PAN African eNetwork Project

Course Name : MFC

Subject Name : Business Environment & Law
Semester - I

Faculty Name: Santosh Kumari

Copyright Amity University

NEGOTIABLE INSTRUMENT

Copyright Amity University

Negotiable Instruments Act, 1881

Importance of Negotiable Instrument

Facilitates payment and settlements in the businesses.

Easy transferability of value of instrument.
It has been amended in 1988
(Dishonour of Cheques and for penalties and 2002 (modified for
requirements as per the electronic commerce)
The payments through the NI are widely accepted throughout the world.

Negotiable Instrument
Meaning and characteristics of Negotiable Instrument
NI means a promissory note, bill of exchange or cheque
payable either to order or to bearer
Free transferability
*by delivery (payable to bearer) or
*by endorsement and delivery
(payable to order)
Holder presumed to be the owner
Holder in due course gets the title from all defects, if the title
is acquired with good faith and for consideration. Can also
sue for recovery of the sum
The instrument transferable till maturity.

Kinds of NIs
Kinds of NIs
o

Negotiable by statute- NI Act only recognizes three kinds of NI

i.e. PN, BOE and Cheque

Negotiable by custom or usage- certain instruments which have

acquired the characteristics of the NI by usage and custom of trade.
E.g. the Government PN, Bankers Draft, Pay orders,
hundies, delivery orders , railways receipts for goods are
all held to be NI.

Presumptions relating to NI
Presumptions relating to NI
o Sections 118 and 119 of the NI act has certain presumptions in order
to facilitate business transactions:
o It shall be presumed that every NI is drawn for consideration
o Every bill is accepted within a reasonable time before its maturity
o The instruments are endorsed in the order, in which they appear on it.
o Every holder is presumed to be a holder in due course
All the above presumptions are rebuttable by evidence
to the contrary.
The burden of proof lies on the defendant and not
upon the plaintiff

Classification of the NI
Classification of the NI
Bearer Instruments- payable to bearer
Order Instruments- expressed to be payable to order
Inland Instruments- drawn and made in India upon any
person resident in India, even though payable in a foreign
country
Foreign Instruments- Not an Inland Instrument, must be
drawn outside India and made payable outside or inside India
Demand Instruments- Time for payment is specified in PN
and BOE/ payable at sight
Ambiguous Instruments- which can be treated as PN or BOE
by the holder

Continued......

Inchoate or incomplete instruments- when the person signs

and delivers a instruments which is wholly blank or incomplete
and gives the authority to make it complete to the holder

Accommodation Bills- A bill drawn , accepted or endorsed

without consideration
a)
b)

Party lending his name to oblige to the other party is

accommodating or accommodation party
The party so obliged is called the party accommodated

Trade Bills- When a bill is drawn, accepted or endorsed for

consideration it is called a genuine trade bill

Escrow- When the NI is delivered conditionally or for special

purpose as a collateral security or for safe coustody only and
not for transferring the absolutely.

Promissory Notes ( Section 4)

Promissory Notes ( Section 4)

PN is an instrument in writing not being a bank note or a

currency note

It contains an unconditional undertaking.

Signed by the maker to pay a certain sum of money only.

To or to the order of certain person, or to the bearer of the

Instruments.

Parties to the PN
a) Maker- the person making or executing the note promising
to pay the amount stated therein
b) Payee -The person to whom the amount is payable
To comply with other formalities like date, place, consideration,
stamp etc.

Bill of Exchange (Section 5)

Bill of Exchange (Section 5)

BOE is an instrument in writing

Containing an unconditional order

Signed by the maker

Directing a certain person to pay

A certain sum of money only

To or to the order of

Certain person or to the bearer of the instrument

Distinction between PN and BOE

In a PN there are only two
parties- maker and the payee

In a BOE, there are three partiesdrawer, the drawee and the payee

It contains an unconditional
promise by the maker to the
payee

It contains an unconditional order to the

drawee or his agent to pay according to
the drawers directions.

No acceptance is necessary

A bill has to be accepted if it is a bill

payable after sight

The liability of the maker or

drawer is primary and absolute

The liability of the drawer secondary

i.e. when there is non payment by the
drawee.

The maker stands in immediate

relationship with the payee

Notice of dishonor to be given by the

holder to the drawer

No notice of dishonor need

to be given.

The maker and the drawee do not stand

in immediate relationship.

Parties to a Bill of Exchange

Parties to a Bill of Exchange
Drawer- Person who draws the bill
Drawee- the person on whom the bill is drawn
Acceptor- person who accepts the bill ( he may be the drawee
or a stranger on behalf of drawee)
Endorser- person who endorses the bill in favour of another
Person
Endorsee- person in whose favour the bill is endorsed
Bill in sets They are usually drawn in set of three, which are
called as Via. The whole set constitutes only one bill

Cheque
Cheque
Signed by the drawer
Contains an unconditional order to a specified banker to
pay on demand
A certain sum of money to or to the order of a specified person or
the
bearer of the instrument. Therefore all cheques are bills of exchange
but whereas all bills of exchange are not cheques.It can be ante
dated or post dated.

In case of a cheque till it becomes stale ( on expiry of 6 months from

the date of issue). It may be made payable to two or more or one of
two alternatively or some of several payees.

