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What constitutes negotiation

An instrument is negotiated when:
 it is transferred from one person to another
 that the transfer must be in a manner as to constitute the transferee a
holder
For a bearer instrument – by delivery
For payable to order – by indorsement and delivery (Sec. 30 NIL)

Lesson 2 - Indorsement

Objectives:
At the end of the lesson,
1. the students can name the different modes of indorsement.
2. Describe how negotiable instruments are negotiated.
Indorsement to be must be written on the instrument itself or upon a piece of
paper attached (Sec. 31 NIL)
– the paper attached with the indorsement is an allonge
– an allonge must be attached so that it becomes a part of the instrument, it
cannot be simply pinned or clipped to it.

Kinds of Indorsements:

1. Special (Sec. 34) - A special indorsement specifies the person to whom,

or to whose order, the instrument is to be payable, and the indorsement of
such indorsee is necessary to the further negotiation of the instrument.
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2. Blank (Sec. 35) - An indorsement in blank specifies no indorsee, and an

instrument so indorsed is payable to bearer, and may be negotiated by
delivery.
3. Restrictive (Sec. 36) - An indorsement is restrictive which either:
(a) Prohibits the 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.
4. Qualified (Sec. 38) - A qualified indorsement constitutes the indorser a
mere assignor of the title to the instrument. It may be made by adding to
the indorser's signature the words "without recourse" or any words of
similar import.
5. Conditional (Sec. 39 NIL) - Where an indorsement is conditional, the party
required to pay the instrument may disregard the condition and make
payment to the indorsee or his transferee whether the condition has been
fulfilled or not.

Effects of indorsing an instrument originally payable to bearer:

– it may further be negotiated by delivery
– the person indorsing is liable as indorser to such persons as to make title
through his indorsement (Sec. 40 NIL)
– This applies only to instruments originally payable to bearer
– It cannot apply where the instrument is payable to bearer because the
only or last indorsement is in blank.

Striking out indorsement

A holder may strike out any indorsement which is not necessary to his title.
Effects:
– An indorser whose indorsement is struck out is discharged
– All indorsers subsequent to such indorser who has been discharged are
likewise relieved. (Sec. 48 NIL)
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Effects of a transfer without endorsement:

– the transferee acquires such title as the transferor had
– the transferee acquires the right to have the indorsement of the transferor
– negotiation takes effect as of the time the indorsement is actually made
(Sec. 49 NIL)

Rights of a holder:
– a holder may sue in his own name
– a holder may receive payment.
Effects:
– if in due course it discharges the instrument (Sec. 51 NIL)

Requisites for a Holder in Due Course (HDC):

a. receives the instrument complete and regular on its face
b. became a holder before it was overdue and had no notice that it had been
previously dishonored if such was the fact
c. takes the instrument for value and in good faith
d. at time he took the instrument, no notice of infirmity in instrument or defect
in the title of the person negotiating it (Sec. 52 NIL)

– every holder is presumed to be a HDC (Sec. 59)

– the person who questions such has the burden of proof to prove
otherwise
– if one of the requisites are lacking, the holder is not HDC
– an instrument is considered complete and regular on its face if a) the
omission is immaterial b) the alteration on the instrument was not apparent on its
face
– an instrument is overdue after the date of maturity.
– on the date of maturity, the instrument is not overdue and the holder is a
HDC
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– acquisition of the transferee or indorsee must be in good faith

– good faith means lack of knowledge or notice of defect or infirmity

A holder is not a HDC where an instrument payable on demand is negotiated at

an unreasonable length of time after its issue (Sec. 53 NIL)

Liability of maker
Effects of making the instrument, the maker:
a. engages to pay according to tenor of instrument
b. admits existence of payee and his capacity to indorse (Sec. 60 NIL)

