Negotiable Instruments Law 2003

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COMMERCIAL LAW REVIEWER

SAINT LOUIS UNIVERSITY BAR OPERATIONS
NEGOTIABLE INSTRUMENTS LAW

(Act No. 2031)
Negotiable Instruments defined A negotiable instrument is a written contract for the payment of money which complies with the requirements of Sec. 1 of the Negotiable Instruments Law, which, by its form and on its face is intended as a substitute for money and passes from hand to hand as money, so as to give the holder in due course the right to hold the instrument free from defenses available to prior parties. Functions The commercial functions of a negotiable paper are: 1. To supplement the currency of the government; 2. To substitute for money and increase the purchasing medium. * Note: A negotiable instrument is not a legal tender. Principal Features and Characteristics Negotiability 1. Accumulation of secondary contracts Distinguished from instrument Basis Negotiable Instrument -contains all the requisites of Sec. 1 of the NIL. by negotiation -A holder in due course can have rights better than his transferor - prior parties warrant payment - Negotiable Instruments Law a Non negotiable
Classes of Instrument Principal Classes: a. Promissory Note is an unconditional promise in writing 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. (Sec. 184) b. Bill of Exchange- is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person 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. (sec 126) c. Check - is a bill of exchange drawn on a bank payable on demand. (Sec. 185); - A check is a bill of exchange drawn on a bank payable on demand. Thus, a check is a written order addressed to a bank or person carrying on the business of banking, by a party having money in their hands, requesting them to pay on presentment, to a person named therein or to bearer or order, a named sum of money. (Moran v. CA, 230 SCRA 799). Differences between a Promissory Note and a Bill of Exchange: Promissory Note 1. It contains an unconditional promise 2. There are two (2) original parties, viz; maker and payee 3. The original issuer (maker) is primarily liable 4. Only one presentment (for payment) is needed Bill of Exchange 1. It contains an unconditional order 2. There are three (3) original parties, viz; drawer, drawee and payee 3. The original issuer (drawer) is secondarily liable 4. At least two (2) presentments (for acceptance and for payment) are generally needed. a Bill of
1. Requisit es 2. Transfer 3. Rights acquired
Nonnegotiable Instrument -does not have any, some or all of the requisites mentioned in the N.I.L. - by assignment
- A transferee acquires rights no better than his transferor - a prior party does not warrant payment but merely the legality of his title. New Code Civil
Differences between Exchange and a Check:
BILL OF EXCHANGE 1. Not necessarily drawn on a deposit. The drawee need not be a bank. 2. Death of a drawer of a BOE, with the knowledge of the bank, does not revoke the authority of the payee to pay. 3. May be presented for payment within a
4. Warrant y 5. Law that governs
CHECK 1. It is necessary that a check is drawn on a bank deposit. The drawee is always a bank. 2. Death of the drawer of a check, with the knowledge of the bank revokes the authority of the banker to pay. 3. Must be presented for payment within a
Prepared by the COMMERCIAL LAW SECTION Chief MARLON CORPUZ Assistant Chief MA. LOURDES COMTIAG Members MARLON BACUNO, VOLTAIRE GARCIA, JEANNYLENE ISIP, BEVERLY MANZANO, KATHRYN BOLINAS, LOTTA OBADO, GRESIL SANTOS, and VENUS DUGAYON. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS 2003.
COMMERCIAL LAW COMMITTEE

Chief: Marlon S. Corpuz Assistant Chief: Maria Lourdes L. Comtiag Members: Jennylene T. Isip, Beverly T. Manzano, Voltaire B. Garcia, Marlon P. Bacuno, Kathryn G. Bolinas, Gresil G. Santos, Lotta B. Obado, Venus G. Dugayon
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reasonable time after its last negotiation because it may be further negotiated. 4. May be payable on demand or at a fixed or determinable future time

reasonable time after its issue. 4. Always payable on demand.
OTHER FORMS OF NEGOTIABLE INSTRUMENTS: 1. Certificate of deposit issued by banks, payable to the depositor or his order, or to bearer (CALTEX v. CA, 212 SCRA 471) 2. Trade Acceptance; 3. Bonds, which are in the nature of a promissory notes; 4. Drafts which are bills of exchange drawn by one bank upon another; All of these comply with Sec. 1 NIL. Letters of Credit are not negotiable.
An instrument to be negotiable must conform to the following requirements: 1. It must be in writing and signed by the maker or drawer; 2. It must contain an unconditional promise or order to pay a sum certain in money; 3. It must be payable on demand or at a fixed or determinable future time; 4. It must be payable to order or to bearer; 5. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. The validity and negotiable character of a negotiable instrument are NOT affected by the fact that: 1. It is not dated; 2. It does not specify the place where it is drawn or where it is payable; 3. It bears a seal; 4. It designates a particular kind of current money in which payment is to be made (Sec. 6)
NON-NEGOTIABLE DOCUMENTS AND INSTRUMENTS: - There are some documents very similar to, but not, negotiable instruments, because they lack one, some, or all the requirements of a negotiable instrument under Section 1 of the Negotiable Instruments Law. Examples: 1. Treasury Warrants 2. Money Orders 3. Warehouse Receipts 4. Bills of Lading 5. Trust Receipts LEGAL TENDER - That kind of money which the law compels a creditor to accept in payment of his debt when tendered by the debtor in the right amount. - a negotiable instrument is not a legal tender. INCIDENTS IN THE LIFE OF A NEGOTIABLE INSTRUMENT (INPADPDND) 1. Issue 2. Negotiation 3. Presentment for acceptance, in certain kinds of bills of exchange 4. Acceptance 5. Dishonor for non-acceptance 6. Presentment for payment 7. Dishonor by non-payment 8. Notice of dishonor 9. Discharge OF
Requisites of a Negotiable Promissory Note: 1. It must be in writing and signed by the maker; (Relate with Sec. 191) 2. It must contain an unconditional promise or order to pay a sum certain in money; 3. It must be payable on demand, or at fixed or determinable future time; and 4. It must be payable to order or to bearer. Requisites of a Negotiable Bill of Exchange: 1. It must be in writing and signed by the maker; 2. It must contain an unconditional order to pay a sum certain in money; 3. It must be payable on demand or at a fixed or determinable future time; 4. It must be payable to order or to bearer; and 5. The drawee must be named or otherwise indicated therein with reasonable certainty. MEANING REQUISITES: OF PARTICULAR
FORM AND INTERPRETATION NEGOTIABLE INSTRUMENTS Requisites of Negotiability in General
UNCONDITIONAL PROMISE OR ORDER - Where the promise or order is made to depend on a contingent event, it is conditional, and makes the instrument nonnegotiable.
COMMERCIAL LAW COMMITTEE

Chief: Marlon S. Corpuz Assistant Chief: Maria Lourdes L. Comtiag Members: Jennylene T. Isip, Beverly T. Manzano, Voltaire B. Garcia, Marlon P. Chief: Marlon S. Corpuz Assistant Chief: Maria Lourdes L. Comtiag Beverly T. Manzano, Voltaire B. Garcia, Marlon P. Bacuno, Kathryn G. Bolinas, Gresil G. Santos, LottaG. Bolinas, Venus G. Dugayon Bacuno, Kathryn B. Obado, Gresil Santos, Lotta B. Obado, Venus G. Dugayon
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The conditional nature of the promise or order is not effected by: a. An indication of a particular fund from which the acceptor reimburses himself after paying the holder; b. A statement of the transaction which gives rise to the instrument. Distinction PARTICULAR FUND FOR PAYMENT 1. There is only one actthe drawee pays directly from the particular fund indicated. Payment is subject to the condition that the fund is sufficient. 2. Particular fund indicated is the direct source of payment. 3. Indication in the instrument makes the promise or order conditional.

