II. NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031, effective June
2, 1911)
Negotiable Instrument (NI) - a written contract for the payment of money which complies with the
requirements of Sec. 1 of the NIL, 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 (HDC) the right to hold the instrument free
from defenses available to prior parties.
TWO
DISTINCTIVE FEATURES OF NI:
1. NEGOTIABILITY - it is that attribute or property whereby a bill or note or check 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 to collect the sum payable for himself
free from defenses.
2. ACCUMULATION OF SECONDARY
CONTRACTS - secondary contracts are picked up
and carried along with Negotiable Instruments as they are negotiated from one
person to another; or in the course of negotiation of negotiable instruments, a
series of juridical ties between the parties thereto arise either by law or by
privity. The indorsers become secondarily liable to the holder.
DISTINCTIONS:
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Negotiable INSTRUMENTS
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Non-Negotiable
INSTRUMENTS
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1. Must contain all
requisites of
sec.1
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1.
Does not contain all requisites of sec.1
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2. Transferable by
negotiation
and
assignment.
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2. Transferable by
assignment
not
negotiation
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3.
HDC can have rights better than his transferor
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3. A transferee
acquires no
better
right than his
transferor
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4.
Prior parties warrant payment (secondary liability).
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4. Prior parties do not
warrant payment
but
merely the
legality of
his title.
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CLASSES OF NI:
1.
PROMISSORY NOTE (PN) - 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)
2.
BILL OF EXCHANGE (BE) -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. (Sec. 126)
3.
CHECK- a bill of exchange drawn on a
bank payable on demand. (Sec. 185)
DISTINCTIONS:
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NEGOTIABLE
INSTRUMENT
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NEGOTIABLE
DOCUMENT OF TITLE
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1. The
subject is
Money
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1. The subject is goods
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2. Is itself the property with value
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2. The document is a mere evidence of title – the things
of value being the goods mentioned in the document
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3. Has all the requisites of Sec 1 of NIL
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3. Does not have these requisites
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4. A holder of NI may run after the secondary parties for
payment if dishonored by the party primarily liable
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4.
Intermediate parties are not secondarily liable if the document is dishonored
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5. A holder, if HDC, may acquire rights over the
instrument better than his predecessors
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5. A holder can never acquire rights to the document
better than his predecessors
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Promissory
Note
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Bill of Exchange
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1.
Unconditional promise
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1.
Unconditional order
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2.
Involves 2 parties
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2.
Involves 3 parties
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3.
Maker is primarily liable
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3.
Drawer is only secondarily liable
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4.
Only one presentment: for payment
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4.
Two presentments: for acceptance and for payment
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Billof Exchange
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Check
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1.
Not necessarily drawn on a deposit. The drawee need not be a bank
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1. It is necessary that
a check is drawn on
a bank deposit.
The drawee is
always a bank
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2. Death of a
drawer
of a BOE, with
the
knowledge of
the
bank, does not
revoke the
authority
of the drawee to
pay.
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2. Death of the drawer
of a check, with
the
knowledge of
the
bank, revokes the
authority of the
banker to pay.
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3. May be presented
for payment within
a
reasonable time
after its
last
negotiation
because
it may be further
negotiated.
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3. Must be presented
for payment within a
reasonable time after
its issue.
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4. May be payable on
demand or at a
fixed
or
determinable
future time
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4. Always payable on
demand
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NEGOTIABLE INSTRUMENT
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NEGOTIABLE WAREHOUSE
RECEIPT
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1. If originally payable to
bearer, it will always remain so payable regardless of manner of indorsement
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1. If payable to bearer, it will
be converted into a receipt deliverable
to order, if indorsed specially
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2. A holder in due course may
obtain title better than that of the one who negotiated the instrument to him
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2. The indorsee, even if holder
in due course, obtains only such title as the person who caused the deposit
had over the goods
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ASSIGNMENT
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NEGOTIATION
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1. pertains to contracts in
general
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1.
pertains to negotiable instruments
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2.
holder takes the instrument subject to the defenses obtaining among the
original parties
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2. a
holder in due course takes it free from personal defenses available among the
parties
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OTHER
FORMS OF NEGOTIABLE INSTRUMENTS:
1.
Certificate of deposit issued by banks,
payable to the depositor or his order, or to bearer
2.
Trade acceptance
3.
Bonds, which are in the nature of
promissory notes
4.
Drafts, which are bills of exchange
drawn by one bank upon another
F All
of these must comply with Sec. 1, NIL
NOTE: Letters of credit are not negotiable.
LEGAL
TENDER
F 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.
NOTE: A negotiable instrument although
intended to be a substitute for money, is generally not a legal tender.
(See notes under
New Central Bank Act)
INCIDENTS IN “LIFE” OF NEGOTIABLE
INSTRUMENT: Key: INPAD PDND
1. Issue
2. Negotiation
3. Presentment
for acceptance, in certain kinds of bills of exchange
4. Acceptance
5. Dishonor
by non-acceptance
6. Presentment
for payment
7. Dishonor
by non-payment
8. Notice
of dishonor
9. Discharge
REQUISITES OF NEGOTIABILITY: (Sec. 1)
1.
Must be in
writing and signed by the maker or drawer;
2.
Must contain an
unconditional promise or order to pay a sum certain in money;
3.