– a maker’s liability is primarily and unconditional

– one who has signed as such is presumed to have acted with care and to
have signed with full knowledge of its contents, unless fraud is proved
– the payee’s interest is only to see to it that the note is paid according to
its terms
– when two or more makers sign jointly, each is individually liable for the full
amount even if one did not receive the value given
– the maker is precluded from setting up the defense of a) the payee is
fictional, b) that the payee was insane, a minor or a corporation acting ultra vires

A drawer is secondarily liable

Effects of drawing the instrument, the drawer:
- admits the existence of the payee,
- the capacity of such payee to indorse
- engages that on due presentment, the instrument will be accepted or paid
or both according to its tenor.
- If the instrument is dishonored, and the necessary proceedings on
dishonor duly taken

- the drawer will pay the amount thereof to the holder

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- will pay to any subsequent indorser who may be compelled to pay it. (Sec.
61 NIL)

An acceptor is primarily liable

By accepting the instrument, an acceptor:
– engages that he will pay according to the tenor of his acceptance
– admits the existence of the drawer, the genuineness of his signature and
his capacity and authority to draw the instrument
– the existence of the payee and his then capacity indorse

Irregular Indorser
A person not otherwise a party to an instrument places his signature in blank
before delivery is liable as an indorser in the following manner:
a. if payable to order of a third person – liable to the payee and to all
subsequent parties
b. if payable to order of the maker or drawer – liable to all parties subsequent
to the maker or drawer
c. if payable to bearer – liable to all parties subsequent to the maker or
drawer
d. if signs for an accommodation party – liable to all parties subsequent to
the payee (Sec. 64 NIL)

Warranties where negotiating by delivery or qualified endorsement:

a. the instrument is genuine and in all respect what it purports to be
b. the indorser has good title to it
c. all prior parties had the capacity to contract
d. indorser has no knowledge of any fact that would impair the validity or the
value of the instrument.

Limitations of warranties:
-if by delivery, extends only to immediate transferee.
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-warranty of capacity to contract does not apply to persons negotiating public or

corporate securities (Sec. 65 NIL)

Qualified indorser
A qualified indorser is one who indorses without recourse or sans recourse
– recourse – resort to a person secondarily liable after default of person
primarily liable
A qualified indorser cannot raise the defense of a) forgery b) defect of his title or
that it is void c) the incapacity of the maker, drawer or previous indorsers.
A qualified Indorsement makes the indorser mere assignor of title of instrument,
relieves him of general obligation to pay if instrument is dishonored, but he is still
liable for the warranties arising from instrument only up to warranties of general
indorser

The warranty is to the capacity of prior parties at the time the instrument was
negotiated. Subsequent incapacity does not breach the warranty.
Lack of knowledge of the indorser as to any fact that would impair the validity or
the value of the instrument must be subsisting all throughout.
A person Negotiating by Delivery warrants same as those of qualified indorser
and extends to immediate transferees only

Warranties of a general indorser:

a. A general indorser warrants that:
b. The instrument is genuine and in all respect what it purports to be
c. The he has good title to it
d. All prior parties had the capacity to contract
e. That the instrument at the time of his indorsement was valid and
subsisting (Sec. 66 NIL)
In addition:
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Engages that the instrument will be accepted or paid or both according to its
tenor on due presentment

Engages to pay the amount thereof if it be dishonored and the necessary

proceedings on dishonor are taken.

Liability of general indorser.

The indorser under Section 66 warrants the solvency of a prior party
The indorser warrants that the instrument is valid and subsisting regardless of
whether he is ignorant of that fact or not.
Warranties extend in favor of a) a HDC b) persons who derive their title from
HDC c) immediate transferees even if not HDC
The indorser does not warrant the genuineness of the drawer’s signature
General indorser is only secondarily liable

Effect of want of demand on principal debtor.

General rule: Presentment for payment is not necessary to charge persons
primarily liable on the instrument. Presentment for payment is necessary to
charge the drawer and indorsers. (Sec 70 NIL)

Presentation for payment – production of a BOE to the drawee for his

acceptance, or to a drawee or acceptor for payment. Also presentment of a PN to
the party liable for payment of the same.
Consists of:
a) a personal demand for payment at a proper place
b) the bill or note must be ready to be exhibited if required and surrendered upon
payment.

