an instrument without indorsement, he incurs all the liabilities prescribed by Section Sixty-five of this Act, unless he discloses the name of his principal and the fact that he is acting only as agent.

MIDTERMWhat is the effect of want of demand on principal debtors?

(Effect of lack of demand)

Section 70:

Presentment for payment is not necessary in order to charge the person primarily liable on the instrument; but if the instrument is, by its terms, payable at a special place, and he is able and willing to pay it there at maturity, such ability and willingness are equivalent to a tender of payment upon his part. But except as herein otherwise provided, presentment for payment is necessary in order to charge the drawer and indorsers.

What is the meaning of presentment for payment

Presentment of payment to the person primarily liable for the purpose of demanding and receiving payment.

When is presentment and demand of payment not necessary?

If the date has passed.IN EFFECT: The holder can sue the maker or the acceptor and presentment and demand of payment are not necessary in order to charge the person primarily liable.

Is presentment necessary to charge the maker or the acceptor?

No, presentment is not required.Example: M – P – Php 1000.00 payable at PNB. P fails to present the note at maturity.

M is still liable to pay the Php 1000.00 and the interest UP TO THE MATURITY (only)

M is not liable to pay the interest AFTER maturity.

Note: Hindi na required ang presentment if the drawer and the drawee is considered a maker – HE IS LIABLE WITHOUT PRESENTMENT.

What are the rules on the presentment for payment?

1. Presentment for payment is not necessary to charge the person primarily liable – BUT THIS IS APPLICABLE ONLY TO NOTES PAYABLE ON DEMAND.

2. Suit may be maintained though no presentment or demand for payment has been made.

What is the effect if presentment is not made? It will not affect the holder but it might put him in the risk if the drawee is INSOLVENT.

Who are secondarily liable? The drawer and indorsers.

Can the holder go directly after the persons secondarily liable?

No, demand for payment must first be made upon the person primarily liable.

What happens if the instrument was not presented to the person primarily liable?

The secondarily liable parties are discharged (unless presentment is excused).

Note: Notice of non-acceptance or non-payment must be given to drawers and indorsers, otherwise kapag hindi sila nabigyan ng notice, they will be RELEASED from liability.

When presentment should be made:

- If not payable on demand?

- If payable on demand?

Presentment must be made on the day it falls due (sa due date) without grace period.

Promissory note - Presentment must be made within a reasonable time after its issue or delivery.

Bill of Exchange - Within reasonable time after the last negotiation (last transfer for value).

What happens if the presentment is done BEFORE the instrument is due?

It was held in William State Bank vs. Clark 208 Pac. 549 that it is not effective and is considered as an improper presentment.

What constitutes a sufficient presentment? Section 72 of NIL:

If the presentment for payment is made:

1. By the holder, or by some person authorized to receive payment on his behalf

2. At a reasonable hour on a business day3. At a proper place as herein defined4. To the person primarily liable on the instrument, or if he is

absent or inaccessible, to any person found at the place where the presentment is made.

Define Presentment. Act of the holder of a negotiable instrument of exhibiting a note to the maker and demanding payment, or showing a bill to the drawee and requesting its acceptance or payment.

What is the effect of present if the following circumstances occur:

a. The instrument is not exhibited?

What is the exception?

b. Demand is through telephone?

c. The demand is informal and not accompanies with presentment?

The presentment would be ineffectual

Exhibition is not necessary if the exhibition is demanded or waived.

It is not sufficient because exhibition of the instrument is not possible.

Not sufficient to dishonor the note and charge the indorser (okay lang).

How is presentment done if the instrument is payable at a bank?

Section 75: Presentment must be made:

a. During banking hoursb. Anytime during the dayc. Before close of banking hours

What is the rule on presentment where the principal debtor is dead?

Section 76:

If the principal debtor is dead, presentment may be made to his EXECUTOR or ADMINISTRATOR if there be one and can be found.

How is presentment done to persons liable as partners?

Section 77:

Presentment may be made to any one of the co-partners or to the agent of one of them.

Note: A dishonor by one is a dishonor by all.

What if the parties are joint debtors, how is presentment executed?

Section 78:

Presentment must be made to all of them to hold the drawer and indorsers on their secondary liability.

When presentment may be dispensed with? Section 82:

Presentment for payment is dispensed with:

a. Where after the exercise of reasonable diligence, presentment cannot be made.

b. Where the drawee is a fictitious personc. By waiver of presentment, express or impliedd. The instrument is overdue and unpaid.

Summarize the rules on presentment for payment.

1. Presentment for payment is not necessary to charge persons primarily liable but is necessary to charge the persons secondarily liable (Sec. 70).

2. In the following cases, presentment for payment is not necessary to charge the persons secondarily liable:a. as to drawerb. as to indorserc. when presentment is dispensed withd. when the bill has been dishonored by non-accpetance.

When is an instrument considered dishonored by non-acceptance?

Section 83:

The instrument is dishonored by non-payment when:

1. it is duly presented for payment and payment is refused or cannot be obtained; or

2. presentment is excused and the instrument is overdue and unpaid.

What is the liability of the person secondarily liable, when the instrument is dishonored?

Section 84:

When the instrument is dishonored by non-payment, an immediate right of recourse to all parties secondarily liable

thereon accrues to the holder.

As to the HOLDER, the persons secondarily liable become the principal debtors.

Define PAYMENT IN DUE COURSE. Payment in due course is payment in the usual course of business.

What constitutes a PAYMENT IN DUE COURSE?

Section 88:

Requisites of payment in due course:

1. Payment must be made AT or AFTER date of maturity.2. Payment must be made to the HOLDER3. Payment must be made in good faith and without notice

that the holder’s title is defective.

Example: M issues a note payable to P or order. The note is indorsed in blank and delivered by P to A from whom it was obtained through fraud by B who presented it to M for payment.

If M had no notice of the fraud, payment by him discharges the note. This would not be so if the payment was made before maturity or M had notice of the fraud when he made the payment.

What is a NOTICE OF DISHONOR? Notice of dishonor is bringing, either verbally or in writing, to the knowledge of the drawer or indorser of an instrument, the fact that a specified negotiable instrument, upon proper proceedings taken, has not been accepted or has not been paid and that the party notified is expected to pay it.

Note: if a notice is given by a notary public, it is called a PROTEST.

To whom notice of dishonor must be given? Section 89:

Notice of dishonor must be given to the DRAWER and each INDORSER, and any drawer or indorser to whom such notice is not given is discharged.

When is the instrument considered A negotiable instrument is considered dishonored:

dishonored?1. If is not accepted when presented for acceptance; or2. If it is not paid when presented for payment at maturity;3. If presentment is excused or waived and the instrument is

past due and unpaid.