does not affect the negotiable character of the instrument. Acceleration clause - it is a provision that upon default in payment of any installment or of interest, the whole shall become due. PAYABLE IN MONEY General Rule: If some other act besides payment of money is promised or ordered, the instrument becomes non-negotiable. Exceptions: a. Authorizes the sale of collateral securities on default; b. Authorizes confession of judgment on default; c. Waives the benefit of law intended to protect the debtor; d. Allows the creditor the option to require something to be done in lieu of money.
FUND FOR REIMBURSEMENT 1. Drawee pays the payee from his own funds; afterwards, the drawee pays himself from the particular fund indicated. 2. Particular fund indicated is not the direct source of payment but only the source of reimbursement. 3. Indication in the instrument does not affect the unconditional of the promise or order
PAYABLE ON DEMAND An instrument is payable on demand: a. Where it is expressed to be payable on demand, at sight or on presentation; b. Where no period of payment is stated; c. Where the instrument has been issued, accepted or indorsed after maturity. DETERMINABLE FUTURE TIME - Future time is determinable in the following cases: a. At a fixed period after date or sight; b. On or before a specified fixed or determinable future time; c. On or at a fixed period after the occurrence of a specified event, certain to happen, although the exact date is not certain. PAYABLE TO ORDER - The instrument is payable to order where drawn payable to the order of a specified person, or to him or his order. - The payee must be named or otherwise indicated therein with reasonable certainty. PAYABLE TO BEARER a. Where it is expressed to be so payable; b. When payable to a person named therein or bearer; c. When payable to the order of a fictitious or non-existing person, and such fact was known to the drawer or maker; d. When the name of the payee is not the name of a person; e. When the only and last indorsement is an indorsement in blank. An original bearer instrument remains to be a bearer instrument even if indorsed specially and thus can be negotiated by mere delivery.
CERTAINTY OF SUM - The sum is certain if the amount fixed. - The certainty is HOWEVER NOT affected although to be paid: 1. with interests; 2. by stated installments; 3. by stated installments with acceleration clause; 4. with exchange; 5. with cost of collection or attorneys fees. Escalation Clause an agreement pertaining to a loan or increased in the event that the applicable maximum rate of interest is increased by law or by the Monetary Board. De-escalation Clause an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be reduced in the event that the applicable maximum rate of interest is decreased by law or by the Monetary Board. The presence of an escalation clause or a deescalation clause or both in the instrument
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When the payee is vaguely designated, the loss will be borne by the party who caused it the drawer. (Equitable Bank v. IAC, 161 SCRA 518).

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RULES AS TO DATES There are several important principles as to dates in negotiable instruments. These are: 1. Where the instrument, its acceptance, or indorsement is dated, such date is presumed to be the corresponding true date; Date is important 2. Where the instrument is payable within a specified period after date, or after acceptance, in which case the date of the instrument and the date of maturity of the instrument; in these cases, the holder may insert the true date; a. when the instrument is payable on demand, the date is necessary to determine whether the instrument was presented within a reasonable time from issue in the case of notes or from last negotiation in the case of bills, as these factors will show whether the last holder is a holder in due course or not; and b. when the instrument is an interest-bearing one, to determine when the interest starts to run. 3. Antedating or postdating an instrument does not affect validity or negotiability, unless done for an illegal or fraudulent purpose. Rules on Interpretation of Instruments 1. Discrepancy between the Amount in Figures and that in Words - the words prevail, but if the words are ambiguous, reference will be made to the figures to fix the amount. 1. Instrument NOT dated - considered dated on the date of issue 2. Conflict between Written and Printed Provisions - written provisions prevail 3. Interest Provided for, but No starting Date was specified starting date is the date of the instrument, in the absence of said date, from date of issue 4. Instrument Ambiguous - if the instrument is ambiguous such that there is doubt whether it is a bill or note, the holder may treat it as a note or a bill at his option. 5. Signature on Instrument Does not Indicate Capacity in Which Made - Where it cannot be determined in what capacity a person affixed his signature to a negotiable instrument, he is deemed to have signed as an indorser. As indorser, his liability under the instrument is secondary, meaning
that if the party primarily liable cannot pay, the indorser can be made to pay by the holder of the instrument. Where Promissory Note worded Promise to Pay is signed by two (2) makers - Under Section 17 (g) of the NIL and Article 1216 of the Civil Code, where the promissory note was executed jointly and severally by two or mote persons, the payee of the promissory note had the right to hold any one of the two (2) signers of the promissory note responsible for the payment of the whole amount of the note. (Philippine National Bank v. Concepcion Milling Co., 5 SCRA 745).
REAL DEFENSES Those that attach to the instrument itself and are available against all holders, whether in due course or not. (WAD FIMMU WIFE) 1. Want of delivery of incomplete instrument; 2. Alteration; 3. Duress amounting to forgery; 4. Fraud in factum or fraud in esse contractus; 5. Insanity where the insane person has a guardian appointed by the court; 6. Minority; 7. Marriage in the case of a wife; 8. Ultra vires acts of a corporation; where the corporation is absolutely prohibited by its charter or statute from issuing any commercial paper under any circumstances; 9. Want of authority of agent; 10. Illegality of contract where it is the contract or instrument itself which is expressly made illegal by statute; 11. Forgery; 12. Execution of instrument between public enemies PERSONAL DEFENSES/ EQUITABLE DEFENSES Those which are available only against a person not a holder in due course or a subsequent holder who stands in privity with him. (W2A4F2I4N2MU) 1. Want of delivery of complete instrument; 2. Want of authority of agent where he has apparent authority. 3. Absence or failure of consideration, partial or total; 4. Acquisition of the instrument by force, duress or fear; 5. Acquisition of the instrument by unlawful means;
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6. 7. Acquisition of the instrument for an illegal consideration; Filling up of blank contrary to authority given or not within reasonable time, where the instrument is delivered; Fraud in inducement; Insertion of wrong date in an instrument, where it is payable at a fixed period after date and it is issued undated or where it is payable at a fixed period after sight and the acceptance is undated; Intoxication; Insanity where there is no notice of insanity on the part of the one contracting with the insane person; Illegality of contract where the form or consideration is illegal; Negotiation in breach of faith; Negotiation under circumstances that amount to fraud; Mistake; Ultra vires acts of corporations where the corporation has the power to issue negotiable paper but the issuance was not authorized for the particular purpose for which it was issued.

- If completed and delivered without authority, not a valid contract against a person who has signed before delivery even in the hands of HIDC but subsequent holders are liable. C. Complete but Undelivered Instrument (Sec 16) - Between immediate parties and a remote party not a holder in due course, delivery to be effectual must be made by or under the authority of the maker, drawer, acceptor or indorser, as the case may be; a. If the instrument is in the hands of a holder in due course, all prior deliveries are conclusively presumed valid; b. If the instrument is out of the hands of the person who signed it, a valid and intentional delivery is disputably presumed. D. Absence or Failure of Consideration 1. Absence of consideration is the total lack of consideration, no consideration, or illegal consideration. 2. Failure of consideration is failure of agreed consideration to materialize. 3. Both absence and failure of consideration are defenses personal to the prejudiced party, and available against any person not a holder in due course. E. Forgery - Forgery is the counterfeit making or fraudulent alteration of any writing. It may consist of: 1. Signing of anothers name with intent to defraud. 2. Alteration of an instrument in the name, amount, description of payee, etc. with intent to defraud. General Rule: The signature is wholly inoperative, and no right to retain the instrument, or to give a discharge therefore, or to enforce payment thereof against any party to it, is acquired through or under such signature. Exception: The party against whom it is sought to enforce such right is precluded from setting up the defense of forgery or want of authority. (Sec. 23) 1. Those who warrant or admit the genuineness of the signature in question. This includes indorsers, persons negotiating by delivery and acceptors. 2. Those who, by their acts, silence, or negligence are estopped from setting up the defense of forgery.
8. 9.
10. 11. 12. 13. 14. 15. 16.
ABNORMAL AND SIMILARLY DEFICIENT NEGOTIABLE INSTRUMENT A. Causes for Abnormality and Deficiency 1. Lack of Essential Requisites to a contract which are a. Lawful subject matter b. Consideration c. Consent 2. Lack of regularity in issue by absence of a. The material particulars of the questioned instrument, or in their correctness; b. Delivery of instrument made with the knowledge and/or conformity of the maker or the drawer and with intention of making the transferee a holder of the instrument. EFFECTS OF DEFENSES: A. Effects of Incomplete but delivered NI (Sec 14) 1. Holder has prima facie authority to complete the instrument; 2. Completion to be done within a reasonable time and according to the authority given; 3. Holder in due course of the instrument previously completed in breach of instructions can enforce the same as if regularly completed. B. Incomplete and undelivered NI (Sec 15)
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F. MATERIAL ALTERATION OF INSTRUMENT - Any alteration which changes the: 1. date, 2. sum payable, 3. time or place of payment, 4. number or relation of the parties, 5. medium or currency of payment, 6. adds a place of payment where none is specified, 7. which alters the effect of the instrument in any respect. Effect: 1. Alteration by a party -- material alteration avoids the instrument EXCEPT as against the party who made, authorized or assented to the alteration, and subsequent indorsers. --Where the altered instrument, however, is in the hands of a holder in due course, not a party to the alteration, he may enforce payment thereof according to its original tenor regardless of whether the alteration was innocent or fraudulent. 2. Alteration by a stranger (Spoliation) same effect with that alteration made a party. (Sec. 124)