Differences between Cheque and BOE

BOE
The drawee liable only after it is
accepted

Cheque
A cheque does not require
acceptance and it is intended
for immediate payment

Days of grace (three) are allowed

in case of a bill except for
payment on demand

No days of grace

Drawee may be any one including

the banker

The drawee is always a banker

It should be presented for payment,

Delay in presenting does

not discharge the drawer from
his liability

otherwise it may dischare the liability

of the drawer

BOE cannot be crossed

A notice of dishonor has to be
given to the drawer

It may be crossed

Crossing of Cheques
Crossing of Cheques

A cheque can be an open or crossed cheque

Open cheques can be encashed directly across the counter by

presenting to drawee bank. But if it is lost or stolen it can be encashed
by any body unless countermanded (stop payment).

Crossing of the cheque was introduced with a view to avoid the losses
that may result from the open cheques.

Crossing is a direction to the bank to pay the money generally to a bank

or to a particular bank.

It is made with the intention to make the payment secured.

Its negotiability is not affected unless Not Negotiable is inserted but it

is still transferable.

Modes of Crossing
Modes of Crossing
Where a cheque bears across it face an addition of words "and company
or any abbreviation thereof, between two parallel traverse lines, or of two
parallel simply, the addition shall be deemed a crossing and it is known
as general crossing.
General Crossing- In general crossing it is the responsibility of the
drawee bank not to make payment otherwise than a bank

Other modes
Special Crossing - Across its face it bears an addition of the name of
a banker with or without the words Not Negotiable.

Restrictive Crossing - Account payee are added to the general or

special crossing. The amount has to be credited to the account of the
payee. They are not negotiable.

Not Negotiable Crossing - It means that the title of the transferee

cannot be better than the transferor. It is crossed so, as a protection
to the drawer or holder of the cheque against miscarriage or
dishonesty in the course of transit by making it difficult to get cashed,
until it reaches its destination.

Crossing after issue of the cheque

Crossing after issue of the cheque

If the cheque is not crossed, the holder of the cheque may cross it
either generally or specially.

If the cheque is crossed generally, the holder may cross it specially

The holder may add the words "Not Negotiable to the crossing

If it is crossed to specified banker, it may be again crossed to another

specified banker, or agent for collection.

Parties to a Negotiable Instrument

Parties to a Negotiable Instrument
Capacity of parties- Every person capable of contracting may bind
himself
and be bound by the making, drawing, acceptance, indorsement, delivery
and negotiation of the NI
The capacity of the party to a NI is co-extensive with the capacity of his
or
her contract capacity to contract

Minor can draw, indorse, deliver and negotiate such instruments as to

bind all other parties other than himself.

Minor can also acquire all rights under it, and if he is a holder he is
entitled to sue all the prior parties to the instruments.

If minor is one of the parties and all others are adults, then other than
the

Holder ( Sec 8)
Holder ( Sec 8)

A person who is entitled to hold the negotiable instruments in his own

name, to possess the instrument and to recover or receive its amount
due from the parties thereto is called a holder.

To be a holder the person must be named in the instrument as a

payee, or the endorsee or a bearer thereof

Holder in due course (HDC)

Holder in due course (HDC)

If a person proves that he acquired the instrument for a valuable

consideration, then he is known as holder in due course.

The holder in due course should show that for consideration he became
the payee or indorsee of the instrument , if it is payable to the order.

In such cases, the instrument should have been indorsed and delivered
to him, as his title to the instrument will be incomplete without delivery.

Other essentials to be a holder in due course

Other essentials to be a holder in due course

The HDC should have acquired the instrument any time before the
amount became payable.

If a person takes the instrument after the day the amount becomes
payable, such a person cannot take the place of HDC, and the rights
acquired by him are only co-extensive with that of his immediate
transferor.

The HDC should have acquired the title without notice of the defect in
the title

Privileges of a HDC
Privileges of a HDC
The presumption is that the HDC obtains title to the instrument free
from equity.
If the instrument is stamped but otherwise inchoate,the person who
has signed and delivers is prevented from asserting against the HDC
as the stamp in itself is sufficient to cover the amount, though the
instrument was incomplete.
Until the instrument is duly satisfied, every prior party to a NI is liable
thereon to a holder in due course.

If the bill or note is negotiated to a HDC, then the negotiating parties

cannot avoid liability if there was a condition or special purpose
attached to it.

Continued......
Once the NI passes through the hands of the HDC, the NI get
cleansed
of all its defects, provided the holder is not a party to the fraud

No defence can be set up against the holder in due course

The validity of the instrument as originally made or drawn cannot be

denied by the maker/ drawer/ acceptor for honor

The endorser cannot deny the signature or capacity to the contract of

any prior party to the instrument

Liabilities of Parties (Drawer)

Liabilities of Parties (Drawer)

Liability of the drawer- the drawer is liable to compensate in case of

dishonor by the drawee or acceptor, provided due notice has been
given to or received by the drawer.

The liability of the drawer in case of bill is secondary in nature. It is the

acceptor who is primarily liable to make the payment.

By drawing a bill, the drawer undertakes that on presentment of the

same to the acceptor, it will be accepted and duly honored and

If it is dishonored by the acceptor or not accepted, the drawer will

compensate to the holder or the indorser, provided due notice is given
to him.