Must be payable
on demand, or at a fixed or determinable future time;
4.
Must be payable
to order or to bearer; and
5.
When the
instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.
F
The validity and negotiable character of a negotiable instrument are not affected by the fact that:
a.
it is not dated;
b.
it does not specify the value given or
that any value has been given;
c.
it does not specify the place where it
is drawn or where it is payable;
d.
it bears a seal;
e.
it designates a particular kind of
current money in which payment is to be made. (Sec. 6)
UNCONDITIONAL
PROMISE OR ORDER
- where the promise
or order is made to depend on a contingent event, it is conditional, and the
instrument involved is non-negotiable. The happening of the event does not cure
the defect.
FThe
unconditional nature of the promise or order is not affected by:
a)
An indication of a particular fund out
of which reimbursement is to be made, or a
particular account to be debited with the amount; or
b)
A statement of the transaction which
gives rise to the instrument
But
an order or promise to pay out of a particular fund is NOT unconditional. (Sec. 3)
DISTINCTIONS:
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Fund for
Reimbursement
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Particular
Fund for Payment
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1.
Drawee pays the payee from his own funds; afterwards, the drawee pays himself
from the particular fund indicated.
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1. There
is only one act- the drawee pays directly from the particular fund indicated.
Payment is subject to the condition that the fund is sufficient.
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2.
Particular fund indicated is NOT the direct source of payment but only the
source of reimbursement.
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2.
Particular fund indicated is the direct source of payment.
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3.
Indication in the instrument does not affect the unconditional nature of the
promise or order.
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3.
Indication in the instrument makes the promise or order conditional.
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CERTAINTY OF SUM -
the sum is certain if the amount is fixed.
F The certainty is
however not affected although to be paid:
a.
with interest; or
b.
by stated installments; or
c.
by stated installments with an
acceleration clause;
d.
with exchange; or
e.
with cost of collection or attorney’s
fees. (Sec.
2)
ACCELERATION CLAUSE - renders whole debt due and demandable
upon failure of obligor to comply with certain conditions.
PAYABLE IN MONEY
þGeneral
Rule: If some other act is required other than or in addition to
payment of money, the instrument is not negotiable.
(Sec. 5)
þExceptions:
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; or
d.
allows the creditor the option to
require something in lieu of money.
PAYABLE ON DEMAND (Sec. 7)
F An instrument is payable on demand:
a.
where expressed to be payable on
demand, at sight or on presentation;
b.
where no period of payment is stated;
c.
where issued, accepted, or indorsed
after maturity (only as between immediate parties).
DETERMINABLE FUTURE TIME (Sec. 4)
F An instrument is payable at a
determinable future time when payable:
a.
At a fixed period after date or sight;
b.
On or before a fixed or determinable
future time specified therein; or
c.
On or at a fixed period after the
occurrence of a specified event, which is certain to happen, though the time of
happening is uncertain.
PAYABLE TO
ORDER (Sec. 8)
F The instrument is payable to order
where it is drawn payable to the order of a specified person, or to him or his order.
F The payee must be named or otherwise
indicated therein with reasonable certainty.
PAYABLE TO BEARER (Sec. 9)
F The instrument is payable to bearer:
a.
When it is expressed to be so payable;
or
b.
When it is payable to a person named
therein or to bearer; or
c.
When it is payable to the order of a
fictitious or non-existing person, and such fact was known to the person making
it so payable;or
d.
When the name of the payee does not
purport to be the name of any person; or
e.
When the only or last indorsement is an
indorsement in blank.
NOTE: An instrument originally payable to
bearer can be negotiated by mere delivery even if it is indorsed specifically. If
it is originally a BEARER instrument, it will always be a BEARER instrument.
As
opposed to an original order instrument becoming payable to bearer, if the same
is indorsed specifically, it can NO LONGER be negotiated further by mere
delivery, it has to be indorsed.
CONSTRUCTION OF NEGOTIABLE INSTRUMENTS (Sec. 17)
a-d – self-explanatory
e. When the
instrument is so ambiguous that there is doubt whether it is a bill or note,
the holder may treat it as either at his election;
f.
If one signs
without indicating in what capacity he has affixed his signature, he is
considered an indorser.
g.
If two or more
persons sign “We promise to pay,” their liability is joint (each liable for his
part) but if they sign “I promise to pay,” the liability is solidum (each can
be compelled to comply with the entire obligation).
REAL
DEFENSES - those that attach to the instrument
itself and are available against all holders, whether in due course or not.
Examples:
1.
Alteration;
2.
Want of delivery of incomplete
instrument;
3.
Duress amounting to forgery;
4.
Fraud in factum or fraud in esse
contractus;
5.
Minority;
6.
Marriage in the case of a wife;
7.
Insanity where the insane person has a
guardian appointed by the court;
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. Execution
of instrument between public enemies;
11. Illegality
of contract where it is the contract or instrument itself which is expressly
made illegal by statute; and
12. Forgery.
PERSONAL 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. (a.k.a. equitable defenses)
Examples:
1.
Absence or
failure of consideration, partial or total;
2.
Want of delivery of complete
instrument;
3.
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;
4.
Filling up of blank contrary to
authority given or not within reasonable time, where the instrument is
delivered;
5.
Fraud in inducement;
6.
Acquisition of instrument by force,
duress, or fear;
7.