notwithstanding that such holder at the time of taking the instrument knew him to be only an accommodation party. It is a valid defense that the accommodation party did not receive any valuable consideration when he executed the instrument. He is liable to a holder for value by virtue of his being an accommodation party. *** An accommodation party to a negotiable instrument, inspite of the lack of consideration between him and the accommodated party, is liable to any other holder NOT to the accommodated party. (Travel-On, Inc. v. CA, et al, 210 SCRA 351). *** An accommodation partys liability as a solidarily party is unconditional party is unconditional and is not affected by an extension of payment granted by the creditor to the debtor. HOWEVER, where the holder allowed payments by the drawer direct to the contractor without availing of the deed of assignment in its favor, said holder is a bad faith holder, NOT a holder in due course against whom an extension to pay granted by the drawer is a defense by the accommodation party. (Prudencio v. CA, 143 SCRA 6). *** The liability of an accommodation party does not extend to corporate accommodation because the act of the corporate officers is ultra vires. However, these officers are personally liable. (Jose v. CA, 177 SCRA 594). *** A promissory note, with an accommodation co-maker, used to settle an Estafa case, has an illegality of cause, and does not make the accommodation co-maker liable. (United General Industries v. Paler, 112 SCRA 404) ***A promissory note with an accommodation maker, utilized to settle an estafa case, has an illegal consideration, and does not make the co-maker liable. (United Industries v. Paler, 112 SCRA 404) RIGHTS PARTY 1. Against the Accommodated Party - the accommodation party, if obliged to pay to a holder of value, can seek reimbursement from the accommodated party. 2. Against the Co-accommodation Party - where a solidary accommodation maker paid to the bank the balance due on a promissory note, he may seek contribution from the other solidary accommodation maker, in the absence of a contrary agreement between them. This rights springs from an implied promise between the accommodation makers to share OF AN ACCOMMODATION
Accommodation Accommodation is a legal arrangement under which a person called the accommodation party lends his name and credit to another called the accommodated party, without consideration.
Effect: A person to whom the instrument thus executed is subsequently negotiated, has a right of recourse against the accommodation party inspite of the formers knowledge that no consideration passed between the accommodation and accommodated parties. Requisites of Accommodation: 1. The accommodation party must sign as maker, drawer, acceptor or indorser; 2. No value is received by the accommodation party from the accommodation party; and 3. The purpose is to lend the name. (Jose v. CA, 177 SCRA 594). Accommodation Party Is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefore, and for the purpose of lending his name to another person. A corporation cannot act as an accommodation party. Such is an ultra vires act. (Crisologo v CA, 117SCRA594) Liability of the Accommodation Party: - The accommodation party is liable on the instrument to a holder for value
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equally the burdens resulting from their execution of the note. They are joint guarantors of the principal debtor. (Sadaya v. Sevilla). A solidary accommodation maker may: a. demand from the principal debtor reimbursement of the amount which he paid on the promissory note and b. demand contribution from his coaccommodation maker, without first directing his action against the principal debtor, PROVIDED that: b.1. he made the payment by virtue of a judicial demand, or b.2. the principal debtor is insolvent. FORGERY IN CHECKS: A. Forgery in Signature of the Drawer on a Check - the drawer is NOT liable and his drawee bank cannot charge the drawers account for said check because a bank is supposed to know the signatures of its customers, and bears the damage in case it pays under a forged signature of its drawer-customer. - the drawee bank is considered as paying out of its own funds and cannot charge the drawers account. (PNB v. CA, 25 SCRA 693) *** N.B Doctrine of Comparative Negligence the party whose negligence is the proximate cause of loss bears the loss. - the risk of loss must perforce fall on the drawee bank. However, if the drawee bank can prove a failure by the customer/drawer to exercise ordinary care that substantially contributed to the making of the forged signature, the drawer is precluded from asserting the forgery. If at the same time the drawee bank was also negligent to the point of contributing to the loss, then such loss from the forgery can be apportioned between the negligent drawer and the negligent bank. (Associated Bank v. CA, 252 SCRA 620). B. Forgery in the Signature of Indorsers As a matter of practical significance, problems arising from forged indorsements of checks may generally be broken into two (2) types of cases: 1) where forgery was accomplished by a person not associated with the drawer- for example a mail robbery; and 2) where the indorsement was forged by an agent of the drawer. (Gempesaw v. CA, 218 SCRA 682). As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot charge the drawers account for the amount of said check. An EXCEPTION to this rule where the drawer is guilty of such

negligence which causes the bank to honor such a check or checks. If a check is stolen from the payee, it is quite obvious that the drawer cannot possibly discover the forged indorsement by mere examination of his cancelled check. EXECUTION AND NEGOTIATION OF THE INSTRUMENT BY AGENTS AND OTHERS A. By Agents a. The agent must be authorized. b. He must disclose his principal. c. He must sign for and in behalf of his principal. Signature per Procuration A signature per procuration is one made by an agent with a limited authority to sign, and the principal is bound only if the agent acts within the limits of the authority. - It is made by adding per procuration, per proc, p.p. under the agents signature. B. Under a Trade Name or Assumed Name The person signing his trade name or assumed name is liable as if the name were his own. C. Indorsements by Minors and Disqualified Corporations Minors and disqualified corporations, although incapacitated to make or draw instruments, can negotiate instruments, transferring valid titles thereto, but are not liable as indorsers under the said signatures. LIABILITIES OF PARTIES:
A. Parties PRIMARILY Liable 1. Maker a. Engages to pay according to the tenor of the instrument b. Admits the existence of the payee and his capacity to indorse. 2. Acceptor or the Drawee who Accepts the Instrument a. Engages to pay according to the tenor of his acceptance. b. Admits the existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument. c. Admits the existence of the payee and his capacity to indorse. B. Parties Secondarily Liable 1. The Drawer a. Admits the existence of the payee and his capacity to endorse.
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b. Engages that the instrument will be accepted or paid by the party primarily liable. c. Engages that if the instrument is dishonored and proper proceedings are brought, he will pay to the party entitled to be paid. 2. The General Indorser a. Warrants the genuineness of the instrument and in all respects what it purports to be, i. his good title to it, ii. the capacity to contract prior parties, and iii. the instrument is valid and subsisting. b. Engages that the instrument will be paid by the party primarily liable. c. Engages that if the instrument is dishonored, and proper proceedings are taken, he will pay to the other party entitled to be paid. *** The collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior indorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the indorsements. ***Aside from the warranties as an indorser, the collecting bank is made liable because it is privy to the depositor who negotiated the check because it knows him, his address and history for being a client thereof. Thus, it is in a better position to detect forgery or irregularity in the indorsement. (Associated bank v. CA, 252 SCRA 620). aka Doctrine of Comparative Negligence 3. The Irregular Indorser - an irregular indorser is one who affixes his signature in blank on an instrument before delivery. a. Instrument payable to order of third person irregular indorser liable to payee and to subsequent parties; b. Instrument payable to order of maker or drawer liable to all parties subsequent to the maker or drawer; c. Irregular indorser signs for accommodation of payee he is liable to all parties subsequent to the payee. C. PARTIES WITH LIMITED LIABILITY 1. The Qualified Indorser Warranties of a Qualified Indorser a. That the instrument is genuine and in all respect what it purports to be; b. That he has a good title to it;