What is the OBJECTIVE of giving notice of dishonor?

1. To inform the parties secondarily liable (THE DRAWER OR THE INDORSER) that the maker or acceptor, as the case may be, has failed to meet his engagement.

2. To advise such parties that they will be require to make payment.

What happens if the party (who has the right to issue a notice) failed to give notice of dishonor?

Any drawer or indorser to whom such notice is not given is discharged (meaning, sinong di nabigyan ng notice ay discharged na).

However, although the indorser to whom the notice is not given is discharged, he is still liable for breach of warranties pertaining to the instrument.

What will a party do if he receives the notice of dishonor?

If a party holding a bill of exchange receives notice of its dishonor, he is bound to communicate this to the drawer.

Who are not entitled to notice of dishonor? (Sino ang hindi na kailangang bigyan ng notice?)

The maker and acceptor do not have to be notified, including the joint maker and/or accommodation maker.

Who may give a notice of dishonor? Section 90: Notice may be given:

1. By the holder2. By another on behalf of yhr holder3. By the party to the instrument who may be compelled

to pay it to the holder and who, upon taking it up, would have the right to reimbursement from the party to whom the notice is given

4. By another person on behalf of # 3.

Note: A mere stranger is ineffectual UNLESS he is acting as agent of the party who is entitled to give notice.

Illustrative Case:

M makes a note payable to the order of P. The

1. Pwedeng magbigay ng notice si D or his agent kina P, A, B, and C.

note is indorsed successively as follows:

P – A – B – C – D

Suppose the note is dishonored sa kamay ni D, what will happen? How will the notice be enforced?

D P, A, B C

2. Kung si C lang ang binigyan ni D ng notice, si C ang magbabayad kay D. Pero pwedeng bigyan ni C sina P, A and B para mareimburse siya.

D C (notify P, A, B for reimbursement)

3. Halimbawa si B ang binigyan ni C, pwedeng bigyan ng notice ni B sina P and A.

C B (notify P, A for reimbursement)

4. Si A naman, pwedeng magbigay kay P

B A (si P lang pwede niyang bigyan)

5. But P cannot give notice to A, because A is the subsequent party and P has no right of reimbursement from A.

P A

6. Pero kung si B and binigyan ni D, discharged na si C. Kasi di naman pwedeng magnotify si B kay C kasi subsequent party na si C.

P – A – B – C – D

What is the effect if the notice is given by a party entitled to give notice?

Section 93:

Where notice is given by or on behalf of a party entitled to give notice, it inures to the benefit of the HOLDER and ALL parties SUBSEQUENT to the party to whom the notice is given.

M makes a note payable to P or order. The note is indorsed successively as follows:

P ABCD – Holder (dishonored)E – Subsequent holder

1. D P, A, B C2. The notice given to P operates to the benefit of A, B, and C

and E3. Notice of A inures to the benefit of B, C and E4. Notice of B inures to the benefit of C and E5. Notice of C inures to the benefit of E

“inures to the benefit” means pwedeng i-charge ng isang party ang prior party na nakatanggap ng notice kahit yung

discharged

Suppose the note is dishonored sa kamay ni D, what will happen? What is the effect of the notice if it is given by D to P, A, B, C?

party nay un ang hindi nagbigay ng notice.

Sa example, si D ang nagbigay ng notice sa lahat (P, A, B, C). Kaya if B pays C:

B can go against P or A (for reimbursement) kahit hindi siya ang nagbigay ng notice

ANOTHER SCENARIO:

If D notifies only C:

1. D C

P, A, and B are discharged. However if C gives due notice to P, A, and B, such notice inures to the benefit of D and E

P – A – B – C – D – E

Si C lang ang binigyan ni D. inures to the benefit of D and E.

For the same reason, C’s notice to A inures to the benefit of B, C, D, E. Kaya kahit na hindi nabigyan ni D ng notice si A (for example) A is not discharged if A is notified by C.

What is the rule if the instrument is dishonored in the hands of an agent?

Section 94:

The agent may notify his principal and he may act as if he were the holder.

Example:

P to AA to BB to X (X is an agent of C)The instrument was dishonored in the hand of X.

1. X can give notice to C, his principal2. X can directly give notice to P, A and B

May a notice of dishonor be waived? Yes, a notice of dishonor may be waived (Section 109 of NIL).

Waiver id the intentional abandonment of a known right. It is willingness on the part of the drawer or the indorser

concerned to be bound as such even without due notice of dishonor.

Who are the persons that may be affected by a waiver?

Section 110:

1. If the waiver is embodied in the instrument itself, that is, it appears in the body or on the face of the instrument, it binds ALL parties.

2. If it is written above the signature of an indorser, it binds him only.

What is the effect of the protest is waived? “Protest is a notice given by the notary public”

It applies only to FOREIGN BILLS .

1. When protest is waived = presentment and notice of dishonor are also deemed waived.

2. When notice of protest is waived = only the notice of dishonor is waived.

3. When presentment is waived = notice of dishonor is also waived

4. When notice of dishonor is waived = does not waive presentment.

Presentment Notice ofDishonor

Protest W WNotice of Protest Not W WPresentment WNOD Not W Not W

When can a notice be dispensed with? Section 112:

Notice of dishonor is dispensed with when, after the exercise of reasonable diligence, it cannot be given or does not reach the parties sought to be charged.

What are the instances where a notice is not required to be given to the DRAWER?

Section 114:

1. When the drawer and the drawee are the same person2. When the drawee is fictitious person or a person not

having capacity to contract.

3. When the drawer is the person to who the instrument is presented for payment

4. Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument

5. Where the drawer has countermanded payment

Countermanded means revoked, rescinded or annulled.

Give the reasons (with respect to Section 114). Instances Reasons1. When the drawer and the

drawee are the same person

The drawer already knows of the dishonor and obviously notice to him is superfluous.

2. When the drawee is fictitious person or a person not having capacity to contract.

Same with 1

3. When the drawer is the person to who the instrument is presented for payment

The drawer has knowledge of the dishonor since he is the one who dishonored the instrument.

4. Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument

Obviously, kapag expected na ng drawer na wala siyang account sa drawee-bank, hindi siya entitled to notice of dishonor.

5. Where the drawer has countermanded payment

Alam na ng drawer that the instrument will be dishonored, and he orders the drawee not to pay (stop payment order). Example, kapag nawala ang check.

The drawer will say, wag mo muna bayaran kasi nawala ko ang check.

What are the instances where a notice is not Section 115:

required to be given to the INDORSER?1. When the drawee is a fictitious person or a person not

having the capacity to contract, and the indorser was aware of the fact at the time he indorsed the instrument.