Acquisition of the instrument by
unlawful means;
8.
Acquisition of the instrument for an
illegal consideration;
9.
Negotiation in breach of faith;
10. Negotiation
under circumstances that amount to fraud;
11. Mistake;
12. Intoxication
(according to better authority);
13. 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;
14. Want
of authority of agent where he has
apparent authority;
15. Insanity
where there is no notice of insanity on the part of the one contracting with
the insane person; and
16. Illegality
of contract where the form or consideration is illegal.
EFFECTS OF DEFENSES:
A.
EFFECTS OF
INCOMPLETE BUT DELIVERED NI: (Sec. 14)
1.
Holder has prima
facie authority to fill up the instrument.
2.
Completion within reasonable time and
according to authority; and
3.
HDC can enforce such despite
deficiency.
B. EFFECTS OF INCOMPLETE AND UNDELIVERED
NI: (Sec. 15)
F If completed and delivered without authority, not a valid contract
against a person who has signed before delivery of the contract even in the
hands of HDC but subsequent indorsers are liable.
C.
EFFECTS OF COMPLETE BUT UNDELIVERED NI: (Sec. 16)
1.
Between immediate
parties and a remote party not a HDC, delivery to be effectual must be
authorized.
2.
As to HDC, all
prior deliveries are conclusively presumed valid; and
3.
If instrument is
not in the hands of drawer/maker, valid and intentional delivery is disputably
presumed.
*For a
comparison of sections of 14, 15 and 16 of the NIL, see Annex A.
D. EFFECT OF ABSENCE OR FAILURE OF CONSIDERATION:
(Sec. 28)
F Personal defense to
the prejudiced party and available against any person not HDC.
E. FORGERY
F counterfeit making or
fraudulent alteration of any writing, which may consist of:
1.
signing of
another’s name with intent to defraud; or
2.
alteration of an
instrument in the name, amount, name of payee, etc. with intent to defraud.
EFFECTS:
F signature (not
instrument itself and subsequent indorsers) is wholly inoperative, and no right
to retain the instrument, or to give a discharge therefor, or to enforce
payment thereof against any party to it, is acquired through or under such
signature UNLESS the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority. (Sec. 23)
F Persons precluded from setting up defense of forgery:
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.
F. MATERIAL ALTERATION:
F any change in the
instrument which affects or changes the liability
of the parties in any way.
EFFECTS:
1.
Alteration by a
party
F Material
alteration avoids the instrument except
as against the party who made, authorized, or assented to the alteration and
subsequent indorsers.
F However, if an
altered instrument is negotiated to a HDC, he may enforce payment thereof
according to its original tenor regardless of whether the alteration was
innocent or fraudulent.
NOTE: Since no distinction is made, it does not matter
whether it is favorable or unfavorable to the party making the alteration. The intent of the law is to preserve the
integrity of the negotiable instruments.
2.
Alteration by a
stranger (spoliation)- the effect is
the same as where the alteration is made by a party, that a HDC can recover on
the original tenor of the instrument. (Sec.
124)
CHANGES IN
THE FOLLOWING CONSTITUTE MATERIAL ALTERATIONS:
1.
date;
2.
sum payable,
either for principal or interest;
3.
time or place of
payment;
4.
number or
relations of the parties;
5.
medium or
currency in which payment is to be made;
6.
that which adds a
place of payment where no place of payment is specified; and
7.
any other change
or addition which alters the effect of the instrument in any respect. (Sec. 125)
PRESUMPTION OF CONSIDERATION:
F Every NI is deemed
prima facie to have been issued for a valuable consideration. Every person
whose signature appears thereon is presumed to have become a party thereto for
value. (Sec. 24)
VALUABLE
CONSIDERATION
In
general, it is said to consist either in some right, interest, profit or
benefit, accruing to the party who makes the contract, or some forbearance,
detriment, loss, responsibility, act, labor, or service on the other side.
ACCOMMODATION
F a legal arrangement
under which a person called the accommodation party, lends his name and credit
to another called the accommodated party, without
any consideration.
REQUISITES :
(Sec. 29)
1.
The accommodation
party must sign as maker, drawer, acceptor, or indorser;
2.
No value is
received by the accommodation party from the accommodated party; and
3.
The purpose is to
lend the name or credit.
EFFECTS OF ACCOMMODATION
F the person to whom
instrument thus executed is subsequently negotiated has a right of recourse
against the accommodation party in spite of the former’s knowledge that no
consideration passed between the accommodation and accommodated parties. (Sec. 29)
NOTE: A
corporation cannot act as an
accommodation party. The issuance or indorsement of negotiable instrument by a
corporation without consideration and for the accommodation of another is ultra vires. (Crisologo v. CA, 117
SCRA 594).
RIGHTS AND LEGAL POSITION OF ACCOMMODATION PARTY:
1.
AP is generally regarded as a surety for the party
accommodated;
2.
When AP makes payment to holder of the
note, he has the right to sue the accommodated party for reimbursement.
LIABILITY
OF ACCOMMODATION PARTY:
F
liable on the instrument to a holder for value notwithstanding such holder at
the time of the taking of the instrument knew him to be only an accommodation
party.
RIGHTS
OF ACCOMMODATION PARTIES AS AGAINST EACH OTHER:
F
may demand contribution from his co-accommodation party without first directing
his action against the principal debtor provided:
a. he
made the payment by virtue of judicial demand; or
b.
the principal debtor is insolvent.