c. That all prior parties had capacity to contract; d. That he has no knowledge of any fact which would impair the validity of the instrument, or render it valueless. - A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorsers signature the words without recourse, sans recourse or any other word of similar import. - Recourse means resort to a person who is secondarily liable after the default of the person who is primarily liable. Appellant, by indorsing the note with recourse, does not make itself a qualified indorser but a general indorser who is secondarily liable because of such indorsement. 2. Person Negotiating by Delivery A. Warranties a. That the instrument is genuine and in all respect what it purports to be; b. That he has a good title to it; c. That all prior parties had capacity to contract; d. That he has no knowledge of any fact which would impair the validity of the instrument, or render it valueless. B. Warranties extended to immediate transferee only. When Secondary Liability Attaches 1. Acts needed before secondary liability attaches a. Presentment for payment in notes and presentment for acceptance and/or payment in bills of exchange; b. Dishonor by non-payment in notes and dishonor by non-acceptance and/or non-payment in bills of exchange; c. Notice of dishonor to secondary parties. 2. Order in which the Indorsers - They are liable in the ORDER in which their indorsements appear in the instrument the latter ones having a right of recourse against the prior ones. INCIDENTS IN THE LIFE OF AN INSTRUMENT AFTER ITS ISSUE A. Negotiation Negotiation is the transfer of a negotiable instrument from one person to another as to constitute the transferee the holder thereof. 1. Negotiation instrument of the whole
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As a rule the whole instrument must be indorsed EXCEPT when it was partially paid in which case the remainder can be indorsed. 2. Rights Transferred by Negotiation - Negotiation constitutes the transferee a holder of the instrument. A holder is entitled to collect the instrument from the party primarily liable, and if dishonored, from the secondary parties. He can sue in court on the instrument. If the holder is a holder in due course, he takes the instrument from the defects of title of prior parties, free from defenses of prior parties among themselves, and he can enforce the instrument for the full amount thereof against all parties liable thereon. Classes of Negotiation a. By Delivery of the Instrument Alone Negotiation of negotiable instrument may be effected by the delivery alone of the instrument to the transferee in those negotiable instruments which are: originally payable to bearer, or originally payable to order instruments where the last indorsement is an indorsement in blank. b. By Indorsements Followed by Delivery A negotiable instrument payable to the order of a specified person, or to him or his order, may be negotiated by the payee by indorsement followed by delivery of the instrument to the indorsee. Subsequent negotiation may be made in this manner if the holder who indorses acquired the instrument under a special indorsement. The payee of the negotiable instrument acquires no interest with respect thereto until its delivery to him. (Development Bank of Rizal v. Sima Wei) INDORSEMENT legal transaction effected by the writing of ones own name at the: 1. back of the instrument or 2. upon a paper (allonge) attached thereto with or without additional words specifying the person to whom or to whose order the instrument is to be payable whereby one not only transfers legal title to the paper transferred but likewise enters into an implied guaranty that the instrument will be duly paid. (sec 31)

General Rule: Indorsement must be of the entire instrument. Exception: Where instrument has been paid in part, it may be indorsed as to the residue. (Sec 32) Classes of Indorsements: 1. Special the name of the indorsee is specified. 2. Blank is an indorsement which does not specify the name of the indorsee, and usually consists of the indorsers signature and nothing else, found at the back of the instrument. 3. Restrictive limits the right of the indorsee by a. restricting further negotiation, or b. making the indorsee the collecting agent of the indorser, or c. making him (indorsee), a trustee of a person in the indorsement 4. Qualified A qualified indorsement is one where the indorser places under his signature the words without recourse or the like. The qualified indorser does not become liable secondarily under his indorsement. 5. Conditional the right of the indorsee under the instrument is made to depend on the happening of the contingent event stated in the instrument. Said indorsee may however negotiate the instrument succeeding indorsees acquiring right to it subject to the condition in the original indorsement. 6. General 7. Regular a regular indorsement is one placed after the issue of the instrument. 8. Irregular is one placed in blank before issue of the instrument
Effect of Indorsement on Instrument Negotiable by DELIVERY Where an instrument negotiable by delivery is indorsed by the holder, he becomes liable as an indorser.
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Effect of Lack of Indorsement on an Instrument Negotiable by Indorsement Followed by Delivery. Where a holder of an instrument payable to order transfers it for value without indorsing it, the transferee is vested with the title, and acquires the right to have the indorsement of the transferor. For the purpose of determining whether the transferee is a holder in due course or not, the negotiation takes effect on the date of indorsement was actually made. STRIKING OUT OF INDORSEMENTS The holder may STRIKE OUT indorsements NOT NECESSARY TO HIS TITLE. The indorser whose indorsement is struck out and all indorsers subsequent to him are relieved from liability on the instrument. RIGHTS OF HOLDER: The holder of a negotiable instrument may sue thereunder in his own name, and payment to him in due course discharges the instrument. If a promissory note is non-negotiable, subsequent holders can never be holders in due course, but are mere assignees against whom defenses may be raised by prior parties. (Consolidated Plywood v. IFC Leasing, 149 SCRA 448). CLASSES OF HOLDERS 1. Holder in due Course - Section 52 (c) provides that a holder in due course is one who takes the instrument in good faith and for value; and Section 52 (d) provides that in order that one may be a holder in due course it is necessary that at the time the instrument was negotiated to him he had no notice of any xxx defect in the title of the person negotiating it, and lastly Section 59 provides that every holder is deemed provides that every holder is deemed prima facie to be a holder in due course. (Vicente R. de Ocampo & Co. v. Gatchalian, 3 SCRA 596). However, when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as holder in due course. (Bataan Cigar and Cigarette Factory, Inc. v. CA, 230 SCRA 647). What constitutes a holder in due course?