2. When the indorser is the person to whom the instrument is presented for payment

3. When the instrument was made or accepted for his accommodation.

Give the reasons (with respect to Section 115). Instances Reasons1. When the drawee is a

fictitious person or a person not having the capacity to contract, and the indorser was aware of the fact at the time he indorsed the instrument.

Alam na ng drawer na ang drawee do not have the capacity to contract or fictitious ang drawee.

2. When the indorser is the person to whom the instrument is presented for payment

Siya (indorser) din ang tatanggap ng payment. Hindi naman niya pwedeng bigyan ng notice ang sarili niya, hehehehe.

3. When the instrument was made or accepted for his accommodation.

He is the accommodated party, kaya siya ang principal debtor. No need to give him a notice.

What is the effect of the notice of dishonor by non-acceptance if it is given to subsequent parties?

Paano kung tinanggap ng drawee?

Paano kung di binayaran ng drawee?

Section 116:

When a bill is dishonored by non-acceptance, an immediate right of recourse against all secondary parties accrues to the holder and no presentment for payment is necessary.

However, kapag tinanggap ng drawee ang bill after it has been dishonored; the holder must present the bill for payment upon maturity.

The holder must give notice to the drawer and the indorsers kasi failure to do so will discharge them from liability.

What will happen if there is an omission to give notice of non-acceptance? Exemplify.

It has been said earlier na kapag di nabigyan ng notice within the time prescribed, the drawer or the indorsers are

discharged. PERO, omission to give notice does not prejudice the right of a party who is a holder in due course.

EXAMPLE:

R drew a bill against W in favor of P.

Nung ipinresent ni P kay W ang bill, W refused to accept it. Kapag P fails to give notice of dishonor by non-acceptance to R within the time prescribed, will discharge R from liability.

Pero kung ipinasa ni P ang bill kay A (before maturity), A cannot be prejudiced kahit na hindi nabigyan ng notice si R kasi HE IS A HOLDER IN DUE COURSE. In effect, pwede pa nga niyang habulin both si P and R for thei secondary liability.

When protest need not be made? Section 118:

x x x protest is not required except in the case of foreign bills of exchange.

In summary, what are the instances where notice of dishonor is not necessary to charge persons secondarily liable?

1. When notice is waived (Section 109)2. When protest is waived (Section 111)3. When notice is dispensed with (Section 112)4. When the subject is the DRAWER himself (Section 114)5. When the subject is the INDORSER himself (Section 115)6. Where due notice of dishonor by non-acceptance has

been given (116)7. When the party involved is a holder in due course, without

notice of dishonor by non-acceptance, subsequent to the omission to give notice (Section 117)

How may an instrument be discharged?

Mnemonics: PAIOH

Section 119:

1. By payment in due course by or on behalf of the principal debtor

2. By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation

3. By the intentional cancellation thereof by the holder4. By any other act which will discharge a simple contract for

the payment of money5. When the principal debtor becomes the holder of the

instrument at or after maturity in his own right.

Short version (for memorization):

1. Payment by principal debtor2. Payment by accommodated party3. Intentional cancellation if instrument by holder4. Any act which discharges a contract5. Reacquisition by principal debtor in his own right.

Note: While the various causes of discharging a simple contract such as payment, condonation, etc. will operate to discharge the instrument as between the immediate parties, they will NOT in the hands of a HOLDER IN DUE COURSE.

What is discharge of an instrument? It is the release of all parties, whether primary or secondary, from the obligation on the instrument.

NOTE: It renders the instrument non-negotiable.

When may a persons secondarily liable on the instrument be discharged?

Section 120:

1. By any act which discharges the instrument2. By the intentional cancellation of his signature by the

holder3. By the discharge of a prior party4. By a valid tender or payment made by a prior party5. By a release of the principal debtor unless the holder's right

of recourse against the party secondarily liable is expressly reserved

6. By any agreement binding upon the holder to extend the time of payment or to postpone the holder's right to enforce the instrument unless made with the assent of the party secondarily liable or unless the right of recourse against such party is expressly reserved.

In summary:

1. Any act which discharges the instrument2. Intentional cancellation of signature3. Discharge of prior party by act of holder4. Valid tender of payment5. Release of the principal debtor by act of holder6. Extension of time of payment

May a party reserve his right of recourse against a subsequent party?

Yes, but it must be an express (not implied) reservation.

For example:

M (maker) – P (payee) – indorsed to A – B – C (present holder).

C releases M – automatically, all subsequent parties are discharged. Pero kung C released M, but expressly reserved his right against P, A and B, they are not discharged.

Pero, ang effect ng reservation ni C ay implied reservation ng mga subsequent parties of their right of against the PRINCIPAL DEBTOR.

Kaya, sina P, A, B pwede ding i-held liable si M.

What are the rights of the party who discharges instrument?

Section 121:

Where the instrument is paid by a party secondarily liable thereon, it is not discharged; but the party so paying it is remitted to his former rights as regard all prior parties, and he may strike out his own and all subsequent indorsements and again negotiate the instrument, except:

1. Where it is payable to the order of a third person and has been paid by the drawer; and

2. Where it was made or accepted for accommodation and has been paid by the party accommodated.

What is the meaning of the first part of Section 121: “Where the instrument is paid by a party secondarily liable thereon, it is not discharged x x x”?

Payment at or after maturity by a party secondarily liable does not discharge the instrument. It only cancels his own liability and that of parties subsequent to him.

Example:

R is a drawer of a bill addressed to W, the drawee, and payable to the order of P. The bill is accepted by W and indorsed by P, A, B and C.

R – P – A – B – C

If A pays the bill, the instrument is not discharged, but it discharges HIM, B and C, kasi yung dalawa are whom

he is personally liable with.

What is the meaning of the this part (Section121): but the party so paying it is remitted to his former rights as regard all prior parties, and he may strike out his own and all subsequent indorsements and again negotiate the instrument, except:

1. Where it is payable to the order of a third person and has been paid by the drawer; and

2. Where it was made or accepted for accommodation and has been paid by the party accommodated?

Based on the above example: A is remitted (released from) to his former rights as regards all prior parties na sina P and R, and pwede niyang istrike-out yung indorsement niya kina B and C and pwede niya i-RENEGOTIATE ang instrument (kasi siya ang nagbayad).

Pero kung si R ang nagbayad ng instrument, hindi allowed yung previous statement kasi the exceptions will apply kung siya ang DRAWER and ACCOMMODATED PARTY (Eh di ba sa example, R is the drawer? Kaya di pwede).

What are the effects if the holder renounces the instrument?

Section 122:

The holder may expressly renounce his rights against any party to the instrument before, at, or after its maturity.

An absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of the instrument discharges the instrument.

But a renunciation does not affect the rights of a holder in due course without notice.

A renunciation must be in writing unless the instrument is delivered up to the person primarily liable thereon.