REQUISITES FOR AN AGENT
TO ESCAPE LIABILITY: (Sec.
20)
1.
must be duly authorized;
2.
add words to his signature indicating that he signs as an agent, that
is, for or on behalf of a principal, or in a representative capacity; and
3.
disclose his principal.
F
A signature by “procuration” operates as notice that the agent has but a
limited authority to sign, and the principal is bound only in case the agent in
so signing acted within the actual limits of his authority. (Sec.
21)
F
Indorsement or assignment of the NI by a corporation or by an infant passes the
property therein, notwithstanding that from want of capacity, the corporation
or infant may incur no liability thereon. (Sec.
22)
þGeneral
Rule:
One whose signature does not appear on the
instrument shall not be liable thereon.
þExceptions:
1. The principal who signs through an agent is liable;
2. The forger is liable;
3. One who indorses in a separate
instrument (allonge) is liable;
4. One who signs his assumed or trade
name is liable; and
5. A person negotiating by delivery (as
in the case of a bearer instrument) is liable to his immediate indorsee.
LIABILITIES OF PARTIES:
1.
PARTIES PRIMARILY LIABLE
a.
MAKER (Sec. 60)
(i)
engages to pay
according to the tenor of the instrument; and
(ii)
admits the
existence of the payee and his capacity to indorse.
b.
ACCEPTOR OR
DRAWEE (Sec. 62)
(i)
engages to pay
according to the tenor of his acceptance;
(ii)
admits the
existence of the drawer, the genuineness of his signature and his capacity and
authority to draw the instrument; and
(iii)
admits the
existence of the payee and his capacity to indorse.
2. PARTIES
SECONDARILY LIABLE
a.
DRAWER (Sec. 61)
(i)
admits the
existence of the payee and his capacity to indorse;
(ii)
engages that the
instrument will be accepted or paid by the party primarily liable; and
(iii)
engages that if
the instrument is dishonored and proper proceedings are brought, he will pay to
the party entitled to be paid.
b.
GENERAL INDORSER (Sec. 66)
(i)
warrants ---
(1)
genuineness of
the instrument;
(2)
his good title to
it;
(3)
capacity to
contract of prior parties; and
(4)
instrument is
valid and subsisting.
(ii)
engages that the
instrument will be accepted or paid by the party primarily liable; and
(iii)
engages that if
the instrument is dishonored and proper proceedings are taken, he will pay to the party entitled to be paid.
c.
IRREGULAR
INDORSER – a person, not otherwise a party to an instrument, places his
signature thereon in blank before delivery. (Sec. 64)
(i)
If instrument
payable to the order of a 3rd person, he is liable to the payee and
subsequent parties.
(ii)
If instrument
payable to order of maker or drawer, he is liable to all parties subsequent to
the maker or drawer.
(iii)
If he signs for
accommodation of the payee, he is liable to all parties subsequent to the
payee.
3. PARTIES WITH
LIMITED LIABILITY (Sec. 65; Metropol
Financing v. Sambok, 120
SCRA 864)
a.
QUALIFIED
INDORSER - warrants that
(i)
instrument is
genuine and in all respects what it purports to be;
(ii)
he has good title
to it;
(iii)
all prior parties
had capacity to contract;
(iv) he has no knowledge of any fact which would impair the
validity of the instrument or render it valueless.
b.
PERSONS
NEGOTIATING BY DELIVERY
warranties same as those of
qualified indorsers; and
warranties extend to immediate
transferee only.
DISTINCTIONS:
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Negotiating by
Mere delivery or by Qualified Indorsement
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General Indorser
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1.
No secondary
liability;
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1.
With secondary
liability;
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2.
Warrants that
he has no knowledge of any fact which would impair the validity of the
instrument or render it valueless.
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2.
Warrants that
the instrument is, at the time of his indorsement, valid and subsisting.
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NEGOTIATION – the
transfer of a NI from one person to another as to constitute the transferee the
holder thereof. If the NI is payable to bearer, it can be negotiated by
delivery; if it is payable to order, it is negotiated by the indorsement of the
holder completed by delivery. (Sec. 30)
INDORSEMENT-
legal transaction effected by the writing of one's own name
at the:
a.
back of the instrument or
b. 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)
þGeneral Rule:
Indorsement must be of the entire instrument.
þException:
Where instrument has been paid in
part, it may be indorsed as to the residue.
(Sec. 32)
KINDS OF
INDORSEMENT:
A. SPECIAL
INDORSEMENT - specifies the person to whom or to whose order, the instrument is to be payable (Sec. 34)
B. BLANK
INDORSEMENT - specifies no indorsee:
1.
instrument is payable to bearer and may
be negotiated by delivery (Sec. 34)
2. may
be converted to special indorsement by writing over the signature of indorser
in blank any contract consistent with character of indorsement (Sec. 35)
C.
ABSOLUTE INDORSEMENT - one by
which indorser binds himself to pay:
1.
upon no other condition than failure of
prior parties to do so;
2.
upon due notice to him of such failure.
D.
CONDITIONAL INDORSEMENT -
right of the indorsee is made to depend on the happening of a contingent event.
Party required to pay may disregard the conditions.
(Sec. 39)
E.