Continued..

The drawer can also limit his or her liability by using the sans recourse
indorsement

If the holder fails to give notice , then the drawer is not liable and
beyond this he is discharged from his/her liability.

This is not only with reference to the bill but also upon the original debt.

Liability of the Drawee

Liability of the Drawee

The relationship between the banker( drawee) and customer is

that of debtor and creditor.

The banker has to undertake to honor the customers cheque until

the funds are available with the bank in the customers account.

Banker can refuse to honor the customers in certain instances like,

a) bankers lien,
b) no amount to honor in the customers account,
c) post dated fund presented before the date,
d) if the instrument is ambiguous,
e) if the customer been declared insolvent,
f) if the customer has countermanded the cheque,
g) if the bankers receives the notice of death or insanity

Liability of the Drawee Bank for Wrongful Dishonour

Cheques to be presented during the usual banking hours.
If there is sufficient fund in the customers fund and still the bank does
not honor the cheque , it has to fulfill the monetary loss of the customer
and also the injury to reputation of the customer.
This remedy against the bank is available only to the drawer of the
cheque and not the holder of the cheque.

Liability of the Drawee Bank Where the Drawers Signature is Forged

If bank honors a cheque which is forged, the bank cannot get the
statutory protection, even if the sign could not be distinguished.

The Act provides protection to the drawee bank paying a cheque that
carries a forged indorsement.

This section applies if the bank pays a cheque that carries a forged
indorsement and it is payable to order and it purports to be indorsed
by or on behalf of the payee. ..If the bank on which is drawn,
makes the payment in due course, then the bank is discharged from
its liability even if the signature of the payee might be forged.

Liability of the Maker of the note and Acceptor of the bill

Both the maker and the acceptor are liable to make the payment.
The liability of the maker in case of note and acceptor in case the bill is
absolute, Unconditional and primary. The liability exists only when he
signs and delivers the note

But to make the acceptor liable only signature is not enough, it has to
be accepted i.e. notice of acceptance should be given and the bill has
to be delivered.

As the acceptor is not the originator of the bill as in case of the note,
the acceptor can have an option to give a qualified acceptance.

Liability of endorser
Liability of endorser

Every indorser after dishonor is liable as upon an instrument payable

on demand to every subsequent holder.

The indorser is in a position of a new drawer and the liability

of the indorser is conditional.

By endorsing the bill the endorser undertakes that the

instrument will be accepted and paid as per the tenor of
presentment.

If it is dishonored, he will compensate the holder or subsequent

indorsers who is compelled to pay for it subject to due notice of
dishonor.

The indorsers liability as per this provision (sec 35) will not commence
until the indorsed instrument is delivered to the transferee. The indorser
has to make good the loss but he can make qualified indorsement by

Liability of the other parties

Liability of the other parties

Every prior party to the indorsement will be liable to the subsequent
party until the instrument is duly discharged or satisfied.
If the indorser knows that bill was forged, he cannot later deny the
liability by pleading forgery as a reason.
The indorser cannot challenge the holders title. He will be liable twice.
One to the holder and the other to the true owner of the instrument.

Acceptor of the bill drawn in fictitious name and payable to the drawers
order is not, by reason that such name is fictious,relieved from liability to
any holder in due course.

Negotiation
Negotiation
Negotiation of an instrument may be either by delivery or by
indorsement. Delivery of NI is an essential ingredient in order
to bind the parties as they are incomplete and revocable.
The delivery should be with an intention to passing of the
property . A PN , BOE or Cheque is considered to be completed
only when it is delivered i.e., actual or constructive

As between the immediate parties, delivery to be effectual must

be made by the party making , accepting or indorsing the
instrument or by a person authorized by such person

For other parties, other than HDC it has to been shown that the
instrument was delivered conditionally or for special purpose only
and not for the purpose of transferring absolutely the property
therein. All the NIs are negotiable by delivery after indorsement.

Endorsements / Indorsements
Endorsements / Indorsements

A bearer instrument is defined as an instrument where the only or last

indorsement is an indorsement in blank.

Partial Indorsement- No writing on a negotiable instrument is valid for

the purpose of negotiation if such writing purports to transfer only a part
of the amount appearing to be due on the instrument, .

But where such amount has been [partly paid, a note to that effect may
be indorsed on the instrument, which may then be negotiated for the
balance ( This is called partial indorsement)

Features of indorsement
Features of indorsement

Intention should be there for negotiating the instrument.

Effected by the signature of drawer or holder of a negotiable

instrument.

Indorsement can be made on the back or face of instrument

(generally it can be made on a plain paper or on a stamp paper)
The person who signs is called Indorser/endorsor.
The person in whose favour it is made is called-Indorsee/endorsee.
The additional slip pf paper, if used for indorsement is called as
allonge

Legal aspects of endorsement

Legal aspects of endorsement
Negotiation

The endorsee acquires the property or interest in the instrument as

a holder. He can further pass the title negotiation, other than for
restrictive endorsement (Transfer)

It can be negotiated till the payment is made

Endorsement in part is invalid if the endorser dies before delivery,

endorsement becomes invalid.

Presumption- Endorsement made in the order it appears

Endorsers signature-Not to be in block letters

Endorser should spell his name in the same way as it appears on

the cheque.