Parties primarily liable – persons by the terms of the instrument are absolutely
required to pay the same. E.g maker and acceptors. They can be sued directly.
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– if payable at the special place, and the person liable is willing to pay there
at maturity, such willingness and ability is equivalent to tender of payment.

Presentment
Presentment is necessary to charge persons secondarily liable otherwise they
are discharged
Acts needed to charge persons secondarily liable: a) presentment for
payment/acceptance b) dishonor by non-payment/non-acceptance c) notice of
dishonor to secondary parties
Acts needed to charge persons secondarily liable in other cases: a) Protest for
non-payment by the drawee b) protest for non-payment by the acceptor for honor

Proper presentment:
- by the holder or an authorized person
- at a reasonable hour on a business day
- at a proper place
- to the person primarily liable or if absent to any person found at the place
where presentment is made (sec. 72 NIL)

Only the holder or one authorized by him has the right to make presentment for
payment. Presentment cannot be made on a Sunday or holiday. Presentment for
payment is made to the maker, or acceptor. Not to the person secondarily liable.
If the instrument is payable on demand – a) if it is a note – presentment must be
made within reasonable time after issue b) if it is a bill – presentment must be
made within reasonable time after last negotiation.

Presentment not required to charge the drawer:

 he has no right to expect
 he has no right to require
 that the drawee or acceptor will pay (Sec 79 NIL)
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Presentment not required to charge the indorser where:

 the instrument was made or accepted for his accommodation

 he has no reason to expect that the instrument will be paid if presented
(Sec. 80 NIL)

General rule: Presentment for payment necessary to charge persons secondarily

liable otherwise they are discharged:
Exception:
Only the drawer or indorser are not discharged. All other parties secondarily
liable are discharged.

Presentment for payment excused if:

a. after due diligence, presentment cannot be made
b. presentment is waived
c. the drawee is a fictitious person (Sec 82 NIL)
What is excused is the failure to make presentment. There is no need to make
any presentment versus under section 81 (delay in presentment) presentment for
payment is still required after the cause of delay has ceased.

Dishonored by non-acceptance:
– the instrument was duly presented but payment is refused or cannot be
obtained
– presentment is excused and the instrument is overdue and unpaid (Sec.
83 NIL)

Effects of dishonor by non-payment:

– an immediate right of recourse to all parties secondarily liable accrues to
the holder. (Sec. 84 NIL)
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Parties cease to be secondarily liable and become principal debtors. Liability

becomes the same as that of the original obligors.

Requisites for payment in due course:

 made at or after the maturity of the instrument

 to the holder
 in good faith
 without notice of any defect in the holder’s title (sec. 88 NIL)

Payment must be made to the possessor of the instrument. Possession of the

note by the maker is presumptive evidence that it has been paid

Notice of Dishonor may be given:

 by or on behalf or the holder
 by or on behalf of any party who:
– is a party to the instrument and might be compelled to pay the
instrument
– to a holder who having taken it up would have a right of
reimbursement from the party to whom notice is given. (Sec. 90 NIL)

Notice:
 may be written or oral (Sec. 96)
 written notice need not be signed or may be supplemented by verbal
communication (Sec. 95)
 may be by personal delivery or by mail (Sec. 96)

Notice may be waived either expressly or implied before the time of giving notice
has arrived or after the omission to give due notice (Sec. 109 NIL)

Protest may be waived:

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Effects:
Deemed a waiver of presentment and notice of dishonor as well (Sec. 111 NIL)
Where notice is waived, presentment is not waived. Where presentment is
waived, notice is also waived. Where protest is waived, notice and presentment
is waived