RESTRICTIVE INDORSEMENT
F An indorsement is restrictive, when it
either:
a. prohibits further negotiation of the instrument; or
b. constitutes
the indorsee the agent of the indorser; or
c. vests the
title in the indorsee in trust for or to the use of some other persons. But
mere absence of words implying power to negotiate does not make an indorsement
restrictive.(Sec. 36)
F. QUALIFIED – constitutes the indorser a
mere assignor of the title to the instrument. (Sec. 38)
F made
by adding to the indoser's signature words like "sans recourse,” “without
recourse", "indorser not holder", "at the indorser's own risk", etc.
G. JOINT - indorsement payable to 2 or
more persons (Sec. 41)
H.
SUCCESSIVE
I.
IRREGULAR- a person who, not
otherwise a party to an instrument, places thereon his signature in blank
before delivery (Sec. 64)
J. FACULTATIVE
REQUISITES
BEFORE SECONDARY LIABILITY ATTACHES:
1.
Presentment
for payment in notes and presentment
for acceptance and/or payment in bills of exchange;
2.
Dishonor by non-payment in notes and dishonor by
non-acceptance and/or non-payment in bills of exchange; and
3.
Notice of
dishonor to secondary parties.
Recourse: Resort to a person secondarily liable after default of
person primarily liable.
STRIKING OUT INDORSEMENT
F The holder may at any
time strike out any indorsement which is not necessary to his title. The
indorser whose indorsement is struck out, and all indorsers subsequent to him,
are thereby relieved from liability
on the instrument. (Sec. 48)
HOLDER IN DUE COURSE
F A holder who has
taken the instrument under the following conditions:
1.
Instrument is
complete and regular upon its face;
2.
Became a holder
before it was overdue and without notice that
it had been previously dishonored;
3.
For value and in
good faith; and
4.
At the time he
took it, he had no notice of any infirmity in the instrument nor defect in the
title of the person negotiating it.(Sec.
52)
RIGHTS OF A HOLDER IN DUE COURSE:
1. May sue on the instrument in his own name;
2. May receive
payment and if payment is in due course, the instrument is discharged;
3.
Holds the
instrument free from any defect of title of prior parties and free from
defenses available to parties among themselves; and
4.
May enforce
payment of the instrument for the full amount thereof against all parties
liable thereon. (Secs. 51 and 57)
PRESENTMENT – the production of a bill of
exchange to the drawee for his acceptance, or to the drawee or acceptor for
payment or the production of a PN to the party liable for the payment of the
same. (Sec. 70)
PRESENTMENT
FOR PAYMENT CONSISTS OF:
1.
personal demand
for payment at the proper place; and
2.
readiness to
exhibit the instrument if required, and to receive payment and to surrender the
instrument if the debtor is willing to pay.
WHEN
PRESENTMENT FOR PAYMENT SHOULD BE MADE:
1.
Promissory note
payable on demand: within reasonable time after
its issue;
2.
Bill of exchange
payable on demand: within reasonable time after its last negotiation;
3.
Instrument
payable on a specified date: on the date it falls due. (Sec. 71)
WHAT
CONSTITUTES SUFFICIENT PRESENTMENT:
1.
made by the
holder or any person authorized to receive payment on his behalf;
2.
at a reasonable
hour on a business day;
3.
at a proper
place;
4.
to the person
primarily liable or if he is absent or inaccessible, to any person found at the
place where the presentment is made. (Sec.
72)
PRESENTMENT
FOR PAYMENT IS MADE AT A PROPER PLACE WHERE:
1.
the instrument is
presented at the place specified;
2.
no place is
specified, and the address of the person to make payment is given, and it is
there presented;
3.
no place is
specified, no address is given, and it is presented at the usual place of
business or residence of the person to
make payment;
4.
in any other
case, if presented to the person to make payment wherever he can be found, or
if presented at his last known place of business or residence. (Sec. 73)
PURPOSE OF EXHIBITION:
To enable the debtor to:
1.
determine the
genuineness of the instrument and the right of the holder to receive payment;
and
2.
to enable him to
reclaim possession upon payment.
WHEN
EXHIBITION EXCUSED:
1.
when debtor does
not demand to see the instrument but refuses payment on some other grounds, and
2.
when the
instrument is lost or destroyed.
F Instrument payable at a bank must be made during
banking hours unless there are no funds to meet it at any time during the
day, presentment at any hour before the
bank is closed on that day is sufficient. (Sec.
75)
F If the person liable is dead, presentment may be made
to his personal representative, if there be one, and if he can be found. (Sec. 76)
PRESENTMENT
FOR PAYMENT IS NOT REQUIRED:
1.
in order to
charge the drawer where he has no right to expect or require that the drawee or
acceptor will pay the instrument;(Sec.
79)
2.
in order to
charge an indorser when the instrument was made or accepted for his
accommodation and he has no reason to expect that the instrument will be paid
if presented. (Sec.
80)
WHEN DELAY
IN MAKING PRESENTMENT OR OF GIVING NOTICE IS EXCUSED:
1. when caused by circumstances beyond the control of
the holder; and
2. not imputable to his default,
misconduct, or negligence. (Sec. 81)
WHEN
PRESENTMENT FOR PAYMENT IS EXCUSED:
1.
after exercise of
reasonable diligence, it cannot be made;
2.
drawee is a
fictitious person;
3.
express or
implied waiver. (Sec. 82)
THE
INSTRUMENT IS DISHONORED BY NON-PAYMENT WHEN:
1.
