Notes on Negotiable Instruments.

Who are the parties primarily liable in a bill of exchange?

The parties primarily liable in a bill of exchange are:

1. Acceptor;
2. Accommodation acceptor;

Who are the parties secondarily liable in bill of exchange?

The parties secondarily liable in a bill of exchange are:

1. General endorsers;
2. Acceptor for honor;
3. Accommodation drawer.

Note that an accommodating partys liability is not strictly primary and

secondary per se. It depends on what capacity the accommodating party signed; as a
maker, drawer, endorser, or acceptor.

This is because the accommodating party, by lending his name, becomes a surety
for the accommodated party. Therefore, the capacity with which he signs, determines
his liabilities. These may be either primary or secondary. The same principle goes for
persons signing as agents, if they fail to sign in accordance to Section 20, of the
Negotiable Instruments Law.

The Negotiable Instruments Law has special rules for the liability of irregular
endorsers. The rules are:

1. If the instrument is payable to the order of third person, an irregular

endorser is liable to the payee, and all the subsequent payees.
2. If the instrument is payable to the order of the maker or drawer, or is
payable to bearer, he is liable to parties subsequent to the maker, or the
drawer.
3. If he signs for the accommodation of the payee, he is liable to all
parties, subsequent to the payee.
 An irregular endorser, is one who signs in a peculiar manner, whose name
appears on the instrument, where one would expect anothers name.

Are the primary and secondary liabilities under the Negotiable Instruments Law, the
same as the liabilities under warranties?

No, the primary and secondary liabilities of the parties, arise from their
obligations to pay, a sum certain in money, as stated in the instrument.

The liabilities for warranties, arise from warranties made by the parties to an
instrument, which warranties are separate and ancillary contracts, to the principal one,
involving the sum payable stated in the instrument.

What are the warranties of the acceptor?

Under Section 62, of the Negotiable Instruments Law, the acceptor warrants that:

1. The existence of the drawer, the genuineness of his signature, and his
capacity and authority to draw the instrument.
2. The existence of the payee, and his then capacity to endorse.

What are the warranties of the general endorser, and the endorser of a bearer
instrument?

Under Sections 66 and 67, of the Negotiable Instruments Law, the general
endorser, and the endorser of a bearer instrument warrant that:

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

be;
2. That he has good title to it;
3. That all prior parties had capacity to contract;
4. That the instrument is, at the time of his endorsement, valid and
subsisting.

What are the warranties of the qualified endorser, and the person negotiating by
mere delivery?
 Under Section 65, of the Negotiable Instruments Law, the qualified endorser, and
the person negotiating the instrument by mere delivery warrant that:

1. That the instrument is genuine, and all respects what it purports to be;
2. That he has good title to it;
3. That all prior parties had capacity to contract;
4. That he has no knowledge of any fact, which would impair the validity
of the instrument, or render it useless.

May a corporation be held liable, when one of its officers signs as an accommodation
party?

It depends. If the person was specifically authorized to do so, the corporation is

liable. If the person so signing had no authority, the act is ultra vires, for which the
corporation cannot be held liable.

What is the liability of an agent, who signs a negotiable instrument, on behalf of

another person?

The agent is not personally liable if he signs in the manner prescribed by Section
20 of the Negotiable Instruments Law; that is:

1. Adds to his signature, words that indicate that he signs for or on behalf
of a principal, or in a representative capacity; and
2. Discloses his principal.

The failure of an agent, to sign in the manner so described, would operate to

make him personally liable, as if he had signed the instrument on his own.

What is the legal effect of a signature per procuration?

According to Section 21, it operates as notice that agent has, but a limited
authority to sign, and the principal is bound only in case the agent so signing, acted
within the actual limits of his authority.

Who is an accommodation party?

 A party is deemed an accommodation party when the following requisites
concur:

1. He must be party to the instrument, signing as a maker, drawer,

acceptor, or endorser;
2. He must not receive value therefor;
3. He must sign for the purpose of lending his name, or credit to some
other person.

May a person who has not signed the instrument, be held liable?

A person who has not signed the instrument, cannot be held liable therefor,
except:

1. One who signs in a trade, or assumed name;

2. One who signs through an agent, or authorized person;
3. Incapacitated persons, who sign through their legal guardians;
4. Forger of signatures;
5. Persons whose signatures are forged, but who are precluded from
setting up the defense of forgery;
6. In cases of constructive acceptance;
7. Endorsers who sign on an allonge;
8. Persons who negotiate by mere delivery.

How is secondary liability enforced in a promissory note?

Secondary liability in a promissory note is enforced by, presentment for payment,

within the required to the maker.

If the note is dishonored, notice of dishonor should be given to the endorsers.

