BASIC CONCEPTS ON THE LAW ON NEGOTIABLE INSTRUMENTS LAW

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BASIC EXPLANATIONS OF LEGAL CONCEPTS ON THE

LAW ON NEGOTIABLE INSTRUMENTS LAW

(ACT NO. 2031)

Introduction

The Negotiable Instruments Law is peculiarly a creature of the law merchant, from which it was imported into England and crystallized in the English common law. It was codified in that country in 1882 by what is known as the Bills of Exchange Act. In the United States there was, prior to the drafting of the Negotiable Instruments Law, a codification of the law in some states but there was nothing looking toward as codification for all the states in union. In 1895, a draft was approved by the Commissioners on the Uniform State Laws in the United States representing nineteen (19) states relative to a codification of laws relating to bills and notes. In the Philippines, it was on February 3, 1911 when Act 2031 was enacted and took effect ninety days after its publication in the official gazette. The effectivity of said law commenced on June 2, 1911.

Character of the Negotiable Instruments of Law

1. The law embraces substantive and adjective law.

2. The application is exclusive. Meaning to say, it covers negotiable instruments only. The Civil Code governs the provisions on negotiable document of title.

Functions of Negotiable Instruments.

They are a substitute for money and increase the purchasing medium in circulation. Otherwise, more specie or paper money would be needed in circulation to take care of everyday business transactions. Many customers of merchants pay their monthly bills by checks and manufacturers when unable to obtain cash from their customers, take promissory notes, accepted bills, trade acceptances or some form of commercial paper which their bank will discount and turn into money for their payrolls. Thus, the negotiable instruments operate to supplement the currency of the government. The check is used as immediate payment while the ordinary bill of exchange and the promissory note are intended for circulation of credit.

In general, negotiable instruments, although they do not constitute legal tender, (1) they are used as substitute of money. (2) They constitute at the present, the media of exchange for most commercial transactions and (3) they serve as a medium of credit transaction.

Payment by Negotiable Instruments.

Since a negotiable instrument is a substitute of money, the question arises as to whether or not the giving or taking of a promissory note or bill of exchange is prima facie absolute payment as in the case of money or merely a prima facie conditional payment. The rule is that the delivery of negotiable instruments shall produce payment only when they have been cashed, or when through the act of the creditor, they have been impaired.(Art.. 1249, New Civil Code) In the meantime, the action derived from the original obligation shall be held in abeyance.

The Two (2) Principal Features of Negotiability.

1. Negotiability. It is that attribute or property whereby a bill, note or check passes or may pass from hand to hand similar to money so as to give the holder in due course the right to hold the instrument and collect the sum payable to himself free from defense. Thus, men in this way without cash in hand are enabled by means of credit to conduct and carry to completion business enterprises upon their promissory notes, bills of exchange and checks knowing that other businessmen will treat these promises as cash. Furthermore, the purpose of negotiability is to allow bills and notes to go from hand to hand in the commercial markers and to take the part of money in commercial transactions. The defenses from which a holder in due course is free are personal defenses but he is not free from real defenses.

Purpose of Negotiability- The primary purpose of negotiability instrument is to allow bills and notes the effect which money, in the form of government bills or notes supplies in the commercial world.

Illustration:

A) A induces B by fraud to make a promissory note payable to the order of A in

the sum of P 1,000 payable on demand. This is fraud in inducement which is a personal defense. If A files an action against the maker, B, for the amount, B can interpose the defense that he was induced to make the note by fraud and that he did not receive any valuable consideration for it.

B) But suppose that instead of trying to collect from B, A transfers the note to C who pays P 1,000 and acquires the note under circumstances that make him a holder in due course. And then he, C files an action against B the maker of the note for P 1,000.00. If the note was not negotiable, B can still interpose the defense against A, with whom he is an original party. But if the note is negotiable, B cannot interpose the defense that he was induced by fraud to make the note and that he did not receive any valuable consideration for it is because, by virtue of its attribute of negotiability, C, a holder in due course has the right to hold the instrument and collect the sum payable regardless of defenses which might obtain between the original parties.

2. Accumulation of secondary contracts. Next to negotiability, the most important characteristic if negotiability is the accumulation of secondary contracts which they pick up and carry along with them as they are negotiated from one person to another. This attribute of negotiated instruments is just as essential as negotiability, if they are to serve as substitute of money. Most Common Forms of Negotiable Instruments

Negotiability distinguished from Assignment:

(1) Assignment is more comprehensive term than negotiability and pertains to contract in general. On the other hand, negotiability pertains only to a special class of contracts, namely to negotiable instruments.

(2) In negotiation, the transferee is a holder, while in assignment, the transferee is an assignee.

(3) A holder in due course is subject only to ral defense while an assignee is subject to both real and personal defense as he takes the instrument subject to the defenses available to his predecessor.

