NEGOTIABLE INSTRUMENTS LAW

MODULE 4

LEARNING OUTCOMES
At the end of this module, you are expected to:
A. Determine how to enforce liability;
B. Enumerate the requisites of presentment of payment;
C. Define acceptance and its requisites;
D. Discuss how may a negotiable instrument be discharged; and
E. Identify the different kinds of checks.
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15. HOW TO ENFORCE LIABILITY

15.01. PRIMARILY LIABLE

a) The maker is liable the moment he makes the instrument. Section 60 of the NIL
provides that the maker by making the promissory note "engages to pay the instru-
ment according to its tenor.

b) A drawee becomes liable the moment he accepts the instrument. Section 62 provides
that the "acceptor, by accepting the instrument, engages that he will pay it according
to the tenor of his acceptance.

15.02. SECONDARY LIABLE

a) Steps to Charge Secondary Parties in Promissory Note

1) Presentment for payment must be made within the required period to the
maker (Sec. 70, NIL).

2)Notice of dishonor should be given, if promissory note is dishonored by non-

payment by the maker (Sec. 89, NIL).

b) Steps to Charge Secondary Parties in Bill of Exchange

1) Presentment for acceptance or negotiation within a reasonable time after it

was acquired - should be made only in the instances required in Section 143.

2) If dishonored by non-acceptance:

(i) Notice of Dishonor should be given to the indorsers and drawer (Sec.
89).

(ii) If the bill is a foreign bill, there must be protest for dishonor by non-
acceptance (Sec. 159).

3) If the bill is accepted:

(i) Presentment for payment to acceptor should be made.

(a) If the bill is dishonored upon presentment for payment.
(b) Notice of dishonor must be given to person secondarily liable.

(ii) If the bill is a foreign bill, protest for dishonor by non-payment must
be made.

c) Steps to Charge Acceptor for Honor and Referee in case of Need

1) Protest for non-payment by the drawee (Sec. 165).
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15.03. RULES ON PRESENTMENT FOR PAYMENT

a) WHEN NOT NECESSARY

Presentment for payment is not necessary to charge persons primarily liable.

But it is necessary to charge persons secondarily liable, except:

1) as to drawer, under Section 79, where he has no right to expect or require

that the drawee or acceptor will pay the instrument;

2) as to indorser, under Section 80, where the instrument was made or accepted
for his accommodation and he has no reason to expect that the instrument will
be paid if presented;

3) when dispensed with under Section 82, such as: (i) where, after the exercise
of reasonable diligence, presentment cannot be made; (ii) where the drawee is a
fictitious person; and (iii) by waiver of presentment, express or implied; and

4) when the instrument has been dishonored by non-acceptance.

b) REQUISITES

1) Presentment must be by the holder, or by some person authorized to receive

payment on his behalf;

2) It must be made at a reasonable hour on a business day on the proper date;

3) Presentment must be at the proper place;

4) Presentment must be to the person primarily liable on the instrument, or if

he is absent or inaccessible, to any person found at the place where the
presentment is made; and

5) The person entitled to present the instrument for payment must exhibit the
instrument to the person from whom the payment is demanded and upon
payment must be delivered to the person paying it. f the instrument is not sur
rendered and cancelled, there is a danger that it may fall in the hands of other
persons who might claim rights over the instrument.

Note: If the place of payment is designated and the maker is ready and present
in the specified place on maturity date, the payee can still recover the face value
or principal of the note but he can no longer recover interest and cost of
collection
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15.04. PRESENTMENT FOR ACCEPTANCE

a) WHEN MANDATORY (Sec. 143, NIL)

Presentment for acceptance is required in the following cases:

1) Where the bill is payable within a fixed period after sight, or in any
other case, where 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; or

3) Where the bill drawn is payable elsewhere than at the residence or

place of business of the drawee.

Note: It is not necessary to present a check for acceptance because it is not one
of those required to be presented for acceptance under Section 143.

b) WHEN EXCUSED OR DISPENSED WITH

1) Delay is excused A bill drawn payable elsewhere than at the place of

business or the residence of the drawee and the holder, with the exercise
of reasonable diligence, failed to present the bill for acceptance. What is
excused is the delay in presenting it for payment caused by presentment
for acceptance (Sec. 147, NIL).

2) Where the drawee is dead, or has absconded, or is a fictitious person

or a person not having capacity to contract by bill.