How is secondary liability enforced in a bill of exchange?

Secondary liability in a bill of exchange is enforced by, presentment for

acceptance. If the bill is dishonored by non-acceptance, notice of dishonor is given to the
endorsers and the drawer. Protest for dishonor is required, if the bill is a foreign bill.
 If the bill is accepted, presentment for payment is made. If the bill is dishonored
upon presentment for payment, notice of dishonor must be given to the persons
secondarily liable. Protest for dishonor for non-payment must be made, if the bill is a
foreign bill.

In case of acceptor for honor, or referee in case of need, there must be protest for
non-payment.

When is presentment for payment unnecessary?

Presentment for payment is not necessary when:

1. As far as the drawer is concerned, when he has no right to expect, or to

require that the drawee or acceptor, will pay the instrument.
2. As regards the endorser, where the instrument was made or accepted
for accommodation, and he has no reason to expect that the instrument
will be if presented.
3. Where, after the exercise of reasonable diligence, presentment cannot
be made;
4. Where the drawee is a fictitious person;
5. When the present has been waived, either expressly or impliedly.

Does non-presentment of a bill, relieve the drawer of all liability?

No, the drawer is only discharged, from the liability to the extent cause by the
delay, or non-presentment. Failure to present on time, does not total wipe out all
liability.

What is acceptance?

Acceptance is the signification by the drawee of his assent to the order of the
drawer, to pay a sum certain in money, as provided in the bill of exchange.

The requisites of acceptance are:

1. It must be in writing;
2. It must be signed by the drawee;
 3. The drawee must assent to paying a sum certain in money, and not by
any other means.

When is presentment for acceptance required?

Presentment for acceptance is required for:

1. Where the bill is payable after sight, or in any other case. Where the
presentment for acceptance, 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 drawn payable elsewhere, than at the residence, or place
of business of the drawee.

How is presentment for acceptance made?

Presentment for acceptance is made:

1. By or on behalf of the holder;

2. At a reasonable hour;
3. On a business day, or before the bill is overdue;
4. At the proper place;
5. To the drawee or the person authorized to accept or refuse acceptance,
on his behalf;
6. If the bill is addressed to two, or more drawees, who are not partners,
presentment must be made to all of them, unless on has the authority
to accept, or refuse acceptance, on their behalf, in which case
presentment must made to that person only;
7. Where the drawee is dead, presentment may be made to his personal
representative;
8. Where the drawee has been adjudged bankrupt, or insolvent, or has
made an assignment for the benefit of his creditors, presentment may
be made to him or his trustee or assignee.

When is presentment for acceptance unnecessary, or excused?

Presentment for acceptance is excused when:

 1. Where the drawee is dead, or has absconded, or is a fictitious person,
or a person not have capacity to contract the bill;
2. Where, after the exercise of reasonable diligence, presentment cannot
be made;
3. Where, although the presentment has been irregular, acceptance has
been refused on some other ground.

What is constructive acceptance?

Constructive acceptance by provision of law, whereby the drawee is deemed to

have accepted the instrument, should either of the following circumstances arise:

1. The bill was delivered to the drawee, and he destroys the same;
2. The bill was delivered to the drawee, but he refuses to pay within 24
hours, or within such other period, as the holder may allow to return
the bill, either as accepted or non-accepted, i.e. when there is undue
retention of the bill.

What is notice of dishonor?

A notice of dishonor, informs the secondary parties, that the instrument was
either dishonored by non-acceptance, or non-payment, and that the holder of the
instrument so dishonored, intends to enforce the liabilities of the persons so notified.

Does the payee have a legal obligation to inform the drawer, that the instrument was
dishonored?

No, the payee is under no obligation to inform the drawer, that the instrument
was dishonored. The notice is only required to preserve the payees right to recover on
the dishonored instrument. The failure to give notice to the drawer, or endorsers
operates to discharge them of their respective liabilities on the instrument.

If no notice was given, is the drawer completely absolved of liability to the payee?
 No, mere failure to give notice to the drawer does not operate to absolve all
liability. The contractual obligation persists.

When is an instrument considered dishonored by non-payment?

An instrument is dishonored by non-payment when:

1. When it is duly presented for payment, and payment is refused or

cannot be obtained;
2. When presentment is excused, and the instrument is overdue and
unpaid.

When is a bill dishonored by non-acceptance?

A bill is dishonored by non-acceptance when:

1. When it is duly presented for acceptance, and such acceptance is

refused, or cannot be obtained;
2. When presentment for acceptance is excused, and the bill is not
accepted.

May a person give notice of dishonor to prior parties, even if he was not authorized
to do so?