(4) A holder in due course may acquire a better title than that of a prior party, while generally an assignee merely steps into the shoes of the assignor.

(5) A general indorser warrants the solvency of the prior parties, while an assignor does not warrant the solvency of prior parties unless expressly stipulated or the insolvency is known to him.

(6) An indorser is not liable unless there be presentment and notice of dishonor, while the assignor is liable even without notice of dishonor.

(7) Negotiation is governed by the Negotiable Instrument Law while assignment is governed by Articles 1624 to 1635 of the Civil Code (Assignment of Credits).

Assignment defined: It means a transfer of title to the instrument with the assignee generally taking only such title as his assignor, subject to all defenses available against his assignor. The word transfer is also used to when referring to assignment.

KINDS OF NEGOTIABLE INSTRUMENTS

Negotiable Instruments Law deals with three (3) kinds of Negotiable Instruments, namely: (1) Promissory Notes, (2) Bills of Exchange, and (3) Checks, which are also bills of exchange, but of a special kind. There are other forms of negotiable instruments. An instruments which does not comply with the requirements of the Negotiable Instruments laws is a simple contract in writing and is merely in evidence of such intangible rights as may have been created by the assent of the parties. If however, it conforms to the requirements of Negotiable Instruments Law, the instrument is itself the contract and not just a mere evidence of rights. It is a mercantile specialty.

PROMISSORY NOTE, defined: A negotiable promissory note, within the meaning of the 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 makers own order, it is not complete until indorsed by him. From the foregoing, it will be noted that a promissory note is essentially a promise in writing to pay a sum certain in money. The promise is to pay on demand or at a fixed or determinable future time.

Illustration of a promissory note

P 10,000 Davao City, Philippines

August 3, 2004

For value received, I promise to pay to the order of Sandara Parks the sum of Ten Thousand Pesos (P 10,000.00) on or before September 30, 2004, at Palengke Bank, Davao City.

(Sgd.) Hero Angeles

General Characteristics of a Promissory Note. The following are the general characteristics of a promissory note:

1. The figures at the upper left hand corner of the instrument P10,000.00. This is to indicate the amount of the note and is more quickly grasped than if written in words.

2. The place, Davao City, Philippines. It shows the place where the contract to pay is executed.

3. The date, August 3, 2004. It is usually inserted either to determine when the note is due or to fix the time when interest is to run, when the payment of interest is stipulated, or whether or not the collection of the instrument is barred by the statute of limitation or prescription.

4. The date of maturity, on or about September 30, 2004. This indicates the time when the promise to pay is to be fulfilled. Where, however, the date of maturity is not stated, the instrument is payable on demand.

5. The promise, I promise to pay. It consists of an absolute promise to do something, that is, to pay. It is not subject to the fulfillment of a condition.

6. The words to the order of. It means that the promise is to pay as ordered or as commanded by the payee. But an instrument may be payable to bearer.

7. The name, Sandara Parks. He is the person to whose order or command the money is promised to be paid. He is known as the payee.

8. The signature Hero Angeles. Hero Angeles is the maker of the note. He is the one who promises to pay it at the first instance. A note may be signed by more than one person either jointly, or jointly and severally.

9. The place of payment, at the Palengke Bank. It indicates where the note is to be paid. However, that is not necessary. An instrument may be made payable at any other agreed upon by the parties.

10. The amount, Ten Thousand Pesos. It indicates, as the figures do, the sum promised to be paid. As it is written in words, it cannot be easily altered and, since it takes longer to write the words than the figures, the words are more likely to be accurate.

11. The consideration, for value received. This indicates that a consideration was given for the note. The consideration may be specified. But the words for value received may be omitted and the consideration not specified, as consideration is presumed.

Special Types of Promissory Notes

1. Certificate of Deposit - is a written acknowledgment by a bank of the receipt of money on deposit which the bank promises to pay to the depositor, bearer or to some other person or order.

2. Bonds A promise under seal to pay money. A series of instruments representing units of indebtedness regarded as parts of one entire debt.

a. Mortgage bonds-secured by a mortgaged constituted on corporate physical property.

b. Equipment bonds Those that are secured by a mortgage or pledge of corporate movable equipment, such as in the case of railroads, their rolling stock.

c. Collateral trust bonds-Those that are not secured by lien on physical property of the corporation but by a lien on securities deposited with a trustee as collateral.

d. Guaranteed bonds- One that is secures by the guaranty of a corporation other than the one issuing it. It implies double obligation, that of the issuing corporation and that of the guaranteeing corporation.

e. Debentures-Those that are not secured by any specific mortgage, lien or pledge on specific corporate property but by the general credit of the corporation and restrictive agreement.

f. Income bonds- One the principal of which may or may not be secured by a mortgage but the interest is payable out of net profit.

g. Convertible bond-One which confers on the holder the option of exchanging it for a more speculative class of security, such as, for preferred shares or common shares.

h. Redeemable bonds- Those that give the privilege to the issuing corporation to pay off the bonds even before the date of maturity.

i. Registered bonds-Those which are issued to a specified person named therein and the fact of the issuance to him is registered in the books of the issuing corporation.

j. Coupon bonds-Those to which are attached a sheet of dated, numbered and similarly printed coupons which the bondholder may cut off when due or thereafter.