Kinds of endorsement
Kinds of endorsement
Endorsement in blank: If there is only name of the endorser
( payable to bearer)
Endorsement in full- If it made to a specified person, A blank
endorsement may be converted into full.
Sans recourse endorsement- Exclude his personal liability
by limiting the liability.
Conditional endorsement- If a condition is specified by the
endorser
Restrictive endorsement- If it specified to one person only
Facultative endorsement- If the provisions of giving notice of
dishonor is waived by the endorse

Difference between Assignment and Negotiation

Assignment should be in
writing

Negotiation by delivery /
endorsement and delivery

Notice of transfer of
actionable claims must be
given by the transferee to
the debtor in case if the
assignment in order to
complete the title

No notice of such kind

required in negotiation

The title is subject to all the

defects, equities of the
assignor

Transferee to prove
consideration for transfer

The title of the transferee

is better than the transferor
Consideration is presumed
in negotiation

Instruments obtained by unlawful means

Instruments obtained by unlawful means

Stolen instruments- Acquires no title

Instruments obtained through fraud or coercion- usually not liable ,

but liable if due and reasonable care not taken

Instruments obtained for unlawful consideration- Does not create a

legal obligation but HDC obtains good title

Forged instruments- Generally it cannot convey title

Forged endorsement-depends of the different situations

Presentment
Presentment
Meaning- Showing an instrument to the drawee, acceptor or maker for
acceptance, sight or payment.
The three kinds of presentment are:
Presentment of BOE for acceptance
Presentment of PN for sight
Presentment of NI for payment
Presentment must be made in a place and time specified or in the place
of business or residence or where ever the person is found.

Presentment when excused

Presentment when excused

Presentment is excused and the instrument can be treated as
dishonored in the following circumstances
a) When the drawee cannot be found after reasonable search
b) Where the drawee is a fictitious person or incapable of contracting
c) Where the presentment is irregular, acceptance has been refused on
some other ground.
d) Where the drawee becomes bankrupt or is dead

Dishonor of a NI
Dishonor of a NI
Non-acceptance of the bill or non- payment results in dishonor of
the
instruments.

Dishonor by non- payment happens when the maker, drawee of the

cheque or acceptor of the bill makes a default in payment upon
being duly required to pay the same.

It is considered to be dishonored by non-payment when the

presentment for payment is excused and the overdue remains
unpaid.

Dishonor continued
Dishonor by non- acceptance happens in the following ways:
a) When the drawee does not accept within 48 hours of presentment
b) When presentment for acceptance is excused and the bill remains
unaccepted.
c) When the drawee is incompetent
d) When the acceptance by the drawee is qualified
e) when the drawee is fictitious person or cannot be found after
reasonable search a notice of dishonour is a must to all prior parties
whom the holder wants to make liable except in those cases where
the law considered it as unnecessasry.

Noting and protest

Noting and protest

A noting is a process of recording of dishonor by the notary

public upon the instrument within a reasonable time of dishonor.
It is the discretion of the holder to get it noted.
A bill that is noted must contain the fact of dishonor, the date,
the reasons. It will also have the notary charges.
When the process of noting is certified, it is called protest.

Dishonor of cheques ( Sec 138-142)

Dishonor of cheques ( Sec 138-142)
>

After the Amendment Act of 1988, the NI Act provide for criminal
penalties in the event of dishonor of cheques for insufficiency of
funds.

>

The drawer may be punished under sec 138 with imprisonment

for two years (after 2002 Amendment Act) or with fine which
may extend to twice the amount of the cheque or with both.

>

(The Amendment has inserted five new sections 143- 147

for the procedure to be followed for the trial)

Conditions to attract criminal penalty under sec 138 are:

The cheque is dishonored due to insufficiency of funds
The payment for which the cheque was issued was for the discharge of
a legally enforceable debt or liability in whole or part of it. ( If it is a gift ,
then the liability will not arise)
The cheque has to be presented to the paying bank within six months
from the date that it was drawn.
The payee or the HDC should have been given a notice of dishonor of
the cheque from the bank.( The court to take cognizance of the
complaint, if it given by the payee or the HDC)
The drawer will be liable only if he fails to make the payment within days
of such notice period.
The payee or HDC of the cheque should have made a written complaint

Discharge of a Negotiable Instrument

Discharge of a Negotiable Instrument
Discharge of parties
a) By cancellation
b) Release
c) Payment
d) If the holder gives more time to the drawee than 48 hours
e) by default in presenting the cheque within a reasonable time
f) Dissenting parties discharged by qualified or limited acceptance
g) Material alteration etc..
******************

NEGOTIABLE INSTRUMENTS LAW

NEGOTIABLE INSTRUMENT
Written contract for the payment of money,
by its form intended as substitute for
money and intended to pass from hand to
hand to give the holder in due course the
right to hold the same and collect the sum
due
PROMISSORY NOTE
unconditional promise in writing made by
one person to another signed by the maker
engaging to pay on demand, or at a fixed
or determinable future time a sum certain
in money to order or to bearer
where a note is drawn to the makers own
order, it is not complete until indorsed by
him.