3) Where, after the exercise of reasonable diligence, presentment cannot

be made.

4) Where, although presentment has been irregular, acceptance has been

refused on some other ground (Sec. 149, NIL).

15.05. ACCEPTANCE

a) ACCEPTANCE

The signification by the drawee of his assent to the order of the drawer.
The acceptance must be in writing and signed by the drawee. It must not
express that the drawee will perform his promise by any other means than the
payment of money (Sec. 132, NIL).
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b) REQUISITES

1) The acceptance must be in writing;

2) The written acceptance must be signed by the drawee; and
3) The drawee must assent to the promise to pay a sum certain in money and
not by any other means.

c) Proof of Acceptance
The written acceptance may be in the instrument itself or in a separate
instrument. However, under Section 133, "the holder of a 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."

EFFECTS: When an acceptance is written on a paper other than the bill

itself, it does not bind the acceptor except in favor of a person to whom it is
shown and who, on the faith thereof, receives the bill for value.

d) When Deemed Accepted

The drawee is deemed to have accepted the instrument under the said
section in the following instances:

1) The bill was delivered to the drawee and the latter destroys the same.
2) The bill was delivered to the drawee but the drawee refuses within 24
hours or within such other period as the holder may allow to return the
bill accepted or non-accepted (Sec. 137, NIL).

Note: Section 136 provides that "the drawee is allowed 24 hours after
presentment in which to decide whether or not he will accept the bill; the
acceptance, if given, dates as of the day of presentation." On the other hand,
Section 137 provides that "where a drawee to whom a bill is delivered for
acceptance destroys the same, or refuses within twenty-four hours after such de-
livery or within such other period as the holder may allow, to return the bill
accepted or non-accepted to the holder, he will be deemed to have accepted the
same."

e) Future Bills

An unconditional promise in writing to accept a bill before it is drawn is

deemed an actual acceptance in favor of every person who, upon the faith there-
of, receives the bill for value (Sec. 135, NIL).
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f) Kinds of Acceptance (Sec. 141, NIL)

1) Conditional; that is to say, which makes payment by the acceptor de

pendent on the fulfillment of a condition therein stated;

2) Partial; that is to say, an acceptance to pay part only of the amount for
which the bill is drawn; Example: Even if the sum certain that is ordered
to be paid in a bill of exchange is P50,000.00 payable one month after
sight, the drawee can accept by stating "I shall pay PhP30,000.00 three
months after sight." He is liable according to the tenor of his acceptance.

3) Local; that is to say, an acceptance to pay only at a particular place;

4) Qualified as to time; and
5) The acceptance of some, one or more of the drawees but not of all.

g) RIGHT TO UNQUALIFIED ACCEPTANCE

The holder may refuse to take a qualified acceptance and if he does not
obtain an unqualified acceptance, he may treat the bill as dishonored by
non-acceptance. Where a qualified acceptance is taken, the drawer and
indorsers are discharged from liability on the bill unless they have expressly or
impliedly authorized the holder to take a qualified acceptance, or subsequently
assent thereto. When the drawer or an indorser receives notice of a qualified
acceptance, he must, within a reasonable time, express his dissent to the holder
or he will be deemed to have assented thereto.

However, acceptance is presumed to be unqualified or absolute.

15.06. NOTICE OF DISHONOR

Without notice of dishonor, the persons secondarily liable are discharged.

a) Who should give: (1) holder; (2) agent or representative of holder; (3) any
party who may be compelled to pay like indorsers; and (4) agent of any party
who may be compelled (Sec. 90, NIL).

b) Who will benefit:

1) Given by or on behalf of the holder - inures to the benefit of all

subsequent holders and all prior parties who have a right of recourse
against the party to whom it is given.

2) If the notice is given by the indorser who may be compelled to pay,

such notice inures to the benefit of the holder and all parties subsequent
to the party to whom notice is given.
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EXAMPLES:
M, maker, issued a negotiable note to P, the payee, payable to P or his order. P
indorsed the instrument to A, then A to B, B to C, and C to D, the present holder. If M
dishonors the instrument, D may notify C since C may be compelled to pay D. C, in turn
may notify any person who may be secondarily liable to him, that is, B, A and P. B may
notify A and P and A may notify P.

If D gave notice of dishonor to P, A, B and C, the latter need not notify P, A and B
again because notice by the holder inures to the benefit of all prior parties who have
the right of recourse against the party to whom it is given.