It is duly
presented for payment and payment is refused or cannot be obtained;
2.
Presentment is
excused and the instrument is overdue and unpaid. (Sec. 83)
F When instrument is dishonored by non-payment, there
is an immediate right of recourse by the holder against persons secondarily
liable. However, notice of dishonor is
generally required. (Sec. 84)
MATURITY OF NEGOTIABLE INSTRUMENT:
F Every negotiable instrument is payable at the time
fixed therein without grace. When the day of maturity falls upon Sunday or a
holiday, the instrument is payable on the next succeeding business day.
Instruments falling due or payable on Saturday are also to be presented for
payment on the next succeeding business day, except that instrument payable on
demand may, at the option of the holder, be presented for payment before 12:00
noon on Saturday when that entire day is not a holiday. (Sec. 85)
REQUISITES OF PAYMENT IN DUE COURSE:
1.
Payment must be
made at or after maturity.
2.
Payment must be
made to the holder.
3.
Payment must be
made in good faith and without notice that the holder’s title is defective. (Sec. 88)
F Good faith refers to the maker or acceptor and not to
the holder.
NOTICE OF DISHONOR - notice given by
holder or his agent to party or parties secondarily liable that instrument was
dishonored by non-acceptance by drawee of a bill, or by non-payment by acceptor
of a bill or by non-payment by maker of a note. (Sec. 89)
REQUISITES:
1.
Given by holder or his agent, or by any
party who may be compelled by the holder to pay (Sec. 90);
2.
Given to secondary party or his agent (Sec. 97);
3.
Given within the periods provided by
law (Sec. 102); and
4.
Given at the proper place (Secs. 103 and 104)
WHEN NOTICE OF DISHONOR IS
DISPENSED WITH:
1.
when party to be notified knows about
the dishonor, actually or constructively (Secs.
114-117);
2.
if waived (Sec. 109); and
3.
when after due diligence, it cannot be
given (Sec. 112).
WHERE
INSTRUMENTS PAYABLE IN INSTALLMENTS:
1.
No acceleration
clause – failure to give notice of dishonor on a previous installment does not
discharge drawers and indorsers as to succeeding installments.
2.
With acceleration
clause – failure to give notice of dishonor as to previous installment will
discharge the persons secondarily liable as to the succeeding installments.
How given:
1.
by bringing
verbally or
2.
by writing to the
knowledge of the person liable the fact that a specified instrument, upon proper
proceedings taken, has not been accepted or has not been paid, and that the
party notified is expected to pay it.
To whom given:
1.
Non-acceptance
(bill) – to persons secondarily liable, namely, the drawer and indorsers as the
case may be.
2.
Non-payment (both
bill and note) – indorsers.
NOTE: Notice must be given to persons secondarily liable.
Otherwise, such parties are discharged. Notice may be given to the party
himself or to his agent.
By whom given:
1.
the holder
2.
another on behalf
of the holder
3.
any party to the
instrument who may be compelled to pay it to the holder, and who would have a
right of reimbursement from the party to whom notice is given. (Sec. 90)
F Notice of dishonor given by or on behalf of a holder inures to the benefit of:
1.
all parties prior
to the holder, who have a right of recourse against the party to whom the
notice is given; and
2.
all holders
subsequent to the holder giving notice. (Sec.
92)
F Notice of dishonor given by or on behalf of a party entitled to give notice inures to the
benefit of:
1.
the holder; and
2.
all parties
subsequent to the party to whom notice is given. (Sec. 93)
F Where an instrument is dishonored in the hands of an agent, he can do either of the ff.:
1.
directly give
notice to persons secondarily liable thereon; or
2.
give notice to
his principal. In such case, he must
give notice within the time allowed by law as if he were a holder. (Sec. 94)
F A party giving notice is deemed to have given due
notice where:
1. the notice of
dishonor is duly addressed, and
2. deposited in
the post-office, even when there is miscarriage of mail. (Sec. 105)
F Where a party receives notice of dishonor, he has,
after the receipt of such notice, the same time for giving notice to antecedent
parties that the holder has after the dishonor. (Sec. 107)
F Notice may be waived
either before the time of giving notice, or after the omission to give due
notice. Waiver may be expressed or
implied. (Sec. 109)
F As to who are affected by an express waiver depends on where the waiver is written:
1.
if it appears in
the body or on the face of the instrument, it binds all parties; but
2.
if it is written
above the signature of an indorser, it binds him only. (Sec. 110)
F Notice of dishonor is not required to be given to the drawer in any of the ff. cases:
1.
drawer and drawee
are the same;
2.
drawee is a
fictitious person or not having the capacity to contract;
3.
drawer is the
person to whom the instrument is presented for payment;
4.
the drawer has no right to expect or require that
the drawee or acceptor will honor the instrument;
5.
where the drawer
has countermanded payment. (Sec. 114)
F Notice of dishonor is not required to be given to an indorser in the ff. cases:
1.
drawee is a
fictitious person or does not have the capacity to contract, and indorser was
aware of that fact at the time he indorsed the instrument;
2.
indorser is the
person to whom the instrument is presented for payment;
3.
instrument was
made or accepted for his accommodation. (Sec.
