Chapter 6

Parties Who are Liable

Nature of Liability

A. Primary and Secondary

- Holder
o Active subject
o Person or entity who is given the right to demand the performance of the obligation reflected in the
negotiable instrument, that is the obligation to pay a sum certain in money.
o Owner of intangible personal property evidenced by the instrument- the right which has for its object a
demandable sum.

- Obligor/Debtor
o Passive subject
o Person against whom the holder can enforce the right represented by the instrument are the person who
are primarily liable and the persons secondarily liable.

- Primarily Liable
o The person who by the terms of the instrument, is absolutely required to pay the same.
o Maker- in promissory note
o Acceptor- in bills

- Secondarily Liable
o He engages that, on due presentment, the instrument shall be accepted or paid, or both, as the case may
be, according to its tenor, and that if it be dishonoured and the necessary proceedings on dishonor be
duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be
compelled to pay it.
o He promises to pay if the person primarily liable refuses or fails to pay.
o Drawers and the general indorsers

B. DISTINGUISHED FROM WARRANTIES

Primary or Secondary Liability
Makes them liable to pay the sum certain in money
stated in the instrument
Secondary liability, requires notice of dishonour
Warranties
Affirmations of fact on the part of the parties that impose
no direct obligation to pay in the absence of breach
thereof.
In case of breach of warranties, the person who breached
the same may either be liable or he may be barred from
asserting a particular defense.
NO NEED

I. MAKER

Sec. 60. Liability of maker.

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

- The liability of the maker is primary and unconditional.

- He cannot shift his liability to any person without the payees consent.

Sec. 17 (g)
Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be
jointly and severally liable thereon.

II. DRAWER

Sec. 61. Liability of drawer.

The drawer by drawing the instrument:

1. admits the existence of the payee and his then capacity to indorse; and
2. engages that, on due presentment, the instrument will be accepted or paid, or both, according to its tenor, and
3. that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to
the holder or to any subsequent indorser who may be compelled to pay it.

But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the
holder.

A. Relationship with Drawee

- Usually, there is Contractual Relations between the drawer and the drawee
- Drawer may have drawn the bill against the drawee because the latter is holding an amount in trust for the drawer.
- The order to pay may also be addressed to the drawee because the drawee may have extended credit to one person
and there is an agreement between them that the drawee will honor any bill drawn by the drawer against the said
drawee.
 B. Relationship with Collecting Bank
- Holders of checks may obtain payment from the drawee bank by presenting it for payment directly with the bank
or by depositing it in his account in another bank known as the collecting bank or depositary bank.
- When the holder deposits his check with the collecting bank, the nature of the relationship created at that stage is
one of agency, that is, the bank is to collect from the drawee of the check the corresponding proceeds.
- The privity of contract is between the holder-depositor and the collecting bank.
- There is no privity of contract between the drawer and the collecting bank.z

III. ACCEPTOR

Sec. 127. Bill not an assignment of funds in hands of drawee.

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

 A drawee does not become liable until he accepts the bill or unless he certifies the check.

 This is true even if, in fact, no obligation is owed by the drawee to the drawer to honor the bill or the check or
even if the drawee did not receive any consideration from the drawee

 Absence of consideration is only issue between the drawer and the acceptor.

 It is not a defense of an acceptor against a holder in due course.

A. Effect of Warranties

Sec. 62. Liability of acceptor.

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

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

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

 If the acceptor pays the holder, the recourse of the drawee in case he paid the payee is to seek reimbursement
from the drawer.

 The acceptor is precluded from setting up certain defences by reason of his warranties.

B. Payment without acceptance

- Acceptance is an unnecessary step in so far as instruments that are payable on demand are concerned.
- The provisions relative to acceptance are without application to checks.
- The drawee does not warrant if it does not accept the checks.- PNV vs Natl City Bank of NY

IV. INDORSERS
- A person who negotiates the instrument through indorsement completed by delivery.
- If there is doubt as to the nature of the signature of a person in the instrument, such person is deemed an indorser.
- A person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor, is deemed to be
indorser unless he clearly indicates by appropriate words his intention to be bound in some other capacity.

a. INDORSEMENT BY AGENT:
- If it is established that the indorsement was made by a duly authorized attorney-in-fact the principal is liable as
the indorser.

b. TWO INDORSEES
- Sec. 68. Order in which indorsers are liable.
As respect one another, indorsers are liable prima facie in the order in which they indorse; but evidence is
admissible to show that, as between or among themselves, they have agreed otherwise. Joint payees or joint
indorsees who indorse are deemed to indorse jointly and severally.