BILL OF EXCHANGE
unconditional order in writing addressed by one person
to another signed by the
person giving it
requiring the person to whom its addressed to pay on
demand or at a fixed or
determinable future time a sum certain in money to order
or to bearer
Check: bill of exchange drawn on a bank payable on
demand.
Kinds of checks:
1. personal check
2. managers/cashiers check drawn by a bank on itself.
Issuance has the effect of
acceptance
3. memorandum check memo is written across its
face, signifying that drawer
will pay holder absolutely without need of presentment

4. crossed check
Effects:
a. check may not be encashed but only deposited in bank
b. may be negotiated only once, to one who has an acct.
with a bank
c. warning to holder that check has been issued for a
definite purpose so that he
must inquire if he received check pursuant to such
purpose, otherwise not
HDC
Kinds:
a. general (no word between lines, or co between lines)
b. special (name of bank appearing between parallel lines)

BEARER
Person in possession of a bill/note payable to bearer
HOLDER
Payee or indorsee of a bill or note who is in possession of
it, or the bearer thereof.
THE LIFE OF A NEGOTIABLE INSTRUMENT:
1. issue
2. negotiation
3. presentment for acceptance in certain bills
4. acceptance
5. dishonor by on acceptance
6. presentment for payment
7. dishonor by nonpayment
8. notice of dishonor
9. protest in certain cases
10.discharge

NEGOTIABILITY
REQUISITES
1. in writing and signed by maker or drawer
no person liable on the instrument whose signature does not appear thereon
( subject to exceptions)
one who signs in a trade or assumed name liable to the same extent as if he had
signed in his own name
signature of any party may be made by a duly authorized agent, no particular
form of appt. necessary
2. unconditional promise or order to pay
unqualified order or promise to pay is unconditional though coupled with
a. an indication of a particular fund out of which reimbursement to be made,
or a particular account to be debited with amount, or
b. a statement of the transaction which gives rise to the instrument
an order or promise to pay out of a particular fund is not unconditional
a sum certain in money
even if stipulated to be paid--a. with interest, or
b. by stated installments, or
c. by stated installments with a provision that upon default in payment of any
installment/interest, the whole shall become due, or
d. with exchange, whether at a fixed rate or at the current rate, or
e. with costs of collection or an attorneys fee, in case payment not made at
maturity

3. payable on demand,
when expressed to be payable on demand, or at sight, or
on presentation;
when no time for payment expressed, or
where an instrument is issued, accepted or indorsed
when overdue, it is, as
regards the person so issuing, accepting, or indorsing it,
payable on demand
or at a fixed or determinable future time
when its expressed to be payable at a fixed period after
date or sight, or
on or before a fixed or determinable future time fixed
therein, or
on or at a fixed period after the occurrence of a specified
event which is certain to
happen, though the time of happening be uncertain
an instrument payable upon a contingency not
negotiable, and happening of
event doesnt cure it

4. payable to order
where it is drawn payable to the order of a specified
person or to him or his order.
May be drawn payable to order of --a. a payee not the maker/drawer/drawee, or
b. drawer or maker, or
c. drawee, or
d. two or more payees jointly, or
e. holder of an office for time being
when the instrument is payable to order the payee must
be named or otherwise
indicated therein with reasonable certainty
or bearer,
when expressed to be so payable
when payable to person named therein or bearer
when payable to order or fictitious/non-existent person,
and such fact known to
the person making it so payable, or
when name of payee doesnt purport to be the name of
any person, or
when the only/last indorsement is in blank

5. where addressed to drawee: such drawee named/ indicated therein

with
reasonable certainty
bill may be addressed to two or more drawees jointly, whether partners
or not,
but not to two or more drawees in the alternative or in succession
bill may be treated as a PN, at option of holder, where
a. drawer and drawee are same person
b. drawee is fictitious/incapacitated
EFFECT OF ADDITIONAL PROVISIONS
Gen. Rule: order/promise to do any act in addition to the payment of
money renders
instrument non-negotiable.
Exception: negotiability not affected by provisions w/c
1. authorize sale of collateral security if instrument not paid at maturity
2. authorize confession of judgment
3. waives benefit of any law intended for advantage/protection of obligor
4. give holder election to require something to be done in lieu of money

CONTINUATION OF NEGOTIABLE CHARACTER

Until
1. restrictively indorsed
2. discharged by payment or otherwise
TRANSFER
DELIVERY
NI incomplete and revocable until delivery for the
purpose of giving effect thereto
as between
a. immediate parties
b. a remote party other than holder in due course
delivery, to be effectual, must be made by or under the
authority of the party
making/drawing/accepting/indorsing
in such case delivery may be shown to have been
conditional, or for a special
purpose only, and not for the purpose of transferring the
property in the
instrument

D. as to presence/absence of express limitations put by indorser upon primary

obligors
privileges of paying the holder
1. Conditional additional condition annexed to indorsers liability.
Where an indorsement is conditional, a party required to pay the instrument may
disregard the condition, and make payment to the indorsee or his transferee,
whether condition has been fulfilled or not
Any person to whom an instrument so indorsed is negotiated will hold the
same/proceeds subject to rights of person indorsing conditionally
2. unconditional
INDORSEMENT OF BEARER INSTRUMENT
Where an instrument payable to bearer is indorsed specially, it may nevertheless
be further negotiated by delivery
Person indorsing specially liable as indorser to only such holders as make title
through his indorsement
UNINDORSED INSTRUMENTS
Where holder of instrument payable to his order transfers it for value without
indorsing, transfer vests in transferee
1. such title as transferor had therein
2. right of transferee to have indorsement of transferor
for purposes of determining HDC negotiation effective upon actual indorsement

