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1.

LIABILITY OF THE PARTIES


A. In General
1. Persons liable on the instrument:
a) The person primarily liable on an instrument is the person who by the
terms of the instrument is absolutely required to pay the same.
b) All other parties are secondarily liable.
2. Effect of want of demand on principal debtor:
a) Presentment for payment is not necessary in order to charge the person
primarily liable on the instrument;
b) But if the instrument is, by its terms, payable at a special place, and he is
able and willing to pay it there at maturity, such ability and willingness
are equivalent to a tender of payment upon his part.
c) But except as herein otherwise provided, presentment for payment is
necessary in order to charge the drawer and indorsers.
PRIMARY PARTY
1. Maker of Promissory Note
2. Acceptor of a Bill
(drawee is not a party liable on
instrument until he accepts.
Unconditionally Liable Primary party is duty bound to pay the
holder at the date of maturity, whether
or not the holder demands payment
from him, and he is not relieved from
liability even if the instrument should
become overdue due to the failure of
the holder to make such demand.

B.

SECONDARY PARTY
1. Indorsers of Note and Bill
2. Drawer of a Bill

Conditionally LiableSecondary party is not bound to pay


unless the following conditions have
been fulfilled:
a.Due presentment or demand to
the primary party for payment or
acceptance,
b.its dishonor by such party,
c. the taking of proceedings
required by law after dishonor

LIABILITY OF THE MAKER


Maker - applies only for promissory note
1. warrants the existence of payee
cannot deny liability on the ground that no payee exists
nor question existence of payee
2. represents that payee has capacity to indorse at the time of making of
note
that payee can transfer good and valid title to the note by indorsement;
Precluded from making defense of minority or insanity

C.

STATUS OF DRAWEE PRIOR TO ACCEPTANCE OF PAYMENT;


EFFECT OF STOP ORDER
Draweeis a person on whom a BOE or check is drawn & who is ordered to
pay it
1. He is not liable until he accepts it
2. Mere issuance of bill does not make him liable - it is not an assignment of
funds
Ex. Drawee bank not liable until he accepts or certifies the check
DRAWER - DRAWEE = DEBTOR - CREDITOR
Although drawee is not liable to holder
until acceptance, failure to accept under
some circumstances holds drawee liable
to drawer for breach of contract or
damages based on tort.

Unjustified refusal to accept


constitutes
Breach
of
Promise
1

D.

LIABILITY OF ACCEPTOR

Negotiable instruments are payable either:


1. Immediately - it will be presented to drawee for payment
2. At some Future Time - BOE may be presented to drawee for acceptance before
due date
GR: Drawee has no liability on the bill until and unless he accepts the same;
Once he accepts, he becomes primarily liable on the instrument.
Upon acceptance he engages that:
1. He will pay it according to the tenor of acceptance
2. Admits the following:
a) Existence of the drawer
b) Genuineness of signature
c) Capacity and Authority to draw instrument
d) Existence of payee and Capacity to Indorse
If alteration consists in RAISING THE AMOUNT payable under the instrument:
Acceptor would be liable to a
Only as to its original amount
holder in due course
If Acceptor pays before knowledge of
He may recover the difference between
alteration
the altered and original amount
If receiver is not a holder in due course
Acceptor would be able to recover the
whole amount paid (since payment was
mistake)
If alteration is of the PAYEES NAME
Paying bank cannot charge the
drawers account with the amount of
the check

RATIO: Banks duty is to pay according


to the order of the drawer.

FORMAL REQUISITES OF ACCEPTANCE


Acceptance - means an acceptance completed by delivery or notification
signification by the drawee of his assent to the order of the
drawer
Requisites for Valid Acceptance:
1. Must be in writing
2. Signed by the drawee
3. Must not change implied promise of acceptor to pay only
money
**Acceptance is usually made by writing the word ACCEPTED
and signing immediately below.
Holder-

may require that acceptance be written on the bill


if refused, has option to treat the bill as dishonored.

Bill may be accepted:


Before signed by drawer
When Incomplete
When Overdue
After dishonored by previous refusal to accept
Non-payment

A. CONSTRUCTIVE ACCEPTANCE
a) Time Allowed for Drawee to Accept - 24 HOURS after presentment
b) Liability of Drawee Retaining/ Destroying Bill:
Destroy or Refuses within 24 hrs after delivery to return the bill accepted/ not
accepted to the holder, he will be deemed to have ACCEPTED.
Otherwise, he
Person
loses right of
presenting
recourse
must treat the
against
bill as
Drawer and
dishonored by
Indorser
nonacceptance
**Drawee has 24 hours to accept / not / to decide counted from
DELIVERY.
Bill is duly
presented for
acceptance but
not accepted
w/in prescribed
period

B. ACCEPTANCE ON A SEPARATE INSTRUMENT


Acceptance:
1. need not be written on the instrument itself.
2. may be written on a separate instrument such as letter / telegram.
3. may either be for an existing or future bill.
a) Extrinsic Acceptance (Existing Bill)
b) Virtual Acceptance (Future Bill)
4. Acceptance appears in a separate instrument, to be operative it must:
Identify the bill to which acceptance refers
Must be clear and unequivocal
Reliance -

is a more important requisite than physical exhibition of the


instrument bearing the acceptance.