A holder in due course is a holder who has taken the instrument under the following conditions: 1. That 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 for value and in good faith; 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. What constitutes NOTICE OF DEFECT: - To constitute notice of defect in the title of the person negotiating the same, the person to whom it is negotiated must have actual knowledge of such facts that his action in taking the instrument amount to bad faith. (Constructive knowledge). Rights of Holder in Due Course: - Like any other holder, a holder in due course may enforce the instrument and sue thereon in his own name. - He also holds the instrument free any defect of title of prior parties, free from defenses of prior parties among themselves, and he may enforce payment of the instrument for full amount thereof, against all parties liable thereon. *N.B. The fact that the postdated checks were merely issued as security is not a ground for the discharge of the instrument as against a holder in due course. The only grounds are those outlined in Section 119 of the NIL. (State Investment House, Inc. v. CA, 217 SCRA 32). 2. Holder NOT in Due Course A holder not in due course is one who became a holder of an instrument without any, some, or all of the requisites under Section 52 of the Negotiable Instruments Law. - Where a holders title is defective or suspicious, it cannot be stated that the payee acquired the check without the knowledge of said defect in the holders title and for this reason the presumption that it is a holder in due course or that it acquired the instrument in good faith does not exist. (Vicente R. Ocampo v. Gatchalian, 3 SCRA 596). A HOLDER FOR VALUE is one who has all the requisites for a holder in due course EXCEPT notice of want of consideration. He is not necessarily a holder in due course, hence, prior parties may avail of defenses against said holder. (Prudencio v. CA, 143 SCRA 7).
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-In a sale on installment, financed by a financing company, the latter is not a holder in due course, and the defense of failure of consideration may be invoked against it, if the goods bought are defective and cannot be used by the buyer for the purpose for which he bought it. (Consolidated Plywood v. IFC Leasing, 149 SCRA 448). - A person who became a holder of a cashiers check indorsed by the person who stole it, is not a holder in due course, and the issuing bank may refuse to pay the same. (Mesina v. IAC, 145 SCRA 497). - Where the payee acquired the check under circumstances which should have put it to inquiry, why the holder had the check and used it to pay his own personal account, the duty devolved upon it to prove that it actually acquired said check in good faith. - Where a note is acquired by the contract of merger or sale between two banks, and the note is subject to a Holdout Agreement, the holder of that note is NOT a holder in due course. (BPI v. CA, 232 SCRA 305). - The indorsee of a crossed check is a holder NOT in due course, and is subject to the defenses as if the instrument is nonnegotiable. - The only disadvantage of a holder who is not a holder in due course is that the instrument is subject to defenses as if it were nonnegotiable. (Bataan Cigar and Cigarette Factory, Inc. v. CA, 230 SCRA 647). Rights of Holder Not in Due Course - A holder not in due course can enforce the instrument and sue under it in his own name. Prior parties, however, even through remote, can avail against him any defense among these prior parties and prevent the said holder from collecting in whole or in part the amount stated in said instrument. ***That a holder is not a holder in due course does not mean that he cannot recover under the instrument. DEFENSES OF PRIOR PARTIES AGAINST THE HOLDER Classes of Defenses 1. Real or Absolute Defenses - a real or absolute defense is a defense which attaches to the instrument irrespective of the parties and is predicated on the principle that the right sought to be enforced has never existed or has ceased to exist. - A real defense is available against ALL HOLDERS, whether in due course or not. 2. Personal or Equitable Defenses

- a personal or equitable is a defense growing out of an agreement or conduct of a particular person in regard to an instrument which renders it inequitable for him although owner of it, to enforce it against the defendant. - The defense is available against all holders NOT in due course EXCEPT those who derive their rights from holders in due course and who are not parties to any fraud or illegality affecting the instrument. PRESENTMENT A. In Promissory Notes Purpose: Not necessary to make the maker liable, but is necessary to make the secondary parties liable. Requisites: For a valid presentment for payment of a promissory note, the following are necessary: a. made within a reasonable time after issue; b. by the holder or his agent; c. to the party liable under it; d. at a reasonable hour on a business day; and e. at the proper place. ***The holder must exhibit the instrument to the debtor and should deliver it to said debtor if the latter pays. When NOT required Presentment is NOT required: 1. when after due diligence presentment cannot be made; 2. when presentment is waived, and 3. when the indorser is an accommodated party. When Instrument Considered Dishonored The instrument is considered dishonored: 1. when after due presentment for payment, payment is refused, and 2. when presentment being excused, the instrument is overdue and unpaid. B. In Bills of Exchange Presentment for Acceptance Purpose: To get acceptance of the drawee for the purpose of making him liable primarily as an acceptor. It is also a pre-requisite to the accrual of secondary liability against the drawer and the indorser. When necessary It is necessary in the following cases, viz: a. to fix the maturity date; b. where the bill expressly stipulated presentment; c. where the bill is drawn payable elsewhere than at the residence or place of business of the drawee. Requisites.
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- Presentment for acceptance must be made within a reasonable time, by the holder, or his agent, to the drawee or his agent at a reasonable hour on a business day, before the bill is overdue. When excused a. where the drawee is dead, hides or is a fictitious or incapacitated person; b. when after due diligence presentment cannot be made; c. when acceptance is refused on another grounds although presentment is irregular. When Instrument Dishonored By NonAcceptance The instrument is considered dishonored by non-acceptance: a. where such acceptance is refused or cannot be obtained, and b. where acceptance being excused, the bill is not accepted. B. Presentment For Payment Of Accepted Bill Purpose The purpose of presentment for payment of an accepted bill is to collect from the acceptor; and if refused, to collect from the secondary parties. Requisites - The accepted bill must be presented for payment within a reasonable time from the last negotiation by the holder or his agent, to the acceptor or his agent, at a reasonable hour on a business day, and at the proper place as defined. The bill must be exhibited to the acceptor and surrendered to him when he pays. When excused Presentment for payment is excused; a. when after due diligence, it cannot be made, b. when the drawee is a fictitious person, and c. where there is a waiver of presentment. ACCEPTANCE IN BILLS OF EXCHANGE 1. Definition: Acceptance is the signification by the drawee of his assent to the order of the drawer. 2. Requisites: - The acceptance must be in writing, signed by the drawee, and must not express that the drawee will perform his promise by means other than money payment. 3. How made - The acceptance may be on the bill, on a separate paper (allonge), and may even be in writing before the bill is drawn. - The drawee, if he wants to dishonor, must do so expressly within twentyfour (24) hours from presentment to him. If he refuses to act, tears the bill, or refuses to return the bill within said

period of twenty-four hours, he is deemed to have accepted the bill implied acceptance. - A sight draft (usually accompanying a letter of credit in importations) is payable on demand and needs no acceptance by the drawee. (Prudential Bank v. IAC) A. Classes of Acceptance 1. General and Qualified General Acceptance a general acceptance assents without qualification to the order of the drawer. Qualified Acceptance it varies the effect of the bill as drawn. The acceptance is qualified if it is: a. Conditional; b. Partial; c. Local; d. Qualified as to time; e. Accepted by some or more of the drawees but not by all. 2. Express and Constructive - Acceptance is express if written on the instrument by the drawee; and constructive, if drawee, within twenty four hours from presentment to him of the instrument, destroys the same, or refuses or fails to return the bill accepted or unaccepted. DISHONOR 1 .In PROMISSORY NOTE - In a promissory note, dishonor by nonpayment takes place when it is duly presented for payment and payment is refused or cannot be obtained; or if presentment is excused, the instrument is overdue and unpaid. 2. In BILLS OF EXCHANGE - In bills of exchange, where the bill is presented for acceptance and is returned dishonored, or within twenty four hours from presentment, is not returned accepted or unaccepted, there is a dishonor by nonacceptance. -There is a dishonor by non-payment if the bill, after it has been accepted is not paid when presented for payment, or presentment being excused, is no paid on the date of maturity. MATURITY OF NEGOTIABLE INSTRUMENT: 1. Every negotiable instrument is payable at the time fixed therein without grace. 2. When the day of maturity falls on a Sunday or a Holiday, the instrument is payable on the next succeeding business day. 3. Instruments falling due or payable on a Saturday are also to be presented for payment on the next succeeding business day, except when the instrument is payable on demand where it may be the option of the holder to present the instrument for payment before 12:00 noon on Saturday when the entire day is not a holiday. (Sec. 85)
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REQUISITES OF PAYMENT IN DUE COURSE 1. Made at of after maturity. 2. Made to the holder. 3. In good faith and without notice that the holders title is defective. (Sec. 88) Good faith refers to the maker or acceptor and not to the holder. NOTICE OF DISHONOR REQUISITES: 1. Given by a holder or his agent, or by any party who may be compelled by the holder to pay. (Sec. 90) 2. Given to a secondarily liable party or his agent. (Sec. 97) 3. Given within the periods provided by law. (Sec. 102) 4. Given at the proper place (Secs. 103 & 104) WHEN NOTICE OF DISHONOR IS DISPENSED WITH: 1. When the party to be notified knows about the dishonor, actually or constructively (Secs. 114-117) 2. If waived (Sec. 109) When after due diligence, it cannot be given (Sec. 112) DISCHARGE OF NEGOTIABLE INSTRUMENT - A release of all the parties liable from obligations arising thereunder. It renders the instrument without force and effect and, consequently, it can no longer be negotiated. WHEN A NEGOTIABLE INSTRUMENT IS DISCHARGED 1. By payment in due course by or on behalf of the principal debtor; 2. Payment by accommodated party; 3. Intentional cancellation by the holder; 4. By any act which will discharge a simple contract for the payment of money. (Sec. 119) 5. When the principal debtor becomes the holder of the instrument at or after maturity in his own right. BILLS OF EXCHANGE
1. Draft a common term for all bills