HOLDER IN DUE COURSE

HOLDER
Sec. 191
RIGHTS OF HOLDER
1. sue thereon in his own name
2. payment to him in due course discharges instrument
HOLDER IN DUE COURSE: REQUISITIES
1. complete and regular upon its face
sec. 124 (effect of alteration)
sec. 125 (what constitute material alterations)
2. holder became such before it was overdue, without notice of any previous dishonor
sec. 53 (demand inst. nego after unreasonable length of time: not HDC)
sec. 12 (effect antedating/postdating)
3. taken in good faith and for value
sec. 24 (presumption of consideration)
sec 25 (definition. of value)
sec. 26 (definition. holder for value)
sec. 27 (lien as value)
4. at time negotiated to him, he had no notice (sec. 56-def; 54-notice before full amt.
paid) of --a. infirmity in instrument
b. defect in title of person negotiating

1. holds instrument free of any defect of title of prior parties

2. free from defenses available to prior parties among themselves
3. may enforce payment of instrument for full amount, against all parties liable
* If in the hand of any holder (note definition of holder) other than a HDC,
vulnerable to
same defenses as if non-negotiable
RIGHTS OF PURCHASER FROM HOLDER IN DUE COURSE
General Rule: in the hands of any holder other than a HDC, NI is subject to same
defenses as if it were non-negotiable.
Exception: holder who derives title through HDC and who is not himself a party to
any
fraud or illegality has all rights of such former holder in respect to all parties prior
to the
latter.
WHO DEEMED HDC
prima facie presumption in favor of holder
but when shown that title of any person who has negotiated instrument was
defective (sec. 55when title defective): burden reversed (now with holder)
but no reversal if party being made liable became bound prior to acquisition of
defective title (i.e., where defense is not his own)

DEFENSES AND EQUITIES

KINDS OF DEFENSES
1. real defense attaches to instrument; on the principle that the right
sought to be
enforced never existed/there was no contract at all
2. personal defense growing out of agreement; renders it inequitable
to be enforced
vs. defendant
DEFENSES
1. INCAPACITY: real; indorsement/assign by corp/infant: passes
property but
corp/infant no liability
2. ILLEGALITY: personal, even if no K because void under CC 1409
3. FORGERY: real (lack of consent):
a. forged
b. made without authority of person whose signature it purports to be

General Rule:
a. wholly inoperative
b. no right to retain instrument, or give discharge, or enforce payment
vs. any party,
can be acquired through or under such signature (unless forged
signature
unnecessary to holders title)
Exception:
Unless the party against whom it is sought to enforce such right is
precluded
from setting up forgery/want of authority
Precluded:
a. parties who make certain warranties, like a general indorser or
acceptor
b. estopped/negligent parties
* Note rules on Acceptance/Payment under Mistake as applied to:
1. overdraft
2. stop payment order
3. forged indorsements

4. MATERIAL ALTERATION
Where NI materially altered w/o assent of all parties liable thereon,
avoided,
except as vs. a
1. party who has himself made, authorized or assented to alteration
2. and subsequent indorsers.
But when an instrument has been materially altered and is in the
hands of a HDC
not a party to the alteration, HDC may enforce payment thereof
according to orig.
tenor
Material Alteration
1. change date
2. sum payable, either for principal or interest
3. time of payment
4. number/relations of parties
5. medium/currency of payment, adds place of payment where none
specified, other change/addition altering effect of instrument in any
respect

*material alteration a personal defense when used to deny liability

according to org.
tenor of instrument, but real defense when relied on to deny liability
according to altered
terms.
5. FRAUD
a. fraud in execution: real defense (didnt know it was NI)
b. fraud in inducement: personal defense (knows its NI but deceived as
to
value/terms)
6. DURESS
Personal, unless so serious as to give rise to a real defense for lack of
contractual intent
7. COMPLETE, UNDELIVERED INSTRUMENT
Personal defense (sec. 16)
If instrument not in poss. Of party who signed, delivery prima facie
presumed
If holder is HDC, delivery conclusively presumed

7. COMPLETE, UNDELIVERED INSTRUMENT

Personal defense (sec. 16)
If instrument not in poss. Of party who signed, delivery prima facie
presumed
If holder is HDC, delivery conclusively presumed
8. INCOMPLETE, UNDELIVERED INSTRUMENT
Real defense (sec. 15)
Instrument will not, if completed and negotiated without authority, be a
valid
contract in the hands of any holder, as against any person whose
signature was
placed thereon before delivery
9. INCOMPLETE, DELIVERED
Personal defense (sec. 14)

 2 Kinds of Writings:
1. Where instrument is wanting in any material particular: person in
possession
has prima facie authority to complete it by filing up blanks therein
2. Signature on blank paper delivered by person making the signature
in order
that the paper may be converted into a NI: prima facie authority to fill up
as
such for any amount
In order that any such instrument, when completed, ma be enforced
vs. any
person who became a party thereto prior to its completion:
1. must be filled up strictly in accordance w/ authority given
2. within a reasonable time
but if any such instrument after completion is negotiated to HDC, it's
valid for all
purposes in his hands, he may enforce it as if it had been filled up
properly