Notice of Dishonor – given by the holder to the parties secondarily liable,

drawer and each indorser, that the instrument was dishonored by non-
acceptance or non-payment by the drawee/maker
General rule: Any drawer or indorser to whom such notice is not given is
discharged.
Exceptions:
1. Waiver (Sec. 109) - Notice of dishonor may be waived either before the
time of giving notice has arrived or after the omission to give due notice,
and the waiver may be expressed or implied.
2. Notice is dispensed (Sec. 112) - Notice of dishonor is dispensed with
when, after the exercise of reasonable diligence, it cannot be given to or
does not reach the parties sought to be charged.
3. Not necessary to Drawer (Sec. 114) - - Notice of dishonor is not required
to be given to the drawer in either of the following cases:
(a) Where the drawer and drawee are the same person;
(b) When the drawee is fictitious person or a person not having capacity to
contract;
(c) When the drawer is the person to whom the instrument is presented for
payment;
(d) Where the drawer has no right to expect or require that the drawee or
acceptor will honor the instrument;
(e) Where the drawer has countermanded payment.

4. Not necessary to Indorser (Sec. 115) - Notice of dishonor is not required

to be given to an indorser in either of the following cases:
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(a) When the drawee is a fictitious person or person not having capacity to
contract, and the indorser was aware of that fact at the time he indorsed
the instrument;
(b) Where the indorser is the person to whom the instrument is presented
for payment;
(c) Where the instrument was made or accepted for his accommodation.

If notice is delayed, delay may be excused (Sec. 113)

Instances when Notice of Dishonor Not Necessary to Drawer

a. drawer and drawee same person
b. drawee is a fictitious/incapacitated person
c. drawer is the person to whom presentment for payment is made
d. drawer has no right to expect that the drawee will accept/pay the
instrument (Sec. 114 NIL)

Instances when Notice Not Required to Indorser

a. drawee was a fictitious/incapacitated person and the indorser was aware
of such at the time of indorsement
b. indorser is the person to whom instrument was presented for payment
c. instrument made/accepted for his accommodation (Sec. 115 NIL)

Causes of Discharge of the Instrument

a. payment by the debtor
b. payment by accommodated party
c. intentional cancellation by holder of instrument
d. any other act discharging a simple monetary obligation
e. debtor becomes holder of the instrument at/after maturity in his own right
( Sec 119 NIL)
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Discharge of the instrument discharges all the parties thereto. Payment must be
in due course, and by the principal debtor or on his behalf. If payment is not
made by the principal debtor, payment only cancels the liability of the payor and
those obligated after him but does not discharge the instrument. Payment by an
accommodation party does not discharge the instrument.

Discharge of Secondary Parties:

a. any act discharging the instrument
b. cancellation of indorser’s signature by indorsers
c. discharge of prior party
d. tender of payment by prior party
e. release of principal debtor
f. extension of payment by the holder/postponement of right to enforce
without assent of secondary parties and without reservation of right of recourse
against secondary parties (Sec 120 NIL)

Rights of a party secondarily liable who pays:

– the instrument is not discharged
– the party is remitted to his former rights as to all prior parties
– the party may strike out his own and all subsequent indorsements
– the party may negotiate the instrument again
Exception:
– an instrument cannot be renegotiated where it is payable to order of a 3rd
person and has been paid by the drawer
– and instrument cannot be renegotiated where is was made or accepted
for accommodation and it has been paid by the party accommodated.

Renunciation by a holder discharges an instrument when:

 it is absolute and unconditional
 made in favor of a person primarily liable
 made at or after maturity of the instrument
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 in writing or the instrument is delivered up to the person primarily liable

(Sec. 122 NIL)
If renounced in favor of a party secondarily liable, only he is exonerated from
liability and all parties subsequent to him. Discharge by novation is allowed.

General rule: When materially altered, without the consent of all parties liable, the
instrument is avoided except as against:
- the party who has made the alteration
- the party who authorized or assented to the alteration.
- subsequent indorsers
Exception:
– if in the hands of a HDC, may be enforced according to its original tenor

There is no distinction between fraudulent and innocent alteration

Material Alteration – an alternation is said to be material if it alters the effect of

the instrument.
The following changes are considered material alterations:
 dates
 the sum payable
 time and place of payment
 number or relations of the parties
 medium or currency for payment
 adding a place of payment where no place is specified
 any other which alters the affect of the instrument

Instances where a BOE may be treated as a PN:

 Where the drawer and the drawee are one and the same
 Where the drawee is a fictitious person
 Where the drawee has no capacity to contract (sec. 130 nil)
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 The holder has the option to treat it as a BOE or PN.

