CLASSIFICATION OF PARTIES ACCORDING TO LIABILITY

1. Primarily liable
a. The maker of the promissory note
b. The acceptor of a bill of exchange; and
c. The certifier of a check.
2. Secondarily liable/conditionally liable
a. The drawer of a bill; and
b. The indorser of a note or a bill.
3. Not liable:
a. The drawee until he accepts the instrument in which case he becomes
an acceptor
PRIMARY vs. SECONDARY PARTY
PRIMARY PARTY unconditionally bound; absolutely required to pay the
instrument upon its maturity
SECONDARY PARTY conditionally bound; undertakes to pay the
instrument only after certain conditions have been fulfilled (due presentment
for payment or acceptance to the primary party and the taking of
proceedings required by law after dishonor

SECTION 60. Liability of maker. The maker of a negotiable instrument by

making it engages that he will pay it according to its tenor, and admits the
existence of the payee and his then capacity to indorse.
LIABILITY OF MAKER
1. Liability of maker unconditional The maker is undoubtedly a party liable
as he is the one to whom the holder will look first for payment and the one
who is expected to pay.
a. Engages to pay the note according to its terms, subject to no condition;
b. Promises to pay not only to the payee but to any subsequent holder who
is legally entitled to the instrument at its maturity date even if the holder
does not demand payment at that time;
c. Remains fully liable despite the fact that the instrument is presented for
payment late unless prescription has run
d. Due presentment for payment and due notice of dishonor are not
necessary to fix the liability of any drawer or indorser
2. Admissions of maker
a. Admits the existence of the payee and his then capacity to endorse

b. The payee must exist because there is no negotiable instrument until it is

delivered to him
c. The payee must have the capacity to contract because the note is intended
to be negotiated and not to be retained with the payee

Pay to Clarice or order the amount of PhP 8,000.00

Sgd. Paul

Clarice indorsed the note to Marie.

PARTIES:
1. Paul maker
2. Clarice payee/indorser
3. Marie - holder
QUESTION:
Can Paul raise the following defenses?
a. Agreement between him and Clarice is only for PhP 800?
b. Clarice is non-existent/fictitious person?
c. Minority/insanity of the payee?

SECTION 61. Liability of drawer. The drawer by drawing the instrument admits
the existence of the payee and his then capacity to indorse; and engages that on due
presentment the instrument will be accepted or paid, or both, according to its tenor,
and that if it be dishonored, and the necessary proceedings on dishonor be duly
taken, he will pay the amount thereof to the holder, or to any subsequent indorser
who may be compelled to pay it. But the drawer may insert in the instrument an
express stipulation negativing or limiting his own liability to the holder.
LIABILITY OF DRAWER
* The drawer by merely signing his name on the bill as drawer, admits the
existence of the payee and his then capacity to indorse the instrument at the time it
was executed.
1. Liability of drawer conditional the drawer does not promise to pay the
bill absolutely. He makes no warranty but he engages to pay after certain
conditions are complied with, to wit:

a. The bill is presented for acceptance or for payment to the drawee;

b. The bill is dishonored by non-acceptance or non payment; and
c. The necessary proceedings of dishonor are duly taken
* Liability of drawer only secondary the drawer is only secondarily liable to
the holder, or to any subsequent indorser, who may be compelled to pay it.
* The drawer may, by express stipulation, inserted in the instrument, negative or
limit his own liability to the holder.
To Walter
Pay to order of Peter.
Sgd. Russel

Peter indorsed the bill to Ann then to Bill then to Cherrie.

Russel is only liable to Cherrie, the present holder if Walter dishonors the bill by
non acceptance or non payment and the necessary proceedings of dishonot are
taken. After such proceedings are taken, the indorsers Peter, Ann, and Bill would
also be liable to Cherrie. If Bill pays Cherrie, Bill may in turn recover from Russel,
Peter or Ann. Peter, Ann, and Bill are the intervening indorsers.
Russel, as drawer, is permitted by law to negative or limit his own liability to the
holder. Thus, Russel may insert in the bill the words I shall not be bound in case
this instrument is dishonored or without recourse.
DRAWER vs. MAKER
1. The drawer issues a bill of exchange, while the maker, a promissory note;
2. The drawer is only secondarily liable while the maker is primarily liable; and
3. The drawer can negative or limit his liability, while the maker may not do so.

SECTION 62. Liability of acceptor. The acceptor by accepting the instrument

engages that he will pay it according to the tenor of his acceptance, and admits:

(a) The existence of the drawer, the genuineness of his signature, and his capacity
and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
LIABILITY OF ACCEPTOR
1. Liability of drawee before acceptance the drawee of a bill is not liable thereon
before acceptance.
* Unless the drawee accepts, he owes no duty to either the payee or other holder;
his only obligation is to the drawee to pay in accordance with the latters orders.
* As a general rule, a refusal by the drawee to accept a bill constitutes a dishonor
of the instrument which triggers the liability of secondary parties (drawer and
indorser) except those indorsing qualifiedly.
2. Liability of drawee after acceptance once accepted, the drawee becomes an
acceptor (the same position as a maker).
* An acceptance occurs when the drawee signs his name somewhere on the face of
the instrument.
3. Liability of acceptor primary
* The acceptor cannot retract his acceptance as against a holder for value, since he
has thereby suspended the holders remedies against the drawee.
* He has the same liability as the maker and the drawer with respect to the
existence of the payee and his capacity to indorse.
* Like the maker of a promissory note, neither presentment for payment nor notice
of dishonor is necessary to charge him with liability, except where he is an
acceptor for honor.
WARRANTIES OF THE ACCEPTOR
1. Existence of the payee
2. Capacity of the payee to pay
3. Existence of the drawer
4. Genuiness of the signature
5. Capacity and authority to draw the bill

DEFENSES PRECLUDED
a. Drawer is fictitious or non-existent.

b. Drawers signature is a forgery.

c. Acceptor has no funds in his hands belonging to the drawer with which to pay
the bill.
d. Drawer has overdrawn his account.
e. Drawer has no capacity to contract or has no capacity to draw the bill.
MATTERS NOT ADMITTED
* The acceptor does not admit the genuineness of the indorsers signature because
it is only the signature of the drawer that he warrants.