LIABILITIES OF PARTIES
A. PRIMARY PARTIES
Person primarily liable: person who by the terms of the
instrument is absolutely
required to pay the same.
Sec. 70 (effect of want of demand on principal debtor)
1. Liability of Maker
a. Promises to pay it according to its tenor
b. admits existence of payee and his then capacity to
indorse
2. Status of drawee prior to acceptance or payment
sec. 127 (bill not an assignment of funds in hands of
drawee)
sec. 189 (when check operates as assignment)

3. Liability of Acceptor
Promises to pay inst according to its tenor
Admits the following:
a. existence of drawer
b. genuineness of his signature
c. his capacity and authority to draw the instrument
d. existence of payee and his then capacity to endorse
sec. 191, 132, 133, 138 --- formal requisites of acceptance
sec. 136, 137, 150 --- constructive acceptance
sec. 134, 135 --- acceptance on a separate instrument
Kinds of Acceptance:
1. general
2. qualified
a. conditional
b. partial
c. local
d. qualified as to time.
e. Not all drawee

1. when check certified by bank on which its drawn, equivalent to

acceptance
2. where holder of check procures it to be accepted/certified, drawer
and
all indorsers discharged from al liability
3. check not operate as assignment of any part of funds to credit of
drawer with bank, and bank is not liable to holder, unless and until it
accepts or certifies check
4. certification obtained at request of drawer: secondary parties not
released
5. bank which certifies liable as an acceptor
6. checks cannot be certified before payable

B. SECONDARY PARTIES
1. Liability of Drawer
a. Admits existence of payee and his then capacity to endorse
b. Engages that on due presentment instrument will be accepted, or paid, or
both, according to its tenor and that
c. If it be dishonored, and the necessary proceedings on dishonor be duly taken,
he will pay the amount thereof to the holder or to an subsequent indorser who
may be compelled to pay it
drawer may insert in the instrument an express stipulation negativing / limiting
his
own liability to holder
2. Liability of Indorsers:
Qualified Indorser and one Negotiating by Delivery
a. Instrument genuine, in all respects what it purports to be
b. good title
c. all prior parties had capacity to contract
d. he had no knowledge of any fact w/c would impair validity of instrument or
render it valueless
in case of negotiation by delivery only, warranty only extends in favor of
immediate transferee

 Liability of a General or Unqualified Indorser

a. instrument genuine, good title, capacity of prior parties
b. instrument is at time of indorsement valid and subsisting
c. on due presentment, it shall be accepted or paid, or both, according to tenor
d. if it be dishonored, and necessary proceedings on dishonor be duly taken, he
will pay the amt. To holder, or to any subsequent indorser who may be
compelled to pay it
Order of Liability among Indorsers
1. among themselves: liable prima facie in the order they indorse, but proof of
another agreement admissible
2. but holder may sue any of the indorsers, regardless of order of indorsement
3. joint payees/indorsees deemed to indorse jointly and severally
3. Liability of Accomodation Party
Definition: one who signed instrument as maker/drawer/acceptor/ indorser w/o
receiving value thereof, for the purpose of lending his name to some other
person

AP liable on the instrument to holder for value even if holder, at time of taking
instrument, knew he was only an AP
Liability of Irregular Indorser
Where a person not otherwise a party to an instrument, places thereon his
signature in blank before delivery, hes liable as an indorser, in accordance w/ these
rules:
1. Instrument payable to order of 3rd person: liable to payee and to all
subsequent parties
2. Instrument payable to the order of maker/drawer, or payable to bearer: liable
to all parties subsequent to maker/drawer
3. Signs for accommodation of payee, liable to all parties subsequent to payee
Sadaya v Sevilla Rules:
1. a joint and several accommodation maker of a negotiable promissory note may
demand from the principal debtor reimbursement for the amt. 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 vs. the principal debtor provided:
a. he made the payment by virtue of a judicial demand
b. or the principal debtor is insolvent

4. Liability of an Agent
Signature of any party may be made by duly authorized agent, establish as in
ordinary agency
Where instrument contains or a person adds to his signature words indicating
that he signs for or on behalf of a principal, he is not liable on the instrument if he
was duly authorized, but the mere addition of words describing him as an agent
without disclosing his principal, does not exempt from personal liability.
Signature per procuration operates as notice that the agent has but a limited
authority to sign, and the principal is bound on ly in case the agent in so signing
acted within the actual limits of his authority
Where a broker or agent negotiates an instrument without indorsement, he
incurs
all liabilities in Sec. 65, unless he discloses name of principal and fact that hes
only acting as agent

I. Presentment For Acceptance

When presentment for acceptance must be made
1. bill payable after sight, or in other cases where presentment for
acceptance
necessary to fix maturity
2. where bill expressly stipulates that it shall be presented for
acceptance
3. where bill is drawn payable elsewhere than at residence / place of
business of
drawee
When failure to present releases drawer/indorser
Failure to present for acceptance of negotiate bill of exchange within
reasonable time
Reasonable Time
Must consider
1. nature of instrument
2. usage of trade or business with respect to instrument