GENERAL INDORSER
Secondary Liable to the holder or any
subsequent indorser who may be compelled
to pay the instrument.
Indorses the instrument without any
qualification
Warranties:
Sec. 66. Liability of general indorser.
Every indorser who indorses without
qualification, warrants to all subsequent
holders in due course:
QUALIFIED INDORSER
Not secondarily liable. His qualified
indorsement transfer title without rendering
him secondarily liable.
Warranties:
Sec. 65. Warranty where negotiation by
delivery and so forth.
Every person negotiating an instrument by
delivery or by a qualified indorsement
warrants:
a. That the instrument is genuine and in
all respects what it purports to be;
INDORSER OF BEARER
INSTRUMENT
Sec. 67. Liability of indorser where
paper negotiable by delivery.
Where a person places his indorsement
on an instrument negotiable by delivery,
he incurs all the liability of an indorser.
If he indorses the instrument without
qualification, he incurs all the liabilities
of a general indirser- he is secondarily
liable for breach of his warranties.

GENERAL INDORSER
a. The matters and things mentioned in
subdivisions (a), (b), and (c) of the next
preceding section; and
o That the instrument is genuine and
in all respects what it purports to
be;
o That he has a good title to it;
o That all prior parties had capacity
to contract;
b. That the instrument is, at the time of his
indorsement, valid and subsisting;
And, in addition, he engages that:
1. on due presentment, it shall be
accepted or paid, or both, as the
case may be, according to its
tenor, and
2. that if it be dishonored and the
necessary proceedings on
dishonor be duly taken, he will pay
the amount thereof to the holder,
or to any subsequent indorser who
may be compelled to pay it.
a. Two Contracts
By indorsing, the indorser is
entering into a contract with
certain fixed and definite terms
and that the terms of such contract
may not be varied or contradicted
by parol evidence.
b. Not Guarantor
Secondarily Liability is not the
same as the liability if a guarantor
under the Civil Code.
INDORSER OF BEARER
QUALIFIED INDORSER
INSTRUMENT
Sec. 40. Indorsement of instrument
b. That he has a good title to it; payable to bearer.
c. That all prior parties had capacity to Where an instrument, payable to bearer,
contract; is indorsed specially, it may
nevertheless be further negotiated by
d. That he has no knowledge of any fact delivery; but the person indorsing
which would impair the validity of specially is liable as indorser to only
the instrument or render it valueless. such holders as make title through his
indorsement.
But when the negotiation is by delivery
only, the warranty extends in favor of no
holder other than the immediate transferee.
The provisions of subdivision (c) of this
section do not apply to a person negotiating
public or corporation securities other than
bills and notes.
*even if the validity of the instrument was
in fact already impaired at the time of
negotiation, the qualified indorser does not
breach his warranty if he has no knowledge
of such fact.
Parole Evidence
 Indorsement must appear to be
qualified on the instrument itself.
 Oral testimony is not admissible to
establish that an unqualified
indorsement is in fact qualified.

Order of Liability

 The holder is free to choose to

recover from any indorser if the
maker dishonors the instrument.

 There is no order of liability

among the indorsers as against the
holder.

 As respect one another, indorsers

are liable prima facie in the order
in which they indorse; but
evidence is admissible to show
that, as between or among
themselves, they have agreed
otherwise.

V. PERSON NEGOTIATING BY DELIVERY

Sec. 65. Warranty where negotiation by delivery and so forth.

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

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

b. That he has a good title to it;

 c. That all prior parties had capacity to contract;

d. That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless.