115)
F If an instrument is not accepted by the drawee, there
is no sense presenting it again for payment, and notice of dishonor must at
once be given. If there was acceptance,
presentment for payment is still required and if payment is refused, there is a
need for notice of dishonor. (Sec. 116)
F An omission to give notice of dishonor by non-acceptance
does not prejudice the rights of a holder in due course subsequent to the
omission. (Sec. 117)
DISCHARGE OF NEGOTIABLE INSTRUMENT
F a release of all parties, whether primary or
secondary, from the 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.
WHEN A
PERSON SECONDARILY LIABLE IS DISCHARGED:
1.
By any act which
discharges the instrument;
2.
By the
intentional cancellation of his signature by the holder;
3.
By the discharge
of a prior party;
4.
By a valid tender
of payment made by a prior party;
5.
By the release of
the principal debtor, unless the holder’s right of recourse against the party
secondarily liable is expressly reserved;
6.
By any agreement
binding upon the holder to extend the time of payment or to postpone the
holder’s right to enforce the instrument. (Sec.
120)
F In the following cases, the agreement to
extend the time of payment does not discharge a party secondarily
liable:
a)
where the
extension of time is consented to by such party;
b)
where the holder
expressly reserves his right of recourse against such party.
F Payment at or after maturity by a party secondarily
liable does not discharge the instrument.
It only cancels his own liability and that of the parties subsequent to
him. (Sec. 121)
EFFECTS OF
RENUNCIATION: (Sec. 122)
1.
A renunciation in
favor of a secondary party may be made by the holder before, at or after
maturity of the instrument. The effect
is to discharge only such secondary party and all parties subsequent to him but
the instrument itself remains in force.
2.
A renunciation in
favor of the principal debtor may be effected at or after maturity. The effect is to discharge the instrument and
all parties thereto provided the renunciation is made unconditionally and
absolutely.
NOTE:
In either case, renunciation does not affect the rights of a holder in
due course without notice.
F Cancellation
of an instrument includes tearing, erasure, obliteration, or burning. It is not limited to writing of the word
‘cancelled”, or “paid”, or drawing of criss-cross lines across the instrument. (Sec. 123)
ACCEPTANCE AND PRESENTMENT
FOR ACCEPTANCE (Secs. 132-151)
F Acceptance of a bill is the signification by the
drawee of his assent to the order of the drawer. It is the act by which the
drawee manifests his consent to comply with the request contained in the bill
of exchange directed to him.
F Acceptance must be in writing and signed
by the drawee and must not express that the drawee will perform his promise by
any other means than the payment of money. (Sec. 132)
F The holder of the bill presenting the same for
acceptance may require that the acceptance be written on the bill, and if such
request is refused, may treat the bill as dishonored. (Sec. 133)
KINDS OF
ACCEPTANCE:
1.
GENERAL -
assents without qualification to the order of the drawer.
2.
QUALIFIED -
which in express terms varies the effect of the bill as drawn.
a. Conditional - 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.
c.
Local - an
acceptance to pay only at a particular place.
d.
Qualified as to
time
e.
The acceptance of
some one or more of the drawees but not of all. (Sec. 141)
WHEN
PRESENTMENT FOR ACCEPTANCE IS REQUIRED:
1.
where the bill is
payable after sight, or when it is necessary in order to fix the maturity of
the instrument;
2.
where the bill
expressly stipulates that it shall be presented for acceptance;
3.
where the bill is
drawn payable elsewhere than at the residence or place of business of the
drawee. (Sec. 143)
NOTE: In all the above cases, the holder must either present the bill for
acceptance or negotiate it within a reasonable time; otherwise, the drawer and
all indorsers are discharged. (Sec. 144)
FORM OF
PRESENTMENT FOR ACCEPTANCE:
1.
must be made by
or on behalf of the holder;
2.
at a reasonable
hour on a business day;
3.
before the bill
is overdue; and
4.
to the drawee or
some person authorized to accept or refuse to accept on his behalf.
WHEN
PRESENTMENT EXCUSED:
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.
after exercise of
reasonable diligence, presentment cannot be made;
3.
although
presentment has been irregular, acceptance has been refused on some other
ground. (Sec. 148)
WHEN BILL
DISHONORED BY NON-ACCEPTANCE:
1.
when it is duly
presented for acceptance and such an acceptance is refused or cannot be
obtained; or
2.
when presentment
for acceptance is excused, and the bill is not accepted. (Sec. 149)
F If bill is duly presented for acceptance and it is
not accepted within the prescribed time, the person presenting it must treat
the bill as dishonored by non-acceptance or he loses the right of recourse
against the drawer and indorsers. (Sec.
150)
F When a bill is dishonored by non-acceptance, an
immediate right of recourse against the drawer and indorsers accrues to the
holder and no presentment for payment is necessary. (Sec. 151)
F There is implied acceptance if after 24 hours, the
drawee fails to return the instrument. He is also deemed to have accepted the
instrument when he destroys the same.
PROTEST - the formal
instrument executed usually by a notary public certifying that the legal steps
necessary to fix the liability of the drawee and the indorsers have been taken.
F Where protest is waived, presentment and notice of
dishonor are also deemed waived. But where the notice of dishonor is waived,
presentment is not waived.