BILL OF EXCHANGE, defined: 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. From the foregoing, it will be noted that a bill of exchange is essentially an order or a command in writing addressed to someone requiring him to pay in money. It is also commonly known as Draft.

Illustration of Bill of Exchange

P 10,000 Davao City, Philippines

August 3, 2004

Thirty days after sight pay to the order of Sandara Park the sum of Ten Thousand Pesos (P 10,000.00), Philippine Currency. Value received and charge the same to the account of

Sgd. Hero Angeles

To: Boy Abunda

Regina Complex

Davao City

General characteristics of a Bill of Exchange. The following are the general characteristics of a bill of exchange not found in the promissory note:

(1) The order or command to pay, Pay to. This is an order or command to pay. Thus, instead of a promise, the bill of exchange contains a command or order to pay money.

(2) The signature Hero Angeles. Hero Angeles is the drawer. He corresponds to the maker of the promissory note.

(3) The name, Boy Abunda. Boy Abunda is the drawee. He is the one ordered or commanded to pay a sum certain in money.

Common Types of Bill of Exchange

1. Trade Acceptance is a draft drawn by the seller of goods upon the buyer for the purchase price of such goods, which draft has been accepted by the buyer.

2. Inland and foreign bills- 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. As long as it is drawn and payable in the same state it is an inland bill of exchange.

3. Bills in set- It is composed of several parts each part being numbered, and containing a reference to the other parts, all of which constitute but one.

4. Sola bill (check) - A sola of exchanfe or sols draft is a bill of exchange issued only in one single instrument as distinguished from a bills in set. It is usually used by individuals when straight cash, with no other accompanying papers, is intended to be remitted.

5. Sight draft- It is a kind of bill of exchange payable at sight as distinguished from time draft which is payable at a fixed time after date.

6. Documentary sight draft- It is a bill accompanied by papers and related documents such as bill of lading, warehouse receipt etc in connection with which the draft is drawn.

7. Bank draft- It is a check by one bank on another bank. It is distinguished from cashiers check which is drawn by the a bank upon itself, signed by the cashier and payable to another,

8. Check - Bill of exchange drawn on a bank payable on demand.

Other forms of instruments of Credit

a. Letters of credit - is a letter addressed generally or specially, requesting that money be advanced or credit be given to the bearer, promising or even guaranteeing repayment of the amount advanced.

b. Trust receipt- is an instrument used in business transaction by which the bank advances the money to enable customer to buy goods and takes the bill of lading for such goods in its own name and latter surrenders possession to the customer according to the terms of the agreement that the title of the goods shall remain in the bank and that the proceeds of the sale shall be applied to the repayment of advances made by the bank on account of the original purchase price.

c. Bill of Lading- is a receipt issued by a carrier for merchandise shipped. Although, quasi-negotiable, they are not negotiable instruments as they are not issued for the payment of money.

d. Money order- a written order issued by an express company, government postal office, telegraph company or bank for payment of money in a distance.

Bill of exchange and promissory note, distinguished:

The fundamental distinction between a bill of exchange and promissory note is that the first is an order or command while the second is a promise.

But that a bill is an order to pay should not be confused with an instrument being payable to order. A bill may be payable to bearer and still be an order to pay money. Where a bill is payable to bearer, it is an order to pay to bearer. Thus, a bill of exchange is an order to pay not because it is payable to order but because, by its terms, it orders or commands that the drawee to pay money to payee or bearer.

A promissory note may be payable to bearer or to order just as a bill may be. Where a promissory note is payable to bearer, it is a promise to pay to bearer. Where it is payable to order, it is a promise to pay to order. But it does not become a bill by reason of the fact that it is payable to order.

CHECK (Special type of Bill of Exchange) defined: A check is a bill of exchange drawn on bank payable on demand. As already stated, a check is a bill of exchange of a special kind.

Illustration of a check:

The Philippine Account No. 2222222

Bank of Ateneo

Davao City, Philippines

August 2, 2004

Pay to Sandar Parks or order the amount of One Thousand Pesos (P 1,000.00).

Sgd. Hero Angeles

General Characteristics of Check. The general characteristics of a check are similar to that of a bill of exchange for the reason that a check is a bill of exchange.