Give example of this: But a renunciation does not affect the rights of a holder in due course without notice.

M – P – A – B – C – D

Si D ang present holder.

D renounces his right against M, automatically, discharged ang mga kasunod na parties: M, P, A, B, C

M – P – A – B – C – D - - - - E

If D negotiates the instrument to E, a holder in due course without notice, E can still enforce the instrument.

When may an instrument be renounced? In favor of secondary party – BEFORE, DURING, AFTER

maturity

In favor of principal debtor – DURING and AFTER maturity.What are other things that should be remembered in Section 122?

Renunciation must be made unconditionally and absolutely.

Renunciation is a personal defense.

What is the rule on cancellations if it is cancelled or made unintentionally?

Who has the burden of proof?

Section 123:

A cancellation made unintentionally or under a mistake or without the authority of the holder, is inoperative but where an instrument or any signature thereon appears to have been cancelled, the burden of proof lies on the party who alleges that the cancellation was made unintentionally or under a mistake or without authority.

INOPERATIVE kapag:

a. Made unintentionallyb. By mistake or through fraudc. Without authority

What is the effect of alteration? Section 124:

Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers.

But when an instrument has been materially altered and is in the hands of a holder in due course not a party to the alteration, he may enforce payment thereof according to its original tenor.

What is the effect if alterations are done by:- The party/holder?

Generally, the effect of material alteration by the HOLDER will discharge the instrument and all prior parties. Pero NOT discharged ang:

1. party who has himself made2. party who authorized, or assented to the alteration3. indorsers who indorsed subsequent to the alteration

Example:

M makes a promissory note for 3,000.00 payable to P or order. P negotiates it to A. A indorsed it to B for 8,000.00 pero nagpaalam siya kay P. B indorsed it to C, then to D.

Halimbawa, D is not a holder in due course.

Since di siya holder in due course, hindi siya pwedeng maningil kay M, kahit pa 3,000 (original tenor) ang sisingilin niya.

Kay A siya pwedeng maningil ng 8,000 kasi he is the party who made the alteration.

Pwede ring maningil si D kay P kasi he authorized or assented to the alteration.

Pati na rin sina B and C kasi sila ang mga subsequent indorsers.

What is the effect if alterations are done by a- Stranger?

Kapag ang alteration ay done by a stranger SPOLIATION ang tawag.

What is the right of the holder in due course against parties who made the alteration?

Pwede siyang maningil sa maker (M) in its original tenor and against prior parties in its altered tenor.

Example:

Pwedeng maningil si D kay M pero 3,000.00 lang.Pwede rin siyang maningil kina P, A, B, C ng 8,000.00 if M dishonored the note.

What constitutes a material alteration? Section 125:

Any alteration which changes:

1. The date;2. The sum payable, either for principal or interest; 3. The time or place of payment: 4. The number or the relations of the parties; 5. The medium or currency in which payment is to be made; 6. Or which adds a place of payment where no place of

payment is specified, or any other change or addition which alters the effect of the instrument in any respect, is a material alteration.

Define Bill of Exchange. Section 126:

A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer.

Distinguish Bill of Exchange from Promissory Note.

SEE PAGE 1.

When is promissory note treated like a BOE? Kapag na-indorse.

When is BOE treated like a promissory note? Kapag it is accepted.

Bill of Exchange Promissory Note1. The instrument must

contain an “unconditional promise” to pay.

1. The instrument must contain an “unconditional order” made by one person to another to pay it.

2. Parties (3): drawer, drawee, payee or bearer

2. Parties (2): Maker and payee or bearer

3. The issuer: drawer is only secondarily liable

3. The issuer: maker is primarily liable

4. A bill drawn payable to the drawer’s own order is complete without indorsement, provided it has been accepted by the drawee.

4. It is not complete until indorsed by the maker.

5. Presentment is necessary 5. Presentment is not necessary

6. A bill payable on demand must be presented for payment within reasonable time from its last negotiation

6. A note payable on demand must be presented for payment within reasonable time from its issue.

Kaya, certified check is practically a promissory note kasi the bank is the maker.

What are the different types of bills of exchange?

1. Draft 2. Trade Acceptance 3. Banker's Acceptance 4. Check

Define draft, Trade Acceptance and Banker’s Acceptance?

Draft - This is the common term of a bill of exchange and used synonymously.

A bank draft is a bill of exchange drawn by a bank, issued at the solicitation of a stranger who purchases and pays therefor.

Trade acceptance - A draft or bill of exchange drawn by the seller on the buyer of goods sold and accepted by such purchaser of goods. It is payable to order and with certain maturity.

Banker's acceptance - A draft or bill of exchange of which the acceptor is a bank or banker engaged generally in the business of granting banker's acceptance credit. Chiefly used for international trade financing.

Are bills considered “assignment of funds” if it is in the hands of the drawee?

Section 127:

A bill of itself does not operate as an assignment of the funds in the hands of the drawee available for the payment thereof, and the drawee is not liable on the bill unless and until he accepts the same. [Section 127]

What are the statuses of the drawee:

a. prior to acceptance or b. payment/after payment?

BEFORE ACCEPTANCE:

1. The drawee is a mere stranger to the bill (unless he accepts the same). Magiging ACCEPTOR ang drawee kapag na-accept na niya.

2. Drawee is not bound to accept. (Take note na kapag hindi pa na-accept ang bill, ORDER pa siya).

3. Drawee is not liable to a holder in due course. (kasi hindi pa niya na-accept ang bill. Hindi pwedeng maningil ang holder in due course sa kanya, sa drawe and indorsers lang siya pwedeng maningil, not sa drawee).

PAYMENT/AFTER PAYMENT:

No contractual relation created between a drawee-bank and the payee. Kaya kapag nadishonor ang check the payee cannot sue the bank pero pwede niyang issue ang drawer for lack of privity.

May a bill be addressed to more than one drawee?

Section 128:

Yes. A bill may be addressed to two or more drawees jointly, whether they are partners or not; but not to two or more drawees in the alternative or in succession.

Example:

ALLOWED: “To A and B” “To A, B and C”

NOT ALLOWED: “To A or B” “To A, and his absence, to B”

Objection is due to: difficulty in determining the exact date of dishonor.

What is an Inland Bill? What is a Foreign Bill? Section 129:

An inland bill of exchange is a bill which is, or on its face purports to be, both drawn and payable within the Philippines. Any other bill is a foreign bill. Unless the contrary appears on the face of the bill, the holder may treat it as an inland bill.

Identify instances where a bill can be treated as promissory note.