of exchange and they are used synonymously. N.B. In bank drafts, DRAWER and DRAWEE are liable to purchaser of draft for not complying with his instructions. 2. Trade Acceptance a bill of exchange payable to order and at a certain maturity, drawn by a seller against the purchaser of goods as drawee, for a fixed sum of money, showing on its face the acceptance of the purchaser of the goods and that it has arisen out of a purchase by goods by the acceptor. 3. Bankers Acceptance a draft or a bill of exchange of which the acceptor is a bank or banker engaged generally in the business of granting bankers acceptance credit. It is similar to a trade acceptance, the fundamental difference being that the bankers acceptance is drawn against a bank instead of the buyer. 4. Trust Receipt the written or printed document signed by the entrustee in favor of the entruster containing terms and conditions substantially complying with the provisions of PD 115 (Trust Receipt Law, which took effect on January 21, 1973). No further formality of execution or authentication shall be necessary to the validity of the trust receipt. -N.B. It is the ENTRUSTEE NOT the ENTRUSTER is the real owner of the trust receipt. The liability of the entrustee to the entruster is EX CONTRACTU not ex delicto. 5. Treasury Warrants a treasury warrant bearing on its face the words payable from the appropriation for food administration is actually an order for payment out of a particular fund and is NOT UNCONDITIONAL, and does not fulfill the one of the essential requirements of a negotiable instrument. (Abubakar v. Auditor General) Money Order a species of draft drawn by the post-office upon another for an amount of money deposited at the first post office by the person purchasing the money order and payable at the second office to a payee named in the order.
Bills of Exchange - it 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 fines or determinable future time a sum certain in money to order or to bearer. TYPES OF BILL OF EXCHANGE:
6.
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N.B. Money order is NOT negotiable. Clean and Documentary Bills of Exchange Clean bill of exchange is one to which are not attached to documents of title to be delivered to the person against whom the bill is drawn when he either accepts or pays the bill. Documentary Bill of Exchange is one to which are attached documents of title to be delivered and surrendered to the drawee when he accepts or pays the bill. D/A and D/P Bills of Exchange Documents Against Payment Bill D/P Bill is a sight or time bill to which are attached documents to be delivered and surrendered to the drawee when he has paid the corresponding bill.

7.
When bill may be treated as promissory note. 1. Where the drawer and the drawee are the person such as, in a draft drawn by an agent on his principal by authority of the principal. 2. Where the drawee is a fictitious person. 3. Where the drawee has no capacity to contract. Referee in case of need is the person whose name was inserted by the drawer of the bill and any indorser to whom the holder may resort in case of need that is in case the bill is dishonored by non-acceptance or by non-payment. N.B. It is the option of the holder to resort to the referee in case of need or not as he may see fit. ACCEPTANCE Acceptance the signification by the drawee of his assent to the order of the drawer. HOW? - The acceptance must be in writing and signed by the drawee. (It may be on the instrument or in a separate paper attached to the instrument, aka, allonge) - It MUST NOT express that the DRAWEE will perform his promise by any other means than the payment of money. KINDS OF ACCEPTANCE: 1. Actual; 2. Constructive; 3. General; or 4. Qualified. REQUISITES OF ACTUAL ACCEPTANCE: - Actual acceptance must be 1. in writing, and 2. signed by the drawee, 3. it must not express that the drawee will perform his promise by another means than the payment of money, and 4. it must be communicated or delivered to the holder. ACCEPTANCE, HOW MADE? - It is usually done by writing across the face of the bill the word ACCEPTED or words of similar import, e.g. HONORED, I WILL PAY THE BILL, SEEN followed by the signature of the drawee. - The drawee must sign because without his signature he would not be bound See Section 18, NIL.
8.
Documents Against Acceptance Bill D/A Bill is a time bill to which are attached documents to be delivered and surrendered to the drawee when he accepts the bill. 9. Time or usance bills- Sight bills are bills which are payable upon presentation or at sight or on demand. Time or usance bills are bills which are payable at a fixed future time or at a determinable future time. Inland Bill of Exchange is a bill which is or on its face purports to be BOTH drawn and payable within the Philippine Islands. Foreign Bill of Exchange- is a bill which is, or on its face purports to be, drawn or payable outside the Philippine Islands. a. to be drawn in the Philippines but payable outside thereof; or b. to be payable in the Philippines but drawn outside thereof.
Importance of the distinction: The distinction is important in 1. That foreign bills are required to be protested. Failure to protest foreign bills will discharge persons secondarily liable thereon. 2. The distinction is also important for the determination of the law applicable.
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- Acceptance by telegram has been held sufficient. N.B. Acceptance is NOT required for CHECKS for the same are payable on demand. EFFECT OF ACCEPTANCE: Upon acceptance, the drawee becomes liable on the bill. The bill becomes in effect a note, the acceptor standing in the place of the maker, and the drawer, in the place of the first indorser. But should the drawee refuse to accept, the payee or the holder has no recourse against him but only against the drawer and indorsers, if any. Is payment equivalent to acceptance? NO, - the payment of a check does not include or imply its acceptance in the sense that this word is used in Section 62, NIL. WHERE BILL MAY BE WRITTEN: - Acceptance may be made 1. on the bill itself, or 2. on a separate paper; and if on a separate paper a. it may be acceptance as to an existing bill; or b. it may be acceptance as to a non-existing bill. If the bill is non-existent, the acceptance on a separate paper must comply with following requirements: i. That the contemplated drawee shall describe the bill to be drawn and promise to accept it. ii. That the bill shall be drawn within a reasonable time after such promise is written; and iii. That the holder shall take the bill upon the credit of the promise.

- Drawee bank is NOT entitled to 24 hours to decide whether for payment NOT acceptance. But, if the check is presented for certification, this ruling will not apply, as certification is equivalent to acceptance. Constructive Acceptance: - this class of acceptance is NOT in writing. 1. Where the drawee to whom the bill is delivered for acceptance, destroys it; or 2. Where the drawee refuses, within 24 hours after such delivery or within such time as is given him, to return the bill accepted or not accepted. - If the holder should demand its return before twenty-four hours, the drawee would be required to comply on pain of being held as an acceptor; but return within twenty-four hours unaccepted would not be a dishonor. In all the foregoing, the drawee will be deemed to have accepted the bill even if there is NO ACTUAL WRITTEN ACCEPTANCE by him.
Section 136. - The drawee is allowed twentyfour hours 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. NOTE: The time allowed begins from the time of delivery and not after demand for a return of the bill and the time for returning the bill to the holder does not begin to run from the demand for its return but from the date of its delivery.
Instances when a bill may be accepted: 1. Before the bill has been signed by the drawer; 2. Even when the bill is otherwise incomplete; 3. Even when the bill is overdue; 4. Even after it has been dishonored by non-acceptance or by non-payment. Kinds of Acceptance: 1. General Acceptance assents without qualification to the order of the drawer. 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. 2. Qualified Acceptance if in express terms varies the effect of the bill as drawn. Kinds of Qualified Acceptance: a. Conditional one which makes payment by the acceptor dependent on the fulfillment of a condition therein stated; b. Partial an acceptance to pay part only of the amount for which the bill is drawn;
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Local an acceptance to pay only at a particular place; d. Qualified as to time e. The acceptance of some or more drawees but NOT ALL. c. The holder of the bill has the right to require GENERAL ACCEPTANCE thus he may REFUSE to take qualified acceptance and if he DOES NOT obtain an unqualified acceptance he may treat the bill as DISHONORED BY NONACCEPTANCE accordingly the holder must give notice of dishonor. Effect of taking acceptance: qualified