C. KINDS OF ACCEPTANCE
1. General Acceptance
2. Qualified Acceptance
3. Trade Acceptance
4. Bankers Acceptance
GENERAL
General assents without
qualification to
the order of the
drawer

QUALIFIED
QualifiedIn express terms,
varies the effect of the
bill as drawn

An acceptance to
pay at a particular
place is a general
acceptance
unless it
expressly states
that the bill is to
be paid there only
and not
elsewhere

(a) Conditional payment by acceptor


is dependent on a
fulfillment of a
condition;
(b) Partial - acceptance
to part only of the
amount
(c) Local - acceptance
to pay only at a

TRADE
Is a draft or bill of
exchange with a
definite maturity
drawn by a seller
on a buyer for the
purchase price of
goods, bearing
across its face the
acceptance of
buyer
Trade
acceptance is
confined to sale of
goods and has a
fixed date of
maturity while an
ordinary bill may
cover any kind of
transaction and

BANKERS
Is a negotiable
time draft or bills
of exchange
drawn on and
accepted by a
commercial bank.

Not only used in


domestic
transactions but
also international
trade for
financial, import
and export which
is accepted by
the buyer.

particular place
(d) Qualifiedas to time
(e) As to Drawee - one
or more but not all

may be payable on
demand or at a
fixed or
determinable
future time.

CHECKS
Check - is a bill of exchange drawn on a bank payable on demand.
Requisites:
1. Must contain an order
2. Must be unconditional
3. Order must be for payment of money
4. The amount must be definite and certain
5. May be transferred by indorsement or delivery (depending if order/bearer)
6. Always payable on demand not at future date
Kinds of Checks:
Cashiers or Managers
Check
one which is drawn by
the bank on itself, and its
issuance has the effect of
acceptance.

Memorandum Check

Travelers Check

one where the word


memorandum or
memo is written across
its face, signifying that
the drawer will pay the
holder absolutely,
without the need of
presentment.

a negotiable instrument
upon which the holders
signature must appear
twice on the instrument:
First when it is issued and
again when it is cashed.

Since drawer and drawee


are the same, holder may
treat it as either bill of
exchange or note
Bank is primarily liable

used by travelers as the


safest and most
convenient substitute for
money.

CERTIFICATION AND EFFECTS


1. Certification of bank is equivalent to an Acceptance. (Primary liable)
2. When holder procures accepted or certified check,
drawer and indorser are discharged from liability.
3. Check is not an assignment of funds of drawer; thus bank is not liable to
holder unless it accepts or certifies.
Certification - is an agreement by which the bank promises to pay the check at
any time
it is presented for payment.
Requisites of valid certification:
1. Must be in writing
2. May be made on the check itself or separate instrument.
3. No particular words necessary; the word certified followed by date,
signature of bank officer is sufficient
**Refusal to accept a bill of exchange = dishonor
**Refusal to certify a check = does not mean dishonor
**Holder cannot (at this stage) exercise right of recourse against drawer/
indorser
**Right of recourse arises only if bank refuses to pay check upon demand.

**Bank may be liable for damages in favor of drawer for refusal to pay.
The acceptance of an ordinary bill even Where the check is certified at the
if given at the request of the holder request of the holder, the bank
does not release the secondary parties becomes solitary debtor and the drawer
who remain liable should the acceptor and indorsers are discharged.
fail to pay.
Where certification is obtained at the request of the drawer, secondary parties
are not released. Personal defenses of drawer against the payee would be
available to the certifying bank against all holders not in due course
But if certification was obtained by the holder, a personal defense of the drawer
against the payee would not be available to the bank even against holder in due
course.
A STOP ORDER
given by the drawer
where check was
certified at the
request of holder is
INOPERATIVE.

Where Certification
was obtained by the
drawer, any stop
order later issued by
him is effective in
preventing bank
from paying check.

Indorsers at the time of certification - release of secondary liability


Indorsers after the certification - remain secondarily liable
Certification warrants genuineness of drawers signature;
Bank is bound to know signature of its depositors;
Cannot recover wrong payment made
DISTINCTION BETWEEN SURRENDER OF CHECK UPON PAYMENT
AND NEGOTIATION

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