Section 130:

1. Where in a bill the drawer and drawee are the same person

2. Where the drawee is a fictitious person 3. Where the drawee is a person not having capacity to

contract, i.e., minor

What is a referee? Section 131:

The drawer of a bill and any indorser may insert thereon the

name of a person to whom the holder may resort in case of need; that is to say, in case the bill is dishonored by non-acceptance or non-payment.

Such person is called a referee in case of need. It is in the option of the holder to resort to the referee in case of dishonor.

Is the referee liable to the holder in case of dishonor?

The referee is not bound to pay the holder but he may be made liable to the party who named him.

Example:

Pay to P or order P 1,000.00

In case of need, apply to X

Sgd. R

To W

If the bill is dishonored by W in the hands of P, P may apply it to X for payment. PERO, he must first have the bill protested.

If X pays it, X may recover from R (the one who named him as referee).

What is Acceptance?

What are the formal requisites of acceptance?

Section 132:

The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer.

TAKE NOTE: ACCEPTANCE APPLIES ONLY TO BILLS OF EXCHANGE.

The acceptance must be in writing and signed by the drawee. It must not express that the drawee will perform his promise by any other means than the payment of money.

1. In writing2. Signed by the drawee3. Express a promise to pay money

4. Delivered to the holder

May a check be accepted? In a certain sense it may be said that there can be no acceptance of a check which is a demand instrument.

What is the objective and effect of acceptance?

1. The object of acceptance is to bind the drawee and make him an actual party liable to the instrument.

Effects:

2. By accepting a bill, the drawee admits everything essential to its validity. (Kaya, kahit na without consideration cannot be shown in a suit).

3. Until the bill has been accepted, the drawer is the principal debtor. Upon acceptance, the bill, in effect becomes a note and the drawee becomes primarily liable.

How to execute acceptance? The acceptance must be communicated or delivered to the holder.

The holder of a bill presenting the same for acceptance may require that the acceptance be written on the bill, and, if such request is refused, may treat the bill as dishonored. [Section 133]

Where an acceptance is written on a paper other than the bill itself, it does not bind the acceptor except in favor of a person to whom it is shown and who, on the faith thereof, receives the bill for value. [Section 134]

May an acceptance be made through a telegram?

Yes, as long as it states a promise to pay.

What does Section 134 provides? How about Section 135?

Section 134 provides that an extrinsic acceptance (acceptance by separate instrument) must be in writing and is good only to person to WHOM IT IS SHOWN.

Section 135 provides that a promise to accept is good to any person who UPON THE FAITH THEREOF RECEIVES THE BILL FOR VALUE.

Is promise to accept equivalent to acceptance?

Section 135:

Yes. An unconditional promise in writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every person who, upon the faith thereof, receives the bill for value.

Example:

Bago pa mapalabas ang bill, nagsulat muna si P to W. Ipinaalam muna niya kung tatanggapin ba niya ang draft ni R for Php1,000 dahil yun ang ibabayad niya sa bibilhin ni R na goods from P.

Sabi ni P, YES. Kaya P sells the goods to R.

W is liable to P as acceptor kasi yung pag-Yes ni P is deemed an actual acceptance.

Pero kung nai-forward ni P kay A ang bill (and A neither saw or knew the promise), W will not be liable to A.

What is the time allowed for a drawee to accept an instrument?

Section 136:

The drawee is allowed twenty-four hours (24) after presentment in which to decide whether or not he will accept the bill; the acceptance, if given, dates as of the day of presentation.

What is the liability of the drawee if he retrains or destroys the bill (with respect to acceptance)?

Section 137:

Where a drawee to whom a bill is delivered for acceptance destroys the same, or refuses within twenty-four hours after such delivery or within such other period as the holder may allow, to return the bill accepted or non-accepted to the holder, he will be deemed to have accepted the same.

What are the rules on the acceptance of incomplete bill?

Section 138:

A bill may be accepted before it has been signed by the drawer, or while otherwise incomplete, or when it is overdue, or after it has been dishonored by a previous refusal to accept, or by non payment.

But when a bill payable after sight is dishonored by non-acceptance and the drawee subsequently accepts it, the

holder, in the absence of any different agreement, is entitled to have the bill accepted as of the date of the first presentment.

What are the different kinds of acceptance? Section 139:

An acceptance is either general or qualified.

1. A general acceptance assents without qualification to the order of the drawer.

2. A qualified acceptance in express terms varies the effect of the bill as drawn.

What constitutes a general acceptance? Section 140:

An acceptance to pay at a particular place is a general acceptance unless it expressly states that the bill is to be paid there only and not elsewhere.

What constitutes a qualified acceptance? Section 141:

An acceptance is qualified which is:

1. Conditional; that is to say, which makes payment by the acceptor dependent on the fulfillment of a condition therein stated

Example: “Received from A Company an order from Y to pay his note as soon as proceeds of sale of hardware is available which I will do.”

2. Partial; that is to say, an acceptance to pay part only of the amount for which the bill is drawn

Example: A bill of P1,000,00 is accepted thus: “Accepted for P700.00 only.

3. Local; that is to say, an acceptance to pay only at a particular place

4. Qualified as to time

Example: A bill payable 30 days after date is accepted thus: “Accepted 60 days from date”

5. The acceptance of some, one or more of the drawees but not of all.

Example: A bill addressed to X, Y, and Z is accepted by X and Y only.

What are the rights of the parties in qualified acceptance?

Section 142

1. The holder may refuse to take a qualified acceptance and if he does not obtain an unqualified acceptance, he may treat the bill as dishonored by non-acceptance.

2. Where a qualified acceptance is taken, the drawer and indorsers are discharged from liability on the bill unless they have expressly or impliedly authorized the holder to take a qualified acceptance, or subsequently assent thereto.

3. When the drawer or an indorser receives notice of a qualified acceptance, he must, within a reasonable time, express his dissent to the holder or he will be deemed to have assented thereto.

When presentment for acceptance must be made? (When presentment for acceptance is necessary?)

Section 143:

Presentment for acceptance must be made:

1. Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or

2. Where the bill expressly stipulates that it shall be presented for acceptance; or

3. Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.

In no other case is presentment for acceptance necessary in order to render any party to the bill liable.

What is presentment for acceptance? Production or exhibition of a bill of exchange to the drawee for his acceptance or payment.

Give example of Section 143. 1. Bills payable after sight – A bill payable 30 days after sight. Kaya if you saw (after presentment din) the bill on August 1, 2008, you will pay the bill, 30 days thereafter.

2. Bill with express stipulation – self-explanatory, siyempre kung ano yung nakasulat sa face ng bill,yun ang susundin.

3. Bill payable elsewhere – A bill payable to P at PNB Manila, drawn against W, residing and having his place of business in QC.

When is presentment for acceptance not necessary?

Take note na kapag presentment for acceptance it also includes PRESENTMENT FOR PAYMENT.