F Protest is necessary only in case of foreign bills of
exchange which have been dishonored by non-acceptance or non-payment, as the
case may be. If it is not so protested,
the drawer and indorsers are discharged. (Sec.
118)
FOREIGN BILL OF EXCHANGE:
1.
Drawn in the
Philippines but payable outside the Philippines.
2.
Payable in the
Philippines but drawn outside the Philippines.
PROTEST MAY BE MADE BY:
1.
a notary public;
or
2.
any respectable resident
of the place where the bill is dishonored, in the presence of 2 or more
credible witnesses. (Sec. 154)
F Protest for better security is one
made by the holder of a bill after it has been accepted but before it matures,
against the drawer and indorsers, where the acceptor has been adjudged a
bankrupt or an insolvent, or has made an assignment for the benefit
of the creditors. (Sec. 158)
ACCEPTANCE FOR HONOR
F an undertaking by a stranger to a bill after protest
for the benefit of any party liable thereon or for the honor of the person for
whose account the bill is drawn which acceptance inures also to the benefit of
all parties subsequent to the person for whose honor it is accepted, and
conditioned to pay the bill when it becomes due if the original drawee does not
pay it. (Secs. 161-170)
REQUISITES:
1.
the bill must
have been protested for dishonor by non-acceptance or for better security;
2.
the acceptor for
honor must be a stranger and not a party already liable on the instrument;
3.
bill must not be
overdue;
4.
acceptance for
honor must be with the consent of the holder of the instrument.
FORMAL
REQUISITES:
1.
must be in
writing;
2.
must indicate
that it is an acceptance for honor;
3.
signed by the
acceptor for honor;
4.
must contain an
express or implied promise to pay money;
5.
the accepted bill
for honor must be delivered to the holder.
PAYMENT FOR HONOR
F payment made by a person, whether a party to the bill
or not, after it has been protested for non-payment, for the benefit of any
party liable thereon or for the benefit of the person for whose account it was
drawn. (Secs. 171-177)
REQUISITES:
1.
the bill has been
dishonored by non-payment;
2.
it has been
protested for non-payment;
3.
payment supra
protest (another term for payment for honor because prior protest for non-payment
is required) is made by any person, even by a party thereto;
4.
the payment is
attested by a notarial act of honor which must be appended to the protest or
form an extension of it;
5.
the notarial act
must be based on the declaration made by the payor for honor or his agent of
his intention to pay the bill for honor and for whose honor he pays.
NOTE: If the above formalities are not complied with,
payment will operate as a mere voluntary payment and the payor will acquire no
right to full reimbursement against the party for whose honor he pays.
F In payment for honor, the payee cannot refuse
payment. If he refuses, he cannot
recover from the parties who would have been discharged had he accepted the
same. In acceptance for honor, the
holder’s consent is necessary.
F The payor for honor is given the right to receive
both the bill and the protest obviously to enable him to enforce his rights
against the parties who are liable to him.
BILL IN SET - one composed of
several parts, each part being numbered and containing a reference to the other
parts, the whole of the parts constituting but one bill.
Purpose: It
is usually availed of in cases where a bill had to be sent to a distant place
through some conveyance. If each part is
sent by different means of conveyances, the chance that at least one part of
the set would reach its destination would be greater.
F Rights of
holders where parts are negotiated separately:
1.
If both are HDC,
the holder whose title first accrues is considered the true owner of the bill.
2.
But the person
who accepts or pays in due course shall not be prejudiced. (Sec. 179)
F Obligations of
holder who indorses 2 or more parts of the bill in set:
1.
the person shall
be liable on every such part;
2.
every indorser
subsequent to him is liable on the part he has himself indorsed, as if such
parts were separate bills. (Sec. 180)
BILLS OF EXCHANGE
F A bill itself does not operate as an assignment of
the funds in the hands of the drawee available for the payment thereof and the
drawee is not liable on the bill unless and until he accepts the same. (Sec. 127)
F The holder of
the bill, at his option, may treat the instrument either as a bill of exchange
or a promissory note if:
a. the drawer and the drawee are the same person; or
b. drawee is a fictitious person; or
c. drawee does not have the capacity to contract.(Sec. 130)
d. where the bill is drawn on a person
who is legally absent;
e. where the bill is ambiguous (Sec. 17[e])
CHECKS
F A check must be presented for payment within
reasonable time after its issue or the drawer will be discharged from liability
thereon to the extent of the loss caused by the delay. (Sec.
186)
F Where a check is certified by the bank on which it is
drawn, the certification is equivalent to an acceptance. And when the holder thereof
procures it to be accepted or certified, the drawer and all indorsers are
discharged from liability. (Secs.
187-188)
F A check of itself does not operate as an assignment
of any part of the funds to the credit of the drawer with the bank. The bank is
not liable to the holder, unless and until it accepts or certifies the check. (Sec. 189)
F A crossed check is a check which in addition to the
usual contents of an ordinary check contains also the name of a certain banker
or business entity through whom it must be presented for payment.
F The effects of crossing a check are:
a)
That the check
may not be encashed; it may only be deposited with the bank;
b)
That the check
may be negotiated only once to a person who has an account with the bank; and
c)
That it serves as
a warning to the holder that the check has been issued for a definite purpose.
F A holder who receives a crossed check without
inquiring into the purpose for which it was issued cannot be a holder in due
course.