Kinds of Check

a. Cashier check- is one drawn by a bank upon itself payable to a third person. In effect it is a promise by the bank to pay the designated payee directly and may in loose sense to be considered as promissory note by the issuing bank.

b. Certified check- is one which has been certified by the bank amounts to an acceptance by the bank. By the certification the drawee bank becomes primarily liable to the holder, who under normal conditions would have no claim against the bank.

c. Managers check-it is similar to a cashier check. Instead of being drawn by the cashier, it is drawn in the name of the manager of the bank.

d. Memorandum check- is a check on which is written the word memorandum or memo or its equivalent indicating that the drawer engages to pay bonafide holder absolutely, and not upon the condition to pay upon maturity if due notice of presentment and non payment be given.

e. Bank draft- is a check drawn by one bank upon another bank, payable to a third person on demand.

f. Crossed Check- is one which in addition to the ordinary check contains also the name of a certain banker through whom it maust be presented for payment. The name of the banker is usually stamped across the face of the check. Crossing of a check may be done by drawing to parallel lines transversally on the face of the check. A check may be crossed specially or generally.

Distinction between Check and Bill of Exchange

(1) A check is always drawn upon a bank or banker, whereas, an ordinary bill may or may not be drawn against a bank.

(2) A check is always payable on demand, whereas an ordinary bill may be payable on demand or at a fixed or determinable future time.

(3) It is not necessary that a check be presented for acceptance as in the case of a bill of exchange. Checks are not be accepted but presented at once for payment. However if the holder requests, and the banker desires, he may accept.

(4) A check is drawn on a deposit while an ordinary bill of exchange is not. In other words, it is not necessary that a drawer of a bill of exchange should have funds in the hands of the drawee, but in the case of the bank, it would be fraud.

(5) The death of the drawer of a check, with knowledge by the bank, revokes the authority of the banker to pay, while the death of the drawer of the ordinary bill of exchange does not. But there some decisions to the contrary.

(6) An ordinary bill of exchange may be presented for payment within reasonable time after its last negotiation. But a check must be presented for payment within a reasonable time after its issue. (Secs. 71 and 186)

To whom instruments may be payable

An instrument may be made or drawn payable to:

a. Bearer

b. Order

It may also be payable to

c. a specified person

When instrument is payable to bearer:

Example:

Pay to B or bearer P 1,000.

Sgd. A

To: X

When payable to order. An instrument is payable to order when it is expressed to be payable to the (1) order of a specified person, or (2) to specified person or his order.

Order of a specified person

Example:

I promise to pay to the order of B P 1,000.00.

Sgd. A

Specified person or his order

Example:

I promise to pay to B or his order P 1,000.00.

Sgd. A

When instrument payable to a specified person. An instrument is payable to a specified person when the instrument is payable to a person named in the instrument and no other. When an instrument is payable to a specified person, it is not negotiable because it is neither payable to bearer nor payable to order.

Illustration:

I promise to pay to B P 1,000.00.

Sgd. A

Parties to a Promissory Note:

a. Maker The person who executes the written promise.

b. Payee- The person in whose favor the promissory note is made payable.

Parties to a Bill of Exchange

a. Drawer- The person who executes the written order to pay.

b. Payee- The person in whose favor a bill of exchange is drawn payable.

c. Drawee-Acceptor- The drawee who signifies his assent to the order of the drawer.

Parties to Check. As the check is a bill of exchange, although a special kind, it has the same parties as the ordinary bill of exchange. The only difference is that a check is usually certified to, not accepted by, the drawee bank. But certification is equivalent to acceptance.

Other Parties to the Negotiable Instrument. The following are the other parties of the added to negotiable instruments when they are negotiated: (1) indorser and (2) indorsee, in the case instruments payable to order and (3) person negotiating by mere delivery and (4) persons to whom the instrument is negotiated by delivery in the case of instruments payable to bearer.

Indorser and indorsee, explained: When an instrument is negotiated, other parties are added to the instrument. Where the negotiation is by indorsement completed by delivery, the parties are added are the indorser and the indorsee. The indorser is the one who negotiates in indorsement and the indorsee is the one to whom the instrument is negotiated by indorsement.

Where instrument is payable to bearer. Where the instrument is payable to bearer, it can be negotiated by delivery without necessity of the instrument. He, therefore, is also a party added to the instrument upon negotiation. For lack of better term, he may be designated as person negotiating by delivery. The person to whom the instrument payable to bearer is negotiated acquires certain rights as a holder. He is therefore also an additional party to the instrument. For lack of a better name, he may be designated as person to whom an instrument is negotiated by delivery.

Holder. Section 190 defines holder as the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. And bearer is therein defined as the person in possession of a bill or note which is payable to bearer. Hence, the meaning of the Holder depends upon the kind of instrument involved. If the instrument is payable to order, holder means the person (1) who is the payee or indorsee therein, and (2) who is in possession thereof. If payable to bearer, holder means the person (1) who is in possession thereof.