Presentment for acceptance is not necessary kapag it does not fall under Section 143. Pero kailangang may presentment for payment in order to charge the drawer or indorsers.

Does refusal of the drawee constitutes dishonor?

Yes, if the drawee refuses to accept, the bill be deemed dishonored by non-acceptance and the holder then must proceed in the same manner as if the bill required acceptance.

What is the effect of failure to present a bill for payment or acceptance?

Section 144:

Except as herein otherwise provided, the holder of a bill which is required by the next preceding section to be presented for acceptance must either present it for acceptance or negotiate it within a reasonable time. If he fails to do so, the drawer and all indorsers are discharged.

How is presentment made? Section 145:

Presentment for acceptance must be made by or on behalf of the holder at a reasonable hour, on a business day and before the bill is overdue, to the drawee or some person authorized to accept or refuse acceptance on his behalf; and:

1. Where a bill is addressed to two or more drawees who are not partners, presentment must be made to them all unless one has authority to accept or refuse acceptance for all, in which case presentment may be made to him only;

2. Where the drawee is dead, presentment may be made to his personal representative;

3. Where the drawee has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of creditors, presentment may be made to him or to his trustee or assignee.

What is the rule if the time for presentment is insufficient?

Section 147:

Where the holder of a bill drawn payable elsewhere than at the place of business or the residence of the drawee has no time, with the exercise of reasonable diligence, to present the bill for acceptance before presenting it for payment on the day that it falls due, the delay caused by presenting the bill for acceptance before presenting it for payment is excused and does not discharge the drawers and indorsers.

What are the instances where presentment may be excused?

Section 148:

Presentment for acceptance is excused and a bill may be treated as dishonored by non-acceptance in either of the following cases:

1. Where the drawee is dead, or has absconded, or is a fictitious person or a person not having capacity to contract by bill.

2. Where, after the exercise of reasonable diligence, presentment can not be made.

3. Where, although presentment has been irregular, acceptance has been refused on some other ground.

When is a bill considered dishonored by non-acceptance?

Section 149:

A bill is dishonored by non-acceptance:

7. When it is duly presented for acceptance and such an acceptance as is prescribed by this Act is refused or can not be obtained; or

8. When presentment for acceptance is excused and the bill is not accepted.

What happens if the bill is not presented within the prescribed time?

What is the duty of holder if the bill is not accepted

Section 150:

Where a bill is duly presented for acceptance and is not accepted within the prescribed time, the person presenting it must treat the bill as dishonored by non-acceptance or he

loses the right of recourse against the drawer and indorsers.

What are the rights of holder if the bill is not accepted?

Section 151:

When a bill is dishonored by non-acceptance, an immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary.

Define Protest. It is a formal statement in writing made by a notary under his seal of office, at the request of the holder of a bill, in which it is declared that the same was on a certain day presented for payment (or acceptance, as the case may be), and such payment was refused, whereupon the notary protests against all parties to such instrument, and declares that they will be held responsible for all loss or damage arising from its dishonor.

What instances where a protest is required? Section 152:

1. Where a foreign bill appearing on its face to be such is dishonored by non-acceptance.

2. Where a foreign bill which has not previously been dishonored for non-acceptance is dishonored by non-payment.

Why protest is necessary? For security, kasi, if the bill is not protested, the drawer and indorsers will be discharged.

What are the instances where protest is not necessary

Section 152:

Where a bill does not appear on its face to be a foreign bill, protest thereof in case of dishonor is unnecessary.

(OF COURSE, kapag hindi siya foreign bill).

Pero what are the exceptions? What are the instances where protest is necessary even if bill is not a foreign bill?

1. Where the bill has been accepted for honor, it must be protested for non-payment before it is presented for payment to the acceptor for honor.

2. Where the bill contains a referee in case of need, it must be protested for non-payment before it is presented for payment to the referee in case of need.

How is protest made? Section 153:

The protest must be annexed to the bill or must contain a copy thereof, and must be under the hand and seal of the notary making 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 answer given, if any, or the

fact that the drawee or acceptor could not be found.

Who can execute a protest? Section 154:

Protest may be made by:

1. A notary public; or 2. By any respectable resident of the place where the bill is

dishonored, in the presence of two or more credible witnesses.

What are the steps in making a protest? 1. After the instrument is dishonored by non-acceptance or non-payment, as the case may be, the holder takes it to a notary public;

2. The notary public will present the instrument (again) to the person who dishonored it, and demands its acceptance for payment;

3. If the acceptance or payment is refused, the notary public will make a minute of dishonor on the instrument or on his notarial register (called NOTING).

4. The notary public will draft a certification of the fact of the protest and affixes his notarial seal;

5. The notice of dishonor is sent to all parties to the instrument.

When to execute a protest? 1. When a bill is protested, such protest must be made on the day of its dishonor unless delay is excused as herein provided.

2. When a bill has been duly noted, the protest may be subsequently extended as of the date of the noting. [Section 155]

3. “Duly noted” is when the notary public jots down a note

on the bill, or paper affixed thereto, or in his registry book, consisting of his initials or signature and those matters required to be stated in Section 153.

May a protest be made both for non-acceptance and non-payment?

Section 157:

A bill which has been protested for non-acceptance may be subsequently protested for non-payment.

What is the rule if the acceptor has been declared insolvent (in relation to protest)?

Section 158:

Where the acceptor has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of creditors before the bill matures, the holder may cause the bill to be protested for better security against the drawer and indorsers.

Kailan hindi na kailangan ng ptotest? Section 159:

Protest is dispensed with by any circumstances which would dispense with notice of dishonor. Delay in noting or protesting is excused when delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, the bill must be noted or protested with reasonable diligence.

IN SHORT: Kapag excusable ang delay.

What will happen to the protest if the bill is lost?

Section 160:

When a bill is lost or destroyed or is wrongly detained from the person entitled to hold it, protest may be made on a copy or written particulars thereof.

Distinguish Notice of Dishonor and Protest. Protest Notice of DishonorApplies to foreign bill Applies to all negotiable

instruments

Always in writing May be oral or written

Protest includes presentment, notice of

Notice only

dishonor and all the steps accompanying dishonor

Made by a notary public or a respectable resident in the presence of witnesses

Made by the party or his agent

Made at the place where the bill is dishonored.

Place of dishonor is not necessary

Made on the day of dishonor

Made within the times prescribed.

When may a bill be accepted for honor? Section 161:

When a bill of exchange has been protested for dishonor by non-acceptance or protested for better security and is not overdue, any person not being a party already liable thereon may, with the consent of the holder, intervene and accept the bill supra protest for the honor of any party liable thereon or for the honor of the person for whose account the bill is drawn.