i. to make presentment for acceptance or ii. to negotiate the bill within a reasonable time. Presentment, how made: -Presentment MUST be made by or on behalf of the holder: Requisites: 1. It must be presented at a reasonable hour; 2. It must be presented on a business day; and 3. It must be presented before the bill is overdue. To WHOM will it be presented? 1. To the DRAWEE or some person authorized to ACCEPT or REFUSE ACCEPTANCE on his BEHALF; and 2. 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; 3. Where the drawee is dead presentment may be made to his personal representative; 4. 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. Days when presentment may be made: A bill may be presented for acceptance on ANY DAY on which negotiable instruments may be presented for payment. When SATURDAY is NOT OTHER WISE A HOLIDAY presentment for ACCEPTANCE may be made before twelve oclock noon on that day. N.B. The only difference between Section 72 and 85 is that under Section 146 there is no distinction between the instruments payable at a fixed or determinable future time and instruments payable on demand. Where the holder of a bill drawn payable elsewhere other than the
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 qualified acceptance or subsequently assents thereto.
* When the drawer or indorser receives notice of qualified acceptance he must within a REASONABLE TIME express his dissent to the holder or he will be deemed to have assented thereto.
PRESENTMENT FOR ACCEPTANCE Definition: It is the production of a bill of exchange to the drawee for his acceptance. GENERAL RULE: Presentment for acceptance is NOT NECESSARY to render any party to the bill liable. EXCEPTIONS: 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 is 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. NOTE: In those instances found in Section 143 it is NECESSARY in order to charge persons secondarily liable to (Section 144)
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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 that day 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. Instances when PRESENTMENT FOR ACCEPTANCE IS EXCUSED and A BILL MAY BE TREATED AS DISHONORED BY NON-ACCEPTANCE: 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 dishonored by non-acceptance. 1. 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 2. When presentment for acceptance is excused and the bill is not accepted. Duty of the holder where bill is not accepted. 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 nonacceptance or he loses the right of recourse against the drawer and indorsers. HOW? By giving NOTICE OF DISHONOR or by making a PROTEST when required. Rights of accepted: holder where bill is NOT

instrument and declares that they will be held responsible for all loss or damage arising from its dishonor. It means all the steps or acts accompanying the dishonor of a bill or note necessary to charge an indorser, Necessity of Protest: Protest is required only for FOREIGN BILLS, but not for inland bills or notes. HOWEVER, they may also be protested if desired. OMISSION OF PROTEST, where protest is required, will DISCHARGE the DRAWER and the INDORSERS. Instances when protest is required: 1. Where the foreign bill is dishonored by non-acceptance; 2. Where the foreign bill is dishonored by non-payment, it not having been dishonored by non-acceptance; 3. Where the bill has been accepted for honor, it must be protested for nonpayment to the acceptor for honor; or 4. 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. Protest, how made: 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 manner given, it any, or the fact that the drawee or acceptor could not be found. Reason for requiring protest: - Protest is required: 1. for uniformity in international transactions because most countries require it and 2. in order to furnish authentic and satisfactory evidence of the dishonor to the drawer who, from his residence abroad, may experience difficulty in verifying the matter and may be forced to rely on the representation of the holder. -Protest may be made by a. A notary public; pr b. By any respectable resident of the place where the bill is dishonored, in
An immediate right of recourse against the drawer and indorsers accrues to the holder and NO PRESENTMENT for payment is necessary. 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 or note, 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 (or acceptance) was refused, whereupon the notary protests against all parties to such
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the presence of two or more credible witnesses. Protest, when made: Protest MUST be made on the day of its dishonor UNLESS delay is excused*. * When a bill has been DULY NOTED the protest may be subsequently extended as of the date of the noting. DULY NOTED means that a notary public jots down on a note on the bill or an paper attached thereto, or in his registry book, consisting of his initials or signature and those matters required to be stated in Section 153.

bill refused to accept it, and the bill has been protested for non-acceptance or where the bill has been protested for better security. Purpose for acceptance for honor: An acceptance for honor is done to save the credit of the parties to the instrument or some party to it, as the drawer, drawee, or indorser, or somebody else. Requisites for acceptance for honor: 1. The bill must have been previously protested (a) for nonacceptance or (b) for better security; 2. The bill is not overdue at the time of the acceptance for honor; 3. The acceptor for honor must be a stranger to the bill. 4. The holder must give his consent. Acceptance for honor: - acceptance supra protest how made: 1. It must be in writing; 2. It must indicate that it is an acceptance for honor; and 3. It must be signed by the acceptor for honor. NOTE: It is necessary that the acceptor for honor MUST APPEAR before a notary public and declare that he accepts the protested bill in honor of the drawer or indorser, as the case may be, and that he will pay it at the appointed time. The LIABILITY OF THE ACCEPTOR FOR HONOR is SECONDARY NOT primary or absolute. ACCEPTOR FOR HONOR agrees to pay if: 1. presentment for payment has been made; 2. the drawee does not pay; 3. the bill is protested for non-payment; and 4. notice of dishonor is given to him. MATURITY OF A BILL PAYABLE AFTER SIGHT which has been accepted for honor: Maturity is calculated from the date of NOTING of the NON-ACCEPTANCE and NOT from the date of the acceptance for honor. Bills which MUST BE PROTESTED FOR NON-PAYMENT before it will be presented for payment: 1. Where a dishonored bill has been accepted for honor supra protest; or 2. Where a dishonored bill contains a referee in case of need.
Protest where made: GENERALLY the protest must be made at the place where the instrument is dishonored. EXCEPTION: - where that when the bill drawn payable at the place of business or residence of some person other than the drawee has been dishonored by nonacceptance IT MUST BE PROTESTED FOR NON-PAYMENT AT THE PLACE WHERE IT IS EXPRESSED TO BE PAYABLE, AND NO FURTHER PRESENTMENT FOR PAYMENT TO, OR DEMADNN ON, THE DRAWEE IS NECESSARY. A bill MAY BE PROTESTED BEFORE MATURITY aka PROTEST FOR BETTER SECURITY
Requisites for Protest for better security: - A protest for better security must be made: a. After acceptance; b. But before the date of maturity; and c. When the acceptor has been adjudged bankrupt and insolvent or has made an assignment for the benefit of creditors. NOTE: Protest is dispensed with by any circumstances which would dispense with notice of dishonor. When a - PROTEST MAY BE MADE ON A COPY OR WRITTEN PARTICULARS THEREOF. 1. bill is lost or destroyed ; or 2. is wrongfully detained from the person entitled to hold it ACCEPTANCE FOR HONOR Acceptance of a bill made by a stranger to it before maturity, where the drawee of the
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Presentment for payment to acceptor for honor, how made: 1. It must 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; 2. If it is to be presented in some other place other than the place where it was protested, then it must be forwarded within the time specified in Section 104. Delay in making presentment is excused when the delay was caused by events which are BEYOND HIS CONTROL and NOT IMPUTABLE TO DEFAULT, MISCONDUCT or NEGLIGENCE. When a bill is DISHONORED by the ACCEPTOR FOR HONOR it must be protested for non-payment by him.