Acceptance
Acceptance is the signification by the drawee of his assent to the order of the
drawer. It is an act by which a person on whom the BOE is drawn assents to the
request of the drawer to pay it. (Sec. 132 NIL)
Acceptance may be:
a) actual
b) constructive
c) general (Sec. 140) - An acceptance to pay at a particular place unless it
expressly states that the bill is to be paid there only and not elsewhere.
d) qualified (Sec. 141) - An acceptance is qualified which is:
(a) Conditional; that is to say, which makes payment by the
acceptor dependent on the fulfillment of a condition therein stated;
(b) Partial; that is to say, an acceptance to pay part only of the
amount for which the bill is drawn;
(c) Local; that is to say, 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.

Requisites of actual acceptance:

– in writing
– signed by the drawee
– must not express the drawee will perform his promise by any other
means than payment of money
– communicated or delivered to the holder

Constructive Acceptance:
Where the drawee to whom the bill has been delivered destroys it
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The drawee refuses within 24 hrs after such delivery or within such time as is
given, to return the bill accepted or not. (sec. 137 nil)
Drawee becomes primarily liable as an acceptor.
Mere retention is equivalent to acceptance

When presentment for acceptance is necessary:

- if necessary to fix the maturity of the bill
- if it is expressly stipulated that it shall be presented for acceptance
- if the bill is drawn payable elsewhere than the residence or place of
business of the drawee (Sec. 143 NIL)

Presentment is the production of a BOE to the drawee for his acceptance. In on

order case is presentment necessary to make parties liable.

Protest
formal statement in writing made by a notary under his seal of office at the
request of the holder, in which it is declare that the some was presented for
payment or acceptance (as the case may be) and such was refused.
General rule: Protest is required only for foreign bills
Exception:
– inland bills and notes may also be protested if desired

Protest is required:
 Where the foreign bill is dishonored by non acceptance
 Where the foreign bill is dishonored by non-payment
 Where the bill has been accepted for honor, it must be protested for non-
payment before it is presented for payment to the acceptor for honor
 Where the bill contains a referee in case of need, it must be protested for
non payment before presentment for payment to the referee in case of
need (sec. 152)
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Acceptance for Honor – an acceptance of a bill made by a stranger to it before

maturirty, where the drawee of the bill has:
 refused to accept it
 and the bill has been protested for non-acceptance
 or where the bill has been protested for better security

Requisites for acceptance for honor:

– The bill must have been previously protested a) for non-acceptance b) or
for better security.
– The bill is not overdue at the time of the acceptance for honor

– The acceptor for honor must be a stranger to the bill

– the holder must give his consent

Purpose: to save the credit of the parties to the instrument or some party to it as
the drawer, drawee, or indorser or somebody else.
Acceptor for honor is liable to the holder and to all the parties to the bill
subsequent to the party for whose honor he has accepted (Sec. 164)

How acceptance for honor is made:

 in writing and indicated that it is an acceptance for honor
 signed by the person making the acceptance (Sec. 162 NIL)

Payment for Honor – payment made through a notarial act of honor of a party
liable/stranger to the bill after bill has been dishonored by non-payment by the
acceptor and protested for non-payment by the holder
Requisites:
a. protest for non-payment
b. any person may pay supra protest

Form for payment of honor:

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Payment must be attested by notarial act appended to the protest, or form an

extension to it. Notarial act of honor must be based on a declaration by the payer
for honor.

Bills in Set – bill of exchange drawn in several parts, each part of the set being
numbered and containing a reference to the other parts, the whole of the parts
just constituting one bill (Sec 178 NIL)