The acceptance for honor may be for part only of the sum for which the bill is drawn; and where there has been an acceptance for honor for one party, there may be a further acceptance by a different person for the honor of another party.

What is an acceptance for honor? An undertaking by a stranger to a bill after protest for the benefit of any party liable thereon or for the honor or the person for whose account the bill is drawn which acceptance inures also to the benefit of all parties subsequent to the person for whose honor is accepted.

ALSO KNOWN as ACCEPTANCE SUPRA PROTEST.

What are the requisites of acceptance for honor?

1. The bill must have been protested for dishonor by non-acceptance or for better security.

2. The acceptor for honor must be a person not a party already liable thereon (STRANGER)

3. The bill must not be overdue at the time of acceptance for honor

4. The acceptance for honor must be with the consent of the holder of the instrument.

How is acceptance for honor supra protest made?

(supra = at an earlier place)

Section 162:

An acceptance for honor supra protest

a. must be in writingb. must indicate that it is an acceptance for honor c. must be signed by the acceptor for honord. must contain an express or implied promise to pay moneye. the accepted bill must be delivered to the holder

When is the effect if the acceptance for honor does not expressly state for whose honor it is made?

Section 163:

x x x it is deemed to be an acceptance for the honor of the drawer.

What is the liability of the acceptor for honor? Section 164:

The acceptor for honor is liable to the holder and to all parties to the bill subsequent to the party for whose honor he has accepted.

R draws a bill against W with P, A, B, and C as successive indorsers. It is forwarded to D, the holder.

D presented it to W, W dishonored it.

D made a protest for non-acceptance.

X, a stranger, with the consent of D accepted the bill for the honor of B.

Therefore: X is only liable to C and D but not R, W, P, A.

Pag nabayaran na ni X si D, that is the time X will have a right of recourse against R, W, P, A and B.

But X’s right to hold W liable will depend upon whether W is liable to R.

What are the things that the acceptor for honor must agree?

Section 165:

The acceptor for honor, by such acceptance engages that he will, on due presentment, pay the bill according to the terms of his acceptance provided

a. it shall not have been paid by the drawee b. it shall have been duly presented for payment and

protested for non-payment and notice of dishonor given to him.

How is maturity calculated if the bill is payable after sight is accepted for honor?

Section 166:

Its maturity is calculated from the date of the noting for non-acceptance and not from the date of the acceptance for honor.

When to protest if the dishonored bill has been accepted for honor supra protest or contains a referee in case of need?

Section 167:

It must be protested for non-payment before it is presented for payment to the acceptor for honor or referee in case of need.

How is “presentment for payment to acceptor for honor made?

Section 168:

Presentment for payment to the acceptor for honor must be made as follows:

4. If it is to be presented in the place where the protest for non-payment was made, it must be presented not later than the day following its maturity.

5. If it is to be presented in some other place than the place where it was protested, then it must be forwarded within the time specified in Section 104.

When may a delay in making presentment be excused?

Section 169:

The provisions of Section 81 apply where there is delay in making presentment to the acceptor for honor or referee in case of need.

(Section 81. When delay in making presentment is excused. – Delay in making presentment for payment is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate,

presentment must be made with reasonable diligence).

Distinguish Acceptance for Honor from Ordinary Acceptance.

Acceptance for Honor Ordinary AcceptanceThere must be a previous protest

Not necessary

Acceptor must be a stranger The acceptor is the drawee

Consent of the holder is required

Consent is not required

Acceptor is secondarily liable

Acceptor is primarily liable

There may be several acceptor for honor for different parties in the bill

No alternative or no acceptors in succession

The bill is not discharged upon payment of the acceptor for honor

The bill is discharged if paid by the acceptor.

What is a payment for honor? Payment made by a person (party or not) after it has been protested for non-payment, for the benefit of any party liable thereon or for benefit of the person for whose account it was drawn.

Also called PAYMENT SUPRA PROTEST.

NOTE: FOR BILLS OF EXCHANGE ONLY. Not applied to promissory note.

Distinguish PAYMENT SUPRA PROTEST from ACCEPTANCE SUPRA PROTEST

Payment Supra Protest Acceptance Supra ProtestProtest for non-payment Protest for non-acceptance

and for better security

Consent of the holder is not required nor can the holder refuse

Consent of the holder not required

Acceptor is secondarily Acceptor is primarily liable

liable

Notarial act of honor is necessary

Notarial act is not necessary

Only one payer for honor There may be several acceptors for honor

Effects: Section 175 and 177 Effects: Section 164 and 165

Who can make a payment for honor? Section 171:

Where a bill has been protested for non-payment, any person may intervene and pay it supra protest for the honor of any person liable thereon or for the honor of the person for whose account it was drawn.

How is payment for honor supra protest made?

Section 172:

The payment for honor supra protest, in order to operate as such and not as a mere voluntary payment, must be attested by a notarial act of honor which may be appended to the protest or form an extension to it.

Where must a notarial act of honor begin? What should be the content of the declaration of the payer for honor?

Section 173:

The notarial act of honor must be founded on a declaration made by the payer for honor or by his agent in that behalf declaring his intention to pay the bill for honor and for whose honor he pays.

Who will be given preference if two or more parties offer to pay a bill for honor?

Section 174:

Where two or more persons offer to pay a bill for the honor of different parties, the person whose payment will discharge most parties to the bill is to be given the preference.

What is the effect on subsequent parties if the bill was paid for honor?

Section 175:

Where a bill has been paid for honor, all parties subsequent to the party for whose honor it is paid are discharged but the payer for honor is subrogated for, and succeeds to, both the

rights and duties of the holder as regards the party for whose honor he pays and all parties liable to the latter.

What will happen if the holder refuses to receive payment supra protest?

Section 176:

Where the holder of a bill refuses to receive payment supra protest, he loses his right of recourse against any party who would have been discharged by such payment.

What are the rights of payer for honor? Section 177:

The payer for honor, on paying to the holder the amount of the bill and the notarial expenses incidental to its dishonor, is entitled to receive both the bill itself and the protest.

What is the effect if the bill is drawn in a set? Section 178:

Where a bill is drawn in a set, each part of the set being numbered and containing a reference to the other parts, the whole of the parts constitutes one bill.

What is the right of holders if different parts of the instrument were negotiated?

Section 179:

Where two or more parts of a set are negotiated to different holders in due course, the holder whose title first accrues is, as between such holders, the true owner of the bill. But nothing in this section affects the right of a person who, in due course, accepts or pays the parts first presented to him.

Example:

If P negotiates (against W) the first part of the Bills in Set to A on September 20, the second part to B on September 25, and the third part to C on September 30.

P is liable in every such part.

If A, B, C are holders in due course = A is the true owner kasi siya ang una.

Halimbawa, sabay-sabay silang pumunta kay W, si A lang ang babayaran ni W.