SECTION 63. When person deemed indorser. A person placing his signature
upon an instrument otherwise than as maker, drawer or acceptor is deemed to be an
indorser, unless he clearly indicates by appropriate words his intention to be bound
in some other capacity.
* Signature on back of the instrument
* Evidence of intention to be bound in some other capacity the law defines the
status of the indorser. One who signs as an indorser cannot show by parol or
extrinsic evidence. The law requires that he indicates by appropriate words his
intention to be bound in some other capacity on the instrument itself.
* Liability as guarantor waives the need for presentment, protest or notice of
dishonor. Liable only subsidiarily after the assets of the principal debtor have been
exhausted.
* Liability as surety as surety, he is primarily and absolutely liable with the
principal debtor without benefit of exhaustion of the properties of the latter and
without also the necessity of presentment or notice of dishonor.

SECTION 64. Liability of irregular indorser. - Where a person, not otherwise a

party to an instrument, places thereon his signature in blank before delivery, he is
liable as indorser in accordance with the following rules:
a) If the instrument is payable to the order of a third person, he is liable to the
payee and to all subsequent parties
b) If the instrument is payable to the order of the maker or drawer, or is payable to
bearer, he is liable to all parties subsequent to the maker or drawer.
c) If he signs for the accommodation of the payee, he is liable to all parties
subsequent to the payee.

SECTION 65. Warranty; where negotiation by delivery. etc. Every person

negotiating an instrument by delivery or by a qualified indorsement warrants:
a. That the instrument is genuine and in all respect what it purports to be;
b. That he has a good title to it;
c. That all prior parties had capacity to contract;
d. That he has no knowledge of any fact which would impair the validity of the
instrument or render it valueless.
But when the negotiation is by delivery only, the warranty extends in favor of no
holder other that the immediate transferee.
The provisions of subdivision (c) of this section do not apply to persons
negotiating public or corporation securities, other than bills and notes.
Pay to bearer or order
Sgd M

P indorsed to A either by delivery or by qualified indorsement.

M was insolvent.
A cannot recover from P because P does not warrant Ms
solvency. But P warrants the following:
* he has a good title to it M stolen the note
* all prior parties had capacity to contract M is a minor
* he has no knowledge of any fact which would impair the validity of the
instrument or render it useless P knew that the note was invalid for want or
failure of consideration

SECTION 66. Liability of general indorser. Every indorser who indorses

without qualification warrants to all subsequent holders in due course:
a. The matters and things mentioned in subdivisions a, b, and c of the next
preceding section and
b. That the instrument is, at the time of his indorsement, valid and subsisting.

And, in addition, he engages that, on due presentment, it shall be accepted or paid,

or both as the case may be, according to its tenor, and that if it be dishonored and
the necessary proceedings on dishonor be duly taken, he will pay the amount
thereof to the holder or to any subsequent indorses who may be compelled to pay
it.

INDORSER

DRAWER

Party to either a note or a bill

Party to a bill

Does not make any admission regarding Makes such admission

the existence of the payee and his then
capacity to indorse
Has warranties

Makes no warranties but engages to pay

after certain conditions are complied
with
Liabilities are conditional in the same
manner as those of the general indorser

GENERAL INDORSER
Makes either
indorsement

blank

or

IRREGULAR INDORSER
special Always makes a blank indorsement

Indorses the instrument after its delivery Indorses before its delivery to the payee
to the payee
Liable only to parties subsequent to him

Liable to the payee and subsequent

parties unless he signs for the
accommodation of the payee in which
case he is liable only to all parties
subsequent to the payee

SECTION 67. Liability of indorser where paper negotiable by delivery. Where

a person places his indorsement on an instrument negotiable by delivery, he incurs
all the liabilities of an indorser.
* If he indorses specially, he is liable only to holders who makes title through his
indorsement.
* If he indorses without qualification, he incurs the liability of a general indorser.

SECTION 68. Order in which indorsers are liable. As respect one another,
indorsers are liable prima facie in the order in which they indorse; but evidence is
admissible to show that, as between or among themselves, they have agreed
otherwise. Joint payees or joint indorsees who indorsed are deemed to indorse
jointly and severally.
* The holder of an instrument which has been dishonored is not bound by the
above section. As to him, indorsers are liable in any order and none of them can
interpose as a defense against him an agreement among themselves that they are
not liable in the order of their indorsements. The rule must be qualified in the case
of a qualified indorser and an indorser of a bearer instrument, title to which the
immediate holder took by delivery alone.

SECTION 69. Liability of agent or broker. Where a broker or other agent

negotiates an instrument without indorsement, he incurs all the liabilities
prescribed by section sixty-five of this Act, unless he discloses the name of his
principal and the fact that he is acting only as agent.
LIABILITY OF AN AGENT OR BROKER
a. The agent or broker who negotiates by mere delivery incurs the liabilities
prescribed in Section 65.
b. The agent or broker who negotiates the instrument by qualified indorsement =
Section 65.
c. General indorsement = Section 66
EXEMPTION FROM LIABILITY
- To escape personal liability, he must disclose his principal and the fact that he is
acting only as agent. Parol evidence is not admissible to exempt from liability an
agent whose indorsement brings him within Section 69.