Yes, Section 91 of the Negotiable Instruments Law provides that notice of

dishonor may be given, by any agent, either in his own name, or in the name of any
party entitled to give notice, whether that party be his principal or not; effectively then,
a person may give notice for another, even if he was not authorized to do so.

To whom should notice be given to the endorsers, in a case where the endorser are
partners?

Notice to either of them, pursuant to the principle of mutual agency, between and
among partners, as provided by Article 1818 of the New Civil Code.
When is notice of dishonor excused or unnecessary for the drawer?

Sec 114 of the Negotiable Instruments Law provides that, notice need not be
given to the drawer, or notice is excused when:

1. Where the drawer and the drawee are the same person;
2. When the drawee is a fictitious person, or a person not having the
capacity to contract;
3. When the drawer is the person, to whom the instrument is presented
for payment;
4. Where the drawer has no right to expect, or require that the drawee or
acceptor will honor the instrument;
5. Where the drawer has countermanded, or cancelled payment.

Note that notice of dishonor is excused, or is no longer necessary because in these

circumstances, the drawer has prior knowledge of the dishonor, or is actually
responsible for the dishonor.

When is notice of dishonor excused for the endorser?

Section 115 of the Negotiable Instruments Law provides that, notice of dishonor
upon the endorser is excused when:

1. When the drawee is a fictitious person, or person not having capacity

to contract, and the endorser was aware of that fact, at the time he
endorsed the instrument;
2. Where the endorser is the person, to whom the instrument is presented
for payment;
3. Where the instrument was made or accepted for his accommodation.

Note that notice of dishonor is excused, or is no longer necessary because in these

circumstances, the endorser has prior knowledge of the dishonor, or is actually
responsible for the dishonor.

May notice of dishonor be waived?

 Notice of dishonor may be waived, before the time of giving notice has elapsed,
or after the omission to give due notice. The waiver may be express or implied, as
provided by Section 109 of the Negotiable Instruments Law.

Who are bound by the waiver of the notice of dishonor?

Section 110 of the Negotiable Instruments Law provides that, if the instrument
itself contains the waiver, all parties thereto are bound. If on the other hand, the waiver
is written above the signature of a particular endorser, only that endorser is bound.

Does the failure to give notice of dishonor affect the rights of a subsequent holder in
due course?

Section 117 provides that 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.

What is protest?

Protest is a formal statement in writing, made by a notary public, at the instance

of the holder, declaring that the instrument has been presented for payment, or for
acceptance, but the instrument has been dishonored. It is generally indispensable only
for foreign bill of exchange. The need for protest in foreign bills of exchange may be
waived.

May protest be made for inland bills?

Sections 152 and 118 provide that, although the Negotiable Instruments Law
requires protests for foreign bills, there is no prohibition against making a protest for
the dishonor of inland, or local bills of exchange.

When protest necessary?

Protest is necessary when:

 1. Where a foreign bill is dishonored, by non-acceptance;
2. Where a foreign bill is dishonored, by non-payment;
3. Where a bill is sought to be accepted for honor;
4. Where a bill is to be presented for payment, to an acceptor for honor;
5. Where a bill is dishonored by an acceptor for honor.

What are the legal effects of a waiver of protest?

The legal effects of a waiver of protest are:

1. Protest itself is waived;

2. Presentment for payment, or acceptance is also deemed waived;
3. Notice of dishonor is also deemed waived;

When is there acceptance for honor?

Acceptance for honor happens when, the original drawee refuses to accept a bill
of exchange, and there is a need to save the credit of certain parties. A third person, or a
stranger to bill of exchange accepts the instrument for honor. The acceptor then makes
himself liable to all parties to the bill, subsequent to the party, for whose honor he
accepted.

What is the nature of the liability of the acceptor for honor?

The liability of the acceptor for honor is secondary. His engagement is to pay,
only if the bill is not paid by the drawer; and provided that it has been duly presented
for payment, and protested for non-payment and that notice of dishonor is given to him.

The nature of an acceptor for honors liability, is different from that of an

ordinary acceptor in this regard. The ordinary acceptor is primarily liable, the moment
he accepts the instrument.

What are the requisites for acceptance for honor?

The requisites for acceptance for honor are:

 1. The bill of exchange has been protested for dishonor by non-
acceptance;
2. The acceptor must be a stranger to bill;
3. The holder must consent to the acceptance for honor;
4. The acceptance for honor, must be made before the instrument is
overdue;
5. The acceptor for honor must be in writing, must indicate that is an
acceptance for honor, and must be signed by the acceptor for honor.

Who can make a payment for honor?

According to Section 171 of the Negotiable Instruments Law, payment for honor
may be made by any person, for the honor of any person liable on the instrument, or for
the honor of the drawer.