Holder explained:

1. Suppose A makes the following instrument. I promise to pay B or order P 1,000. Sgd. A. (1) A keeps it in his drawer and does not deliver it to B. Is B a holder? No, because while B is the payee, he is not in possession of the note.

2. Suppose that A delivers the note to B and B indorses it to C, but delivers it to Y. Who is the holder C or Y? Neither is the holder. Y is not the holder because while he is in possession of the note, he is not the indorsee. C is not the holder because while he is the indorsee, he is not in possession of the note.

3. Suppose that the note is payable to B or bearer and A keeps the note in his drawer. Is B the bearer? No. because while he is the indorsee, he is not in possession of the note.

4. But suppose that A delivers the note to Y but not to B. Is Y the holder? Yes because Y is in possession of the note.

FORMAL REQUIREMENTS OF NEGOTIABILITY IN GENERAL

In determining the negotiability of the instrument, the following must be considered:

a. The whole of the instrument;

b. Only what appears on the face of the instrument; and

c. The provisions of the Negotiable Instrument Law especially Section 1 thereof which gives the requirements of negotiability.

Section 1 provides the following requisites:

a. It must be in writing.

b. The instrument must be signed by the maker or drawer.

c. The instrument must contain an unconditional promise or order.

d. The instrument must be payable in a sum certain money.

e. The instrument must be payable at a filed or determinable future time or on demand.

f. The instrument must be payable to order or

g. The instrument must be payable to bearer.

h. The drawee must be named or otherwise indicated therein with reasonable certainty

Incidents in the life of Negotiable Instruments

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

2. Delivery defined: Transfer of possession with intent to transfer title. It consisti principally of placing the transferee in possession of the instrument, but must be accompanied with intent to transfer title.

3. Negotiation defined and explained: Negotiation is such transfer of an instrument from one person to another as to constitute the transferee the holder of the instrument. In other words, negotiation is a mode of transferring an instrument

How negotiation is made?

a) Payable to bearer- it may be negotiated by mere delivery.

b) Payable to order it must be negotiated by indorsement and completed by delivery

Indorsement defined and explained: Indorsement is a legal transaction, effected by the writing of ones own name on the back of the instrument or upon a paper attached thereto with or without additional words specifying the person to whom or to whose order the instrument is so payable whereby one not only transfers ones full legal title to the paper transferred but likewise enters an implied guaranty that the instrument will be duly paid.

Indorsement is either (a) Special or (b) Blank Indorsement

Special Indorsement, defined and explained. A special indorsement is one that specifies the person to whom or to whose order the instrument is so payable. The following written at the back of t he instrument is an illustration of a blank indorsement.

Pay to Sandara Parks

(Sgd.) Hero Angeles

Blank Indorsement, defined and explained. An indorsement in blank is one that does not specify the person to whom or to whose order the instrument is to be payable. It consits merely of the signature of the indorser. The following written at the back of instrument is an illustration of a blank instrument.

(Sgd) Hero Angeles

Negotiation, Indorsement, delivery compared. From the foregoing, the following will be noted:

(1) Strictly speaking, indorsement is not equivalent to negotiation. Indorsement is merely the first step in the process of negotiating an instrument which is payable to order. The second step in the process is delivery. However, Section 191 defines indorsement as an indorsement completed by delivery. In this sense, indorsement is equivalent to negotiation.

(2) Where the instrument is payable to order, neither is delivery equivalent to negotiation. The mere delivery of such an instrument, without indorsement is merely equivalent to an assignment thereof.

(3) But where the instrument is payable to bearer, delivery is equivalent to negotiation.

Presentment for Acceptance, explained: Presentment for acceptance consists of exhibiting the bill to the drawee and demanding that he accept it, that is, signify his assent to the order or command of the drawer.

When necessary? Under Section 143, it is must be made:

a. Where the bill is payable after sigh, or in any case, where presentment for acceptance is necessary in order to fix the maturity of the instrument.

b. Where the bill expressly stipulates that it shall be presented for acceptance.

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

Meaning of after sight. Sometimes, a bill is drawn payable, Thirty days after sight. This means that the bill is payable thirty days after it has been presented for acceptance, whether it has been accepted or not.

Acceptance defined and explained. Acceptance is the signification by the drawee of his assent to the order of the drawer. As already stated, this is usually done by writing across the face of the bill the word accepted, followed by the signature of the drawee. The term acceptance has therefore a technical meaning under the Negotiable Instruments Law. It should not be used as the equivalent of receive. As to checks, they are generally certified instead of being accepted. The certification of a check is usually done by stamping on the check the word certified and underneath it is written the signature of the proper officer if the bank. Certification is equivalent to acceptance.