3. facts of each case

How and When Made Sec. 145, 146, 147
When Excused Sec. 148
Dishonor and Effects
sec. 149 (when dishonored by non-acceptance)
sec. 150 (duty of holder where bill not accepted)
sec. 151 (rights of holder where bill not accepted)
sec. 89 (to whom notice of dishonor must be given)
sec. 117 (effect of omission to give notice of nonacceptance)
II. For Payment
Where necessary Sec. 70
Where not necessary Sec. 79, 80, 82, 151, 111
Date and time of presentment of instrument bearing fixed
maturity Sec. 71, 85, 86, 194

Date of presentment
Where instrument not payable on demand: presentment must be made on date
it falls due
Where payable on demand: presentment must be made within reasonable time
after issue, except that in case of a bill of exchange, presentment for payment
will be sufficient if made within a reasonable time after last negotiation (but note:
though reasonable time from last negotiation, it may be unreasonable time from
issuance thus holder may not be HDC under sec. 71)
Check must be presented for payment within reasonable time after its issue or
drawer will be discharged from liability thereon to extent of loss caused by delay
Delay excused Sec. 81
Manner Sec. 74, 72, 75
Place Sec. 73
To Whom Sec. 72, 76, 77, 78
Dishonor by nonpayment Sec. 83, 84

General rule: to drawer and to each indorser, and any drawer or

indorser to whom such
notice is not given is discharged
Form, Contents, Time Sec. 95, 96, 102, 103, 104, 105, 106, 108, 113
By Whom Given
By or on behalf of the holder or any party to the instrument who may
be
compelled to pay it to the holder, and who, upon taking it up, would
have a right
to reimbursement from the party to whom the notice is given
Notice of dishonor may be given by an 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
Where instrument has been dishonored in hands of agent, he may
either himself
give notice to the parties liable thereon, or he may give notice to his
principal (as
if agent an independent holder)

In whose favor notice operates

1. when given by/on behalf of holder: insures to benefit of
S
a. all subsequent holders and
b. all prior parties who have a right of recourse vs. the party to whom
its given
2. Where notice given by/on behalf of a party entitled to give notice:
insures for benefit
of a. holder , and
b. all parties subsequent to party to whom notice given
Waiver Sec. 109, 110
Where not necessary to charge drawer
1. drawer/drawee same person
2. drawee fictitious, incapacitated
3. drawer is person to whom instrument is presented for payment
4. drawer has no right to expect/require that drawee/acceptor will
honor instrument
5. drawer countermanded payment

1. drawee fictitious, incapacitated, and indorser aware of the fact at time

of indorsement
2. indorser is person to whom instrument presented for payment
3. instrument made/accepted for his accommodation
Protest
Definition: testimony of some proper person that the regular legal steps
to fix the liability
of drawer and indorsers have been taken
When necessary: sec. 152,
Form and contents: sec. 153
By whom made: sec. 154
Time and Place: sec. 155, 156
For better security: sec. 158
Excused: sec. 159
Waiver: sec. 111
Acceptance for Honor
Sec. 161, 131, 171
Bills in Set: 178-183

DISCHARGE
A. Of the Instrument
1. payment in due course by or on behalf of principal debtor
Payment in due course:
1. made at or after maturity
2. to the holder thereof
3. in good faith and without notice that his title is defective
2. payment in due course by party accommodated where party is
made/ accepted for
accommodation
3. intentional cancellation by holder
If unintentional or under mistake or without authority of holder,
inoperative.
Burden of proof on party which alleges it was unintentional, etc.
4. any other act which discharges a simple contract

5. principal debtor becomes holder of instrument at or after maturity in

his own right
6. renunciation of holder:
holder may expressly renounce his rights vs. any party to the
instrument, before or after its maturity
absolute and unconditional renunciation of his rights vs. principal debtor
made at or after maturity discharges the instrument
Renunciation does not affect rights of HDC w/o notice.
Renunciation must be in writing unless instrument delivered up to
person primarily liable thereon
7. material alteration (sec. 124: material alteration w/o assent of all
parties liable avoids instrument except as against party to alteration and
subsequent indorsers)

1. any act which discharges the instrument

2. intentional cancellation of signature by holder
3. discharge of prior party
4. valid tender of payment made by prior party
5. release of principal debtor, unless holders right of
recourse vs. 2ndary party
reserved
6. any agreement binding upon holder to extend time of
payment, or to postpone
holders right to enforce instrument, unless made with
assent of party secondarily
liable, or unless right of recourse reserved.
8. Failure to make due presentment (sec. 70, 144)
9. failure to give notice of dishonor
10.certification of check at instance of holder

11. reacquisition by prior party

where instrument negotiated back to a prior party, such
party may reissue and further negotiate, but not entitled
to enforce payment vs. any intervening party to
whom he was personally liable
where instrument is paid by party secondarily liable, its
not discharged, but
a. the party so paying it is remitted to his former rights as
regard to all prior parties
b. and he may strike out his own and all subsequent
indorsements, and again negotiate instrument, except
where its payable to order of 3rd party and has been
paid by drawer
where its made/accepted for accommodation and has
been paid by party
accommodated

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