PAN African eNetwork

Project
Masters of Finance and Control
Business Environment & Law
Semester - I

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 NI’s

Kinds of NI’s

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

i.e. PN, BOE and Cheque

o 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, Banker’s 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) Party lending his name to oblige to the other party is

accommodating or accommodation party
b) 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 In a BOE, there are three parties-

parties- maker and the payee drawer, the drawee and the payee

It contains an unconditional It contains an unconditional order to the

promise by the maker to the drawee or his agent to pay according to
payee the drawer’s 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 The liability of the drawer secondary

drawer is primary and absolute i.e. when there is non payment by the
drawee.

The maker stands in immediate Notice of dishonor to be given by the

relationship with the payee holder to the drawer

No notice of dishonor need The maker and the drawee do not stand
to be given. 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
Days of grace (three) are allowed
in case of a bill except for
payment on demand
Drawee may be any one including
the banker
It should be presented for payment,
otherwise it may dischare the liability
of the drawer
BOE cannot be crossed
A notice of dishonor has to be
given to the drawer
Cheque
A cheque does not require
acceptance and it is intended
for immediate payment
No days of grace
The drawee is always a banker
Delay in presenting does
not discharge the drawer from
his liability
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

continued….
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
minor all are liable. Adults are not discharged from liability even if the
minor is discharged.
 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.

Continue….
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.

Continue…..
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 Drawer’s Signature is Forged

If bank honor’s 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
using ‘sans recourse indorsement’.
 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 holder’s 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 drawer’s
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 NI’s 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.

Need not include prefixes and suffixes

 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 Negotiation by delivery /

writing endorsement and delivery

Notice of transfer of No notice of such kind

actionable claims must be required in negotiation
given by the transferee to
the debtor in case if the The title of the transferee
assignment in order to is better than the transferor
complete the title
Consideration is presumed
The title is subject to all the in negotiation
defects, equities of the
assignor

Transferee to prove
consideration for transfer
 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.

Continue…..
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
within one month of cause of action.
 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 maker’s 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 it’s 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. manager’s/cashier’s 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 attorney’s 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 it’s 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 doesn’t 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 doesn’t 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
obligor’s
privileges of paying the holder
1. Conditional – additional condition annexed to indorser’s 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. 55—when 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 holder’s 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 (didn’t know it was NI)
b. fraud in inducement: personal defense (knows it’s 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 it’s 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, he’s 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 he’s
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 non-
acceptance)
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
it’s 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 holder’s right of
recourse vs. 2ndary party
reserved
6. any agreement binding upon holder to extend time of
payment, or to postpone
holder’s 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, it’s
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 it’s payable to order of 3rd party and has been
paid by drawer
· where it’s made/accepted for accommodation and has
been paid by party
accommodated
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