Dishonor by non-acceptance. Where the bill is presented for acceptance, and acceptance is refused by the drawee or cannot be obtained, or where presentment for acceptance is excused and bill is not accepted, it is said to be dishonored by non-acceptance.

Presentment for Payment explained. Presentment for payment consists of exhibiting the instrument to the person primarily liable thereon and demanding payment from him on the date of maturity. This is required for all kinds of negotiable instruments.

Dishonor by non-payment. Where the instrument is presented for payment, and payment is refused or cannot be obtained, or where presentment for payment is excused and the instrument is overdue and unpaid, it is said to be dishonored by non-payment.

Notice of Dishonor, explained. When a negotiable instrument has been dishonored by non-acceptance or non-payment, a notice of dishonor must be given to the drawer and to each indorser, and any drawe or indorser to whom such notice is not given is discharged. The purpose is to notify the drawe and the indorsers that the instrument has not been accedpted by the drawee, or that it has not been paid by the acceptor, in the case of the bills, or by the maker in the case of notes.

Discharge, explained. A negotiable instrument is usually discharged by payment in due course by or on behalf of the principal debtor. But where the one paying is a party secondarily liable on the instrument, it is not discharged. Thus, suppose that A is the maker of a note and B is the payee. He indorses to C, C to D, D to E and E to F. If A pays the instrument, it is discharged. If C pays, he instrument is not discharged.

Parties primarily and secondarily liable, explained. Under the Negotiable Instruments Law, 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. When one speaks of primary and secondary liability, at least two debtors or obligors are contemplated. For instance, A and B are indebted to C in the sum of P10,000, A being primarily liable, B secondarily liable. This means that A, being the person primarily liable, must un the first instance be made to pay, that the person secondarily liable, B in this case, must be made to pay.

Effects of Liability

In Bills of Exchange.

1. Acceptor is primarily liable. He is primarily liable because under Section 62, he is absolutely required to pay the instrument as he engages that he will pay it according to the tenor of his acceptance.

2. The drawer, indorsers and the person negotiating by mere delivery are secondarily liable. Under Section 61, the general tenor of the liability of the drawer is that he will pay the bill if the drawee does not accept or pay the bill. In other words, he is not absolutely required to pay the bill. If the drawee pay, then he is not required to pay. It is only when the drawee does not pay that he will be required to pay.

3. By indorsing an instrument without saying more, an indorser assumes all the liability stated in Section 65 or 66. Under said sections, the general tenor of the liability of the indorser is that he will pay the instrument if the person primarily liable will not pay. In other words, he is not absolutely required to pay the bill. If the drawee pays, then he is not required to pay. It is only when the drawee does not pay that he will be required to pay.

4. By merely delivering an instrument payable to bearer, without saying more, a person negotiating by mere delivery assumes the liability stated in Section 65 Under sad section, the general tenor of the liability of a person negotiating by delivery is similar of that of an indorser.

In Promissory Notes

1. The maker is primarily liable.

2. The qualified or general indorsers and person negotiating by mere delivery are secondarily liable. Under Section 60, the agreement of the maker is that he will pa the instrument according its tenor. He does not say that he will pay it if somebody does not pay. Hence, he is primarily liable.

EXAMINATION OF THE LIABILITIES OF PARTIES

Primarily Liable:

a) The maker of a promissory note

b) The acceptor of a bill of exchange and

c) The certifier of a check

Secondarily (conditionally) liable

a) The drawer of a bill; and

b) The indorser of a note or a bill

Not liable.

a) The drawee until he accepts the instrument in which case he becomes an acceptor.

Liability of the maker:

1. He engages to pay the note according to its terms, subject to no condition whatsoever.

2. He admits the existence of the payee and his capacity to indorse at the time of the making of the note

Liability of the drawer:

1. Admits the existence of the payee

2. Admits his capacity to endorse the instrument at the time it was executed.

3. Engages that on due presentment the instrument will be accepted or paid or both according to its tenor;

4. That if it is 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.

Liability of acceptor:

1. Engages to pay it according to the tenor of his acceptance.

2. Admits the existence of the drawer and the genuiness of his signature and his capacity and authority to draw the instrument; and

3. The existence of the payee and his then capacity to indorse.

Warranties of a person negotiating of an instrument by delivery or by a qualified indorsement.

1. That the instrument is genuine and in all respect what it purports to be;

2. That he has good title to it.

3. That all prior parties have capacity to contract;

4. 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 delivery only, the warranty depends in favor of no holder other than the immediate transferee. (Section 65)

Warranties of a general or unqualified indorser.

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

2. That he has good title to it;

3. That all prior parties had capacity to contract;

4. That the instrument is at the same time of his indorsement valid and subsisting; and

5. 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.