liabilities of an indorser or of one negotiating by mere delivery. Preference of parties offering to pay for honor: The person WHOSE PAYMENT will DISCHARGE MOST PARTIES to the bill is to be given the preference. Effects on subsequent parties where bill is paid for honor: 1. All parties subsequent to the party for whose honor it is paid are discharged. 2. 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. Effect if the holder REFUSES to receive payment supra protest? He losses his right of recourse against any party who would have been discharged by such payment. Rights of payer for honor: 1. He acquires the rights of the holder under Section 175; and 2. He has also the right to receive both the bill and the protest. BILLS IN SET Bills in set one composed of various parts, each part being numbered and containing a reference to the other parts, all of which parts constitute but one bill. Purpose of bill in set: In order to increase the probability of the bill reaching its destination. Right of holders where different parts are negotiated: Where two or more parts are negotiated to different HOLDERS IN DUE COURSE the HOLDER whose title FIRST ACCRUES AS BETWEEN SUCH HOLDERS is the TRUE OWNER of the bill. Liability of holder who indorses two or more parts of a set to different persons: He is liable on EVERY SUC H PART; and EVERY INDORSER SUBSEQUENT to him is LIABLE on the part he has himself indorsed AS IF SUCH PARTS WERE SEPARATE BILLS. Acceptance of bills in set: The acceptance may be written on any part and it must be written on ONE PART only.
Reason: - In order to fix the liability of the indorsers. PAYMENT FOR HONOR Requisites for payment for honor: 1. The bill has been protested for nonpayment; 2. ANY PERSON, even a party thereto may pay supra protest. NOTE: As distinguished from acceptance for honor the acceptor for honor MUST BE A STRANGER. In payment for honor the PAYOR SUPRA PROTEST may even be a PARTY to the instrument.
Form for payment for honor: 1. The payment must be attested by notarial act appended to the protest, or form an extension to it; and 2. The notarial act must be based in a declaration by the payer for honor. Procedure for payment for honor: 1. The payer or his agent goes to a notary public and declares his intention to pay the bill and for whose honor he pays. 2. The notary then records the declaration in the protest or in a separate paper attached to it. 3. The payor then notifies the person for whose honor he pays within reasonable time. Purpose of payment for honor: Instead of simple negotiation to the person desiring to pay, payment for honor may be availed of when the holder does not want to indorse the bill and thereby incur the
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Effect if the drawee accepts more than one part: If the drawee ACCEPTS MORE THAN ONE PART and such accepted parts are negotiated to different holders in due course he is liable on every part as if it were a separate bill. Payment by acceptor of bills drawn in sets: 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 thereof. Effect of discharging one of a set: Where ONE PART OF A BILL DRAWN in a set is discharged by payment or otherwise THE WHOLE BILL is DISCHARGED except as otherwise provided. PROMISSORY NOTES AND CHECKS 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 certain in money to order or bearer. NOTE: Where a note is drawn to the makers own order, it is NOT complete until indorsed by him. 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. - It is NOT ipso facto negotiable it must first comply with the requirements provided under Section 1, NIL. 2. Bonds - A promise, under seal, to pay money. - The bond certifies that the issuing company is indebted to the bondholder for the amount specified on the face of the bond, and contains an agreement of the company to pay the sum at a specified time in the future, and meanwhile to pay a specified interest on the principal amount at regular intervals, generally six months apart. They are negotiable if it the requisites in Section 1, NIL are complied with.

Classes of Bonds: 1. Mortgage bonds; 2. Equipment Bonds; 3. Collateral trust bonds; 4. Guaranteed bonds; 5. Debentures; and 6. Income bonds; 7. Convertible bonds; 8. Redeemable Bonds; 9. Registered Bonds; and - Coupon Bonds those which are attached a sheet of dated, numbered and similarly printed coupons which the bondholder may cut off when due or thereafter. Such coupons may be served and deposited in a bank, negotiated before the maturity of the interest they represent, and transferred just like any commercial paper. They are negotiable if it the requisites in Section 1, NIL are complied with. 10.Bank Notes - Are promissory notes of the issuing bank payable to bearer on demand and intended to circulate as money. They are regarded as cash and pass from hand to hand without any evidence of titled in the holder than that which arises form possession. However, they are not money. 11.Due Bills - is an instrument whereby one person acknowledges his indebtedness to another. CHECK is a bill of exchange drawn on a bank payable on demand. NOTE: - Acceptance is NOT required for checks for the same are PAYABLE ON DEMAND. - BP 22 took effect on June 29, 1979. Special types of checks: 1. Cashiers check it is a check drawn by the cashier of a bank in the name of the bank against the bank itself payable to a third person or order. 2. Managers Check a 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 cashiers check as to effect and use. 3. Memorandum Checks a check on 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 and non-payment.
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- If it bounces the drawer can be charged for violation of BP 22. 4. Certified Checks a check on which the drawee bank has written an agreement whereby it undertakes to pay the check at any future time when presented for payment, such as, by stamping on the check the word certified and underneath it is written the signature of the cashier. 5. Crossed check How is crossing of check done: it is usually done by drawing two parallel lines transversally on the face of the check. A check may be crossed (1) specially or (2) generally. Crossing specially a check is crossed specially when the name of a particular banker or a company is written between the parallel lines drawn transversally on the face of the check. Crossing generally a check is crossed generally when only the words and company are written between the parallel lines, or when nothing is written at all between the parallel lines. NOTES: 1. Under crossed check the payee has the duty to ascertain the holders title to checks. 2. Drawee should not encash a crossed check but merely the same for deposit. 3. Where other than payee of crossed checks presented it for payment, there is no proper presentment and drawer is not liable thereon. Advantages of crossing check: - it is a good precaution when it is to be forwarded by mail or when it is entrusted to an agent and the drawer wants to be sure that it will be paid to the rightful owner. Check when should it be presented for payment: 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. must be presented within six (6) months otherwise it will become stale. - a check under BP 22 must be presented for payment to the bank within 90 days from date so that the holder will enjoy the benefit of the prima facie presumption that the maker, drawer, or issuer knows at the time of issue that he does not have

sufficient funds in or credit with the drawee bank for payment of such check. A check is a bill of exchange payable on demand is intended for immediate use and not to circulate as a promissory note. Effect if the check was allowed to become stale? - the drawer is discharged but only to the extent of the loss caused by the delay. Hence, if no loss or injury is shown, the drawer is not discharged. Certification of check is an agreement whereby the bank against whom a check is drawn, undertakes to pay it at any future time when presented for payment. A bank is not obliged to the depositor to certify checks. The certification of a check is EQUIVALENT to an ACCEPTANCE. Form of certification: No particular form is required BUT IT MUST BE IN WRITING. The letters O.K., with the initials of the cashier of a bank do not constitute a sufficient certification under modern banking practice. Effect of Certification: 1. It is equivalent to acceptance and is the operative act that makes the drawee bank liable; 2. It operates as an assignment of the funds of the drawer in the hands of the drawee bank; and 3. If obtained by the holder, it discharges persons secondarily liable thereon. Effect where the holder of check procures it to be certified. Where the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon. Indorsers subsequent certification are not discharged. to the
When check operates as an assignment. A check of itself does not operate as 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. DEFINITION OF TERMS 1. Acceptance an acceptance completed by delivery or notification. 2. Action includes counterclaim and setoff.
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3. Bank includes any person or association of persons carrying on the business of banking, whether incorporated or not. 4. Bearer the person in possession of a bill or note which is payable to bearer. 5. Bill means bill of exchange and note means negotiable promissory note. 6. Delivery transfer of possession, actual or constructive, from one person to another. 7. Holder the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof. 8. Indorsement means an indorsement completed by delivery. 9. Instrument means negotiable instrument. 10. Issue means first delivery of the instrument, complete in form, to a person who takes it as a holder. 11. Person includes a body of persons, whether incorporated or not; 12. Value means valuable consideration. 13. Written includes printed and writing includes print.


Negotiable Instruments Law 2003

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COMMERCIAL LAW REVIEWER