On the other hand, if D notified only C but C, in turn, notified P, A and B, D can
already hold P, A and B liable because notice by an indorser (C in this case) inures to
the benefit of the holder. Additionally, P need not be notified by A and B anew because
the notice given by C inures to the benefit of all parties subsequent to the party to
whom notice is given (l having been given notice by C).

c) Effect
Upon valid notice of dishonor, immediate right of recourse against the
indorser arises. It is as if the indorser becomes primarily liable in the sense that
the holder need not claim payment from the person primarily liable.

d) Time to give notice (Secs. 103 and 104, NIL)

1) Where parties reside in same place.

(i) If given at the place of business of the person to receive notice,

it must be given before the close of business hours on the day
following.
(i) If given at his residence, it must be given before the usual
hours of rest on the day following.
(iii) If sent by mail, it must be deposited in the post office in time
to reach him in the usual course on the day following.

2) Where parties reside in different places.

(i) If sent by mail, it must be deposited in the post office in time to

go by mail the day following the day of dishonor, or if there be no
mail at a convenient hour on the last day, by the next mail
thereafter.
(ii) If given otherwise than through the post office, then within the
time that notice would have been received in due course of mail, if
it had been deposited in the post office within the time specified
in the last subdivision.
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15.07 PROTEST

Protest is a formal declaration, drawn and signed by a notary, that the foreign
bill has been presented for acceptance or payment and that the acceptance or payment
is refused.

a) When protest is NECESSARY?

1) If a foreign bill has been dishonored by non- acceptance;
2) If a foreign bill which was not previously presented for acceptance has
been dishonored by non-payment;
3) If a stranger to a bill will accept the instrument for honor;
4) If the bill will be presented for payment to acceptor for honor or
referee in case of need (Sec. 167, NIL); and
5) When the bill is dishonored by the acceptor for honor (Sec. 170, NIL).
Note: Without protest of a dishonored foreign bill, the drawer and
indorser are not liable based on the instrument. However, the
drawer may still be liable based on contract.

Requisites (Secs. 153 and 154, NIL)

1) The protest must be made by a notary public or any respectable resident of
the place where the bill is dishonored;
2) It must be made in front of two witnesses; It must be annexed to the bill or
must contain a copy thereof; It must be under the hand and seal of the notary
making the protest; The protest must specify the following: (i) time and place of
presentment, (ii) the fact that presentment was made and the manner thereof,
(iii) cause or reason for protest, and (iv) demand was made and the answer
given, if any, or that the drawee or acceptor cannot be found.

15.08. ACCEPTANCE FOR HONOR (Secs. 161-170)

a) Acceptance for Honor

It is 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 persons for whose honor it is accepted, and conditioned to
pay the bill when it becomes due if the original drawee does not pay it.

b) Requisites for Acceptance for Honor

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; and
4) acceptance for honor must be with the consent of the holder of the
instrument.
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15.09. PAYMENT FOR HONOR (Secs. 171-177)

a) Payment for Honor

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.

b) Requisites for Payment for Honor

1) the bill has been dishonored by non payment;

2) it has been protested for non-payment;
3) payment supra protest 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; and
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.

c) What is the effect of non-compliance with the formalities?

Payment will operate as a mere voluntary payment and the payer will acquire
no right to full reimbursement against the party for whose honor he pays.

16. BILLS IN SET (Secs. 178-183)

16.01. BILLS IN SET

There is only one bill that is composed of several parts, each part being num-
bered and containing a reference to the other parts.

16.02. PURPOSE
Bills in set are usually availed of in cases where a bill has 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.

16.03. LIABILITY OF ACCEPTOR

a) The acceptor is bound to accept only one part of a bill. If different parts of the bill
are negotiated separately to two persons and both are holders in due course, the
holder whose title first accrues is considered the true owner of the bill.

b) If he accepts more than one part, he is liable to all the holders of the parts he
accepted.
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16.04. OBLIGATIONS OF TRANSFERORS

When the holder indorses two or more parts of the bill in set:
a) the person shall be liable on every such part; and
b) in every indorser subsequent to him is liable on the part he has himself
indorsed, as if such parts were separate bills.