Note: While the qualified indorser warrants merely that he has no knowledge of any fact which would invalidate the instrument or render it useless, the general indorser guarantees that the instrument is valid and subsisting whether or not he has knowledge of the fact.

EXAMINATION OF SECTIONS 14, 15 & 16

1. Incomplete instrument but delivered- The holder or the person in possession has prima facie authority to complete an incomplete instrument by filing up the blank therein only with the material particular. The defense that the instrument had not been filled up in accordance with the authority given and within reasonable time is not available ad against a holder in due course.

2. Incomplete and undelivered. The fact that an incomplete instrument complete without authority had not been delivered is a defense even against a holder in due course. The invalidity of the instrument is only with reference to the parties whose signatures appear on the instrument before and not after delivery.

3. Complete but undelivered- If a complete instrument is found in the possession of an immediate party or remote party other than the holder in due course, there is a prima facie presumption of delivery but subject to rebuttal. An undelivered instrument is inoperative because delivery is pre-requisite to liability. However, if the instrument is no longer in the possession of the person who signed it and it is complete in its terms, a valid and intentional delivery by him is presumed until the contrary is proved. In the hands of a holder in due course, if a complete instrument is in his hands, a valid delivery thereof by all parties prior to him is conclusively presumed.

Rights of the Holder: Section 51

Classes of Holders:

2. Holders simply (section 51)

3. Holder for value (Section 26)

4. Holder in due course (Section 52, 57)

Rights of Holder in general:

1. He may sue on the instrument in his name; and

2. He may receive payment and if the payment is in due course (Section 88), the instrument is discharged (Section 119).

In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable. However, it does not mean that an instrument in the hands of such holder is non-negotiable. Under Section 58 & 59, a holder who is not himself a holder in due course but derives his title from such former holder is given the rights of such former holder.

What constitute a Holder in Due Course?

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

1. That the it is complete and regular upon its face;

2. That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact;

3. That he took it in good faith and for value;

4. 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.

Defenses:

Real Defenses: These are defenses that are available against all parties both immediate and remote including holders in due course. They are called real because they are attached to the res, that is the instrument itself regardless of the merits or demerits of the holder. The instrument is valueless and can never be enforced. It is unenforceable against the party entitled to set up the defense.

a. Incapacity as far as the incapacitated is concerned. (Art. 1327, Civil Code)

b. Illegality of contract when declared by law (Art. 1409, Civil Code) except where the maker or drawer is himself a party to its illegality; thus a note for gambling debt (an illegal consideration) is a mere personal defense (Section 55)

c. Want of delivery of incomplete instrument (Section 15)

d. Forgery (Section 23)

e. Want of authority, apparent and real (Section 23)

f. Duress amounting to forgery as when one takes the hands of another and forces him to sign his name;

g. Fraud in factum or fraud in esse contractus (Section 14)

h. Fraudulent alteration by holder (Sec. 124)

i. Prescription (Art. 1140-1142; 1144-1147, Civil Code)

j. Other Infirmities appearing in the face of the instrument (sec. 52)

k. Discharge at or after maturity

Personal Defenses: These are defenses 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 holder in due course (Section 55). They are available only against the 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.

a. Filing the wrong date (Section 13)

b. Filling up blanks not in accordance with the authority given and within reasonable time (Sec. 4)

c. Want of delivery of complete instrument (Sec. 16)

d. Absence or failure of consideration (section 28)

e. Simple fraud or fraud by inducement (Section 55)

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

g. Acquisition of instrument by unlawful means

h. Acquisition of instrument for an illegal consideration

i. Negotiation in breach of faith

j. Negotiation under circumstances that amounts to fraud

k. Innocent alteration or spoliation (Section 124 last sentence). Spoliation is an alteration made by stranger to an instrument. If the original meaning can be ascertained, the holder in due course may recover according to its tenor.

l. Set-off between immediate parties (Section 58)

m. Discharge by payment or renunciation or release before maturity (Secs. 50, 121, 122)

n. Discharge of party secondarily liable by discharge of prior party (Sec. 20 (c)

o. Want of authority but agent has apparent authority (Art. 1869, Civil Code)

Rights of a Holder not in due course:

1. He may sue on the instrument in his own name (Sec. 51)

2. He may receive payment and if the payment is in due course, he is discharged.

3. He is entitled to the instrument but holds it subject to the same defenses as if it were non-negotiable (Sec. 58) and

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

Rights of purchaser from a holder in due course:

General Rule: If a person is not a holder in due course, his rights are those of his transferee of a non-negotiable instrument so that he is not free from personal defenses.

Exception: A holder who derives his title from a holder in due course hall all the rights of the latter even though he himself is a mere transferee. Requisites:

a. That he derives his title through a holder in due course; and

b. That he was no himself a party to fraud or illegality affecting the instrument.