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

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

VI. AGENTS
- A maker, drawer, acceptor or indorser may act through an agent.
- An agent incurs all the liabilities as such maker, drawer, acceptor, or indorser “unless he discloses the name of
his principal and the fact that he is acting only as agent.

Sec. 18. Liability of person signing in trade or assumed name.

No person is liable on the instrument whose signature does not appear thereon, except as herein otherwise expressly
provided. But one who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own
name.

Sec. 19. Signature by agent; authority; how shown.

The signature of any party may be made by a duly authorized agent. No particular form of appointment is necessary for
this purpose; and the authority of the agent may be established as in other cases of agency.

Sec. 20. Liability of person signing as agent, and so forth.

Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal
or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words
describing him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him
from personal liability.

Sec. 21. Signature by procuration; effect of.

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.

o PERSON WHO SHOULD SIGN

- A person must sign the negotiable instrument before he can be made liable under the same instrument.

The following persons who did not sign in their own names, or persons whose signature do appear in the
instrument itself, are still liable:

1. One who signs in a trade or assumed name

 Liable as if he signed using his real name.
2. One who signs through an agent or authorized representative
 if the agent signs in the manner prescribed by the Negotiable Instruments Law, the agent is not
personally liable and the only person who is liable is the principal
 2 things must be present:
 He must indicate that he is signing as a mere agent
 He must indicate the name of the principal
3. Incapacitated persons who sign through their legal guardians
4. Forgers of signature
5. Persons whose signatures were forged but who are precluded from setting up the defense of forgery
6. In case of constructive acceptance
7. Indorsers who sign on separate piece of paper known as allonge; and
8. Persons who negotiate by mere delivery. They are liable for breach of warranty although they did
not sign.

VII. ACCOMMODATION PARTIES

Sec. 29. Liability of accommodation party.

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

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

 The accommodation party lends his name to the accommodated party

 He lends his name to enable the accommodated party to obtain credit or raise money.
 He receives no part of the consideration for the instrument but assumes liability to the other parties thereto.
 Accommodation party is liable according to the face of his undertaking, the same as if he were himself financially
interested in the transaction.
a. Surety of Accommodated Party
 By lending his name, the accommodated party is in effect, a surety of the accommodated party.
 Thus, if he is an accommodation indorser, he is secondarily liable as an accommodation indorser and he cannot make
the holder recover directly from the accommodated party.
 Only recourse- to seek reimbursement from the accommodated party.
 Unlike in a contract of suretyship, the liability of the accommodation party remains not only primary but also
unconditional to a holder for value such that even if the accommodated party receives an extension of the period of
payment without the consent of the accommodation party, the latter is still liable for the whole obligation and such
extension does not release him because as far as the holder for value is concerned, he is a SOLIDARY CO-DEBTOR.

b. Irregular Indorser
 Not otherwise a party to an instrument who placed thereon his signature in blank before delivery.
 One who indorses the instrument in an unusual, singular or peculiar manner; it is irregular and an anomaly in the law.
 His name appears where we would naturally expect another name.

Sec. 64. Liability of irregular indorser.

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

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

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

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

c. Liability among themselves

A solidary accommodation party may seek reimbursement from the accommodated party of other accommodation
parties subject to the following rules:

1. A joint and several accommodation party such as an accommodation maker may demand from the principal debtor
reimbursement for the amount that he paid to the payee;

2. A joint and several accommodation maker who pays on the said promissory note may directly demand
reimbursement from his co-accommodation maker without first directing his action against the principal debtor
provided that:

o He made the payment by virtue of judicial demand; or

o Principal debtor is insolvent

d. Corporations
 Section 29 (Liability of accommodation party) does not apply
 If the corporation is not liable, the holder may turn to its officers for relief.

Personal Liability of officers and directors:

1. He assents:
c. To a patently unlawful act of the corporation
d. For bad faith or gross negligence in directing its affairs
e. For conflict of interest, resulting in damaged to the corporation, its stockholders or other persons.

2. He consent to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file
with the corporate secretary his written objection thereto.

3. He agrees to hold himself personally and solidarily liable with the corporation;

4. He is made, by a specific provision of law, to personally answer for his corporate action.