Pero kung mas naunang pumunta si C kay W, si C ang

babayaran ni W.

What is the liability of the holder if he indorses two or more parts of a set to different persons?

Section 180:

Where the holder of a set indorses two or more parts to different persons he is liable on every such part, and every indorser subsequent to him is liable on the part he has himself indorsed, as if such parts were separate bills.

DA = 1,000 (1st part)

P EB = 1,000 (2nd part)

C

C = 1,000 (3rd part) F

In this sample:

P is liable for a total of P3,000 kasi treated as separate bills.

Pero kung naipasa na kina D, E, C, F, P1,000 lang ang liability ni P.

Section 181:

If P BEFORE negotiating the three parts of the bill, presented them for acceptance to W, and W writes his acceptance on each part. P negotiates it to A, B, and C. A, B and C are deemed holders in due course. Si W na ang liable kina A, B and C for P1,000 EACH.

But if P does not negotiate the three parts, he liable for only one part or for P1,000.00

What is the effect of payment of bill by acceptor of bills drawn in sets?

Section 182:

When the acceptor of a bill drawn in a set pays it without requiring the part bearing his acceptance to be delivered up to him, and the part at maturity is outstanding in the hands of a holder in due course, he is liable to the holder thereon.

What is the effect if one part of the bill in a set is discharged?

Except as herein otherwise provided, where any one part of a bill drawn in a set is discharged by payment or otherwise, the

whole bill is discharged. [Section 183]

Define Promissory Note. Section 184:

A negotiable promissory note within the meaning of this Act is an 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 certain in 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.

What is a Check (Cheque). • A check is a bill of exchange drawn on a bank payable on demand.

• Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a check. [Section 185]

• A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank, and the bank, is not liable to the holder, unless and until it accepts or certifies the check.

• A check is payable on demand even when not so stated on its face.

• A check is supposed to be drawn against a previous deposit of funds, while an ordinary need not be drawn against a deposit.

• A check need not be presented for acceptance.

Kapag encashed na, a check may be considered as payment.

Identify the different kinds of check? Cashier's check - One drawn by the cashier of a bank in the name of the bank against the bank itself payable to a third person or order.

A cashier's check is a primary obligation of the issuing bank and accepted in advance by its mere issuance.

Manager's check - A check drawn by the manager of a bank in the name of the bank against the bank itself payable to a third person.

It is similar to the cashier's check as to effect and use.

Memorandum check - A check in which is written the word "memorandum," "memo" and "mem" signifying that the

drawer engages to pay the bona fide holder absolutely, and not upon a condition to pay upon presentment of maturity and if due notice of presentment and non-payment should be given.

It is a check given by a borrower to a lender for the amount of a short loan, with the understanding that it is not to be presented at the bank, but will be redeemed by the maker himself when the loan falls due and which understanding is evidenced by writing the word "memorandum," "memo" or "mem" on the check.

Certified check - A certification is an agreement whereby the bank against whom a check is drawn undertakes to pay it on any future time when presented for payment.

Certification is equivalent to acceptance and operates as an assignment of a part of the funds to the creditors.

Crossed check - Under accepted banking practice, crossing a check is done by writing two parallel lines diagonally on the left top portion of the checks. Sa bangko lang inindorse. Governed by Code of Commerce.

The crossing is special where the name of the bank or a business institution is written between the two parallel lines, which means that the drawee should pay only with the intervention of that company.

What are the effects of a crossed check? 1. The check may not be encashed but only deposited in the bank.

2. The check may be negotiated only once—to one who has an account with a bank.

3. The act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose, so that he must inquire if he has received the check pursuant to that purpose; otherwise, he is not a holder in due course.

What is a Stale check? One which is not presented for payment within a reasonable time after its issue.

Distinguish BP Blg. 22 (Bouncing Check Law) 1. BP 22 and Estafa have different elements.

and Estafa (Article 315 of the RPC). 2. Estafa is malum in se requiring proof of criminal intent on the part of the offender.

3. Violation of BP 22 is mala prohibitum – malice and intent are immaterial.

Within what time a check must be presented? Section 186:

A check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay.

Hence, if no loss or injury is shown, the drawer is not discharged.

What is the effect if the check is certified by the bank?

Section 187:

Where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance.

However, a bank is not obligated to the depositor to certify checks.

What is the effect if the holder of check procures it to be certified?

Section 188:

Where the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon.

Can a check operate as an assignment? Section 189:

A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank, and the bank is not liable to the holder unless and until it accepts or certifies the check.

GENERAL PROVISIONS

Define and give the meaning of the following terms.

• "Acceptance" means an acceptance completed by delivery or notification.

• "Action" includes counterclaim and set-off.

• "Bank" includes any person or association of persons carrying on the business of banking, whether incorporated or not.

•• "Bearer" means the person in possession of a bill or note

which is payable to bearer.

• "Bill" means bill of exchange, and "note" means negotiable promissory note.

• "Delivery" means transfer of possession, actual or constructive, from one person to another.

• "Holder" means the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof.

• "Indorsement" means an indorsement completed by delivery.

• "Instrument" means negotiable instrument.

• "Issue" means the first delivery of the instrument, complete in form, to a person who takes it as a holder.

• "Person" includes a body of persons, whether incorporated or not.

• "Value" means valuable consideration.

• "Written" includes printed, and "writing" includes print.

Who are primarily liable with the terms of the instrument?

Section 192:

The person "primarily" liable on an instrument is the person who, by the terms of the instrument, is absolutely required to pay the same. All other parties are "secondarily" liable.

How to determine whether or not the time is reasonable?

Section 193:

In determining what is a "reasonable time" regard is to be had to the nature of the instrument, the usage of trade or business with respect to such instruments, and the facts of the particular case.

How is time computed? What is the rule if the last day falls on holiday

Section 194:

Where the day, or the last day for doing any act herein required or permitted to be done falls on a Sunday or on a holiday, the act may be done on the next succeeding secular or business day.

Bonus Question: When was NIL enacted? When it was published? The effectivity?

Enacted on 3 February 1911Published on 4 March 1911Took effect on 2 June 1911

What is a “document of title?” It refers to goods and not to money (a non-negotiable instrument).

It is a symbol of the goods covered by it, serving as evidence of transfer of title and transfer of possession.

What are most common forms of documents of title?

1. Bill of lading – contract or receipt for the transport of goods and their delivery to the person named therein, to his order, or to bearer.

2. Dock warrant – an instrument given by dock owners to an importer of goods warehouse on the dock recognizing the importer’s title to the said goods.

3. Warehouse receipt – contract or receipt for goods deposited with a warehouseman containing the latter’s undertaking to hold or deliver the goods to a specific person, to his order, or to bearer.