PRESENTMENT FOR PAYMENT:

Presentment for payment is the presentation of an instruments (promissory note or accepted bill of exchange) to the person primarily liable for the purpose for of demanding and receiving payment.

It is necessary to charge the persons secondarily liable, namely, the drawer and the indorser, Reason: They undertake to pay only of the instrument is dishonored. (Sec. 61. 66)

When is presentment for payment not necessary?

(1) To charge the persons primarily liable (Sec. 70). Reason: They are absolutely required to pay the instrument upon maturity.

(2) When presentment is dispensed with (See Sec. 82)

Where after the exercise of reasonable diligence presentment as required by law cannot be made.

Where the drawee is fictitious person; and

By waiver of presentment, express or implied

(3) Where the bill has been dishonored by non-acceptance (See Sec. 151)

It is duly presented for payment and payment is refused or cannot be obtained; or

Presentment is excused and the instrument is overdue and unpaid (Sec. 83)

(4) To charge the drawer under Section 79 and the indorser under Section 80

Presentment for payment is not required where the drawer has no right to expect or require that the drawee or acceptor will pay the instrument, as where the drawer has stopped payment thereopr or has no funds with the drawee.

Presentment for payment is not required where the instrument was made or accepted for the accommodation of the indorser and he has no reason to expect that the instrument will ne paid of presented. (Sec. 80). Reason: The accommodated payee-indorser is the real debtor.

When should present for payment to be made?

1. Where the instrument is payable at a fixed or determinable future time: - It must be made on the date it falls due without period of grace. (Section 85)

2. Where the instrument is payable on demand:

(a) Promissory note. - It must be made to the maker within reasonable time after its issue. (Sec. 71)

(b) Bill of exchange - it must be made to the drawee or acceptor within a reasonable time after the last negotiation thereof.

Effect if presentment of payment is not made in due time:

The drawer and indorser will be discharged from their secondary liability (Sec. 70) unless such presentment is excused or dispensed with. But this does not mean that the indorsers are also discharged from liability for breach of warranties. (Secs. 65, 66)

Payment In Due Course:

1. Payment must be made at or after the date of maturity; otherwise, it would constitute a negotiation back to the primary party;

2. It must be made to the holder; and

3. It must be made by the maker or acceptor in good faith and without notice that the holders title is defective (sec. 88)

NOTICE OF DISHONOR

An instrument is considered to be dishonored:

1. If it is not accepted when presented for acceptance or

2. If it is not paid when presented for payment at maturity; or

3. If presentment is excuses or waived and the instrument is past due and unpaid (Secs. 83, 149)

Object of giving notice of dishonor is two-fold:

1. To inform the parties secondarilu liable that the maker or acceptor, as the case may be, failed to meet his engagement; and

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

Effect if failure to give notice of dishonor:

When an instrument is dishonored by non-acceptance on presentment for acceptance (bill) or by non-payment at its maturity (both bill and note), notice of such dishonor must be given to persons secondarily liable, namely: drawer, if it be a bill and each indorser, whether it be a bill or note. Any such person to whom such notice is not given is discharged.

Notice of Dishonor is not necessary:

1. To charge persons primarily liable because thy are the very ones who dishonored the instrument;

2. When notice of dishonored is waived;

3. When protest is waived (sec.111). Reason: Protest includes presentment, notice of dishonor and all steps accompanying dishonor necessary to the charge the persons secondarily liable;

4. When notice of dishonor is dispensed with

5. To charge the drawer under Sec. 113 and the indorser under Dec. 115)

6. Where due notice to dishonor by non-acceptance of a bill has been given, in which case notice of subsequent dishonor by non-payment is not necessary, unless in the meantime the instrument has been accepted.

7. Where a bill has been dishonored by non-acceptance, notice of dishonor to persons secondarily liable is not necessary in order to charge them as to the holder in due course, without notice of dishonor by non-acceptance. Reason: The omission to give notice of non-acceptance does not prejudice the rights of a holder in due course subsequent to the omission. (Sec. 117).

Persons who will give notice:

1. By the holder or another on his behalf; or

2. By or on behalf of any party to the instrument-

a. who may be compelled to pay it to the holder and

b. who upon taking it up, would habe a right to reimbursement from the party to whom the notice is given (Se. 90) and is therefore, entitled to give notice (Sec. 93).

If the notice is given by an agent, the latter need not be authorized by the principle (Sec. 91). Reason: The giving of notice benefits the principal.

Effect of Notice of Dishonor given by the holder or by a party entitled to give notice?

1. By the holder. - It inures to the benefit of (a) all subsequent holders and (b) all prior parties who have right of recourse against the party to whom it is given (Sec. 92)

2. By a party entitled to give notice. It inures to the benefit of (a) holder and (b) all subsequent to the party to whom notice is given. ((Sec. 93)