17. DISCHARGE

17.01. How may a negotiable instrument be discharged

a) By payment in due course by or in behalf of the principal debtor;

b) By payment in due course by the party accommodated, where the instrument is
made or accepted for his accommodation;
c) By the intentional cancellation thereof by the holder;
d) By any other act which will discharge a simple contract for the payment of money;
and
e) When the principal debtor becomes the holder of the instrument at or after maturity
in his own right (Sec. 119, NIL).

17.02. What is payment in due course?

Payment in due course—payment made at or after the maturity of the

instrument, to the holder thereof in good faith and without notice that his title is
defective (Sec. 88, NIL),

17.03. When is a person secondarily liable discharged?

Section 120 of the NIL provides that a person secondarily liable on the
instrument is discharged.

a) By any act which discharges the instrument;

b) By the intentional cancellation of his signature by the holder;

c) By the discharge of a prior party;

d)By a valid tender or payment made by a prior party;

d) By a release of the principal debtor unless the holder's right of recourse against the
party secondarily liable is expressly reserved; and

e)By any agreement binding upon the holder to extend the time of payment or to
postpone the holder's right to enforce the instrument unless made with the assent of
the party secondarily liable or unless the right of recourse against such party is
expressly reserved.
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18. CHECKS

18.01. A check is a bill of exchange drawn on a bank payable

a) A check must be presented for payment within a reasonable time after its
issue or the drawer will be discharged from liability thereon to the extent of the
loss caused by the delay.

b) When check operates as an assignment. 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,
and the bank is not liable to the holder unless and until it accepts or certifies the
check

18.02. KINDS

a) Cashier's Check - A bill of exchange drawn by a bank upon itself, and is

accepted by its issuance. A manager's check is of the same nature, although
instead of being signed by the cashier, it is the manager who signs the same for
the bank.

b) Certified Check - One drawn by a depositor upon funds to his credit in a

bank which a proper officer of the bank certifies will be paid when duly
presented for payment.

1) Certification is equivalent to acceptance

2) Where the holder of a check procures it to be accepted or certified, the
drawer and all indorsers are discharged from liability thereon.
3) 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, and the bank is not liable
to the holder unless and until it accepts or certifies the check .

c) Crossed Check - Done by writing two parallel lines diagonally on the left top
portion of the checks. The crossing is special where the name of a bank or a
business institution is written between the two parallel lines, which means that
the drawee should pay only with the intervention of that company. The crossing
is general where the words written between two parallel lines are "and Co." or
"for payee's account only".

1) Effects

The crossing of a check relates to the mode of its presentment for

payment. Under Section 72 of the NIL, presentment for payment, to be
sufficient, must be made by the holder or by some person authorized to
receive payment on his behalf. Who the holder or authorized person is
depends on the instruction stated on the face of the crossed check.
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(i) The check may not be encashed, but only deposited in the bank;
(ii) The check may be negotiated only once to one who has an account
with the bank; and
(in) The act of crossing serves as a warning to the holder that the check
has been issued for a definite purpose so that he must inquire if he has
received the check pursuant to that purpose.

d) Memorandum Check - In the form of an ordinary check, with the word

"memorandum, "memo" or "mem" written across its face, signifying that the
maker or drawer engages to pay the bona fide holder absolutely, without any
condition concerning its presentment. Such a check is an evidence of debt
against the drawer, and although it may not be intended to be presented, has the
same effect as an ordinary check, and if passed to a third person, will be valid in
his hands like any other check.

e) Traveler's Checks - Instruments purchased from banks, express companies,

or the like, in various denominations, which can be used like cash upon second
signature by the purchaser. It has the characteristics of a cashier's check of the
issuer. It requires the signature of the purchaser at the time he buys it and also
at the time he uses it - that is when he obtains the check from the bank and also
at thetime he delivers the same to the establishment that will be paid thereby.

18.03. STOPPING PAYMENT

a) The drawer has the right to order the drawee to stop payment of a check and
this right flows from the rule that the issuance of a check by itself is not an
assignment of funds by the drawee. If a bank pays a check after it has been
notified to stop payment, it pays on its own responsibility and will not be
permitted to charge the account. The bank would be liable to the drawer if the
bank pays the payee despite the stop payment order

b) The drawer may countermand payment if he has a valid defense against the
holder of the check. Thus, countermanding of a check is proper where the payee
failed to deliver the goods that he was supposed to deliver.

c) The rule allowing stop payment orders applies to manager's and cashier's
checks if the holder is not a holder in due course.