MODULE LAW ON NEGOTIABLE INSTRUMENTS

CHAPTER 5-DISHONOR BY NON-PAYMENT

Learning Objectives:

1. Define dishonor by non-payment

2. Understand the notice of dishonor.
3. Determine the parties involved to be notified.
4. Discuss the effect of notice.

I. DISHONOR BY NON‐PAYMENT

When is an instrument dishonored by non‐ payment?

Non‐payment upon due presentation. Happens when:

a. The instrument is duly presented for payment to party primarily liable;&

b. It is either refused or cannot be obtained.

Non‐payment without presentation. Happens when:

 a. Presentment is excused the instrument is overdue it is unpaid

What is the effect of dishonor by non‐ payment?

As to the holder, after an instrument has been dishonored by non‐payment, the

person secondarily liable becomes the principal debtors and he need not proceed
against the person primarily liable.

II. NOTICE OF DISHONOR

What is notice of dishonor?

Given by the holder to the parties secondarily liable, drawer and each indorser,
that the instrument was dishonored by non‐payment or non‐acceptance by the
drawee/maker.

Note: Persons primarily liable need not be given notice of dishonor because they
are the ones who dishonored the instrument.

What are the purposes for requiring notice of dishonor?

1. To inform parties secondarily liable that the maker or acceptor has failed to meet
his engagement.
2. To advise them that they are required to make payment.

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When is a PN considered dishonored?

1. If not accepted
2. Not paid when presented; or
3. Where presentment is excused, instrument is overdue and unpaid. (Sec. 83)

What is the liability of person secondarily liable when instrument dishonored?

After the necessary proceedings for dishonor had been duly taken, an immediate
right of recourse to all parties secondarily liable thereon accrues to the holder. (Sec. 84)

III. PARTIES TO BE NOTIFIED

To whom must notice be given?

Notice of dishonor should be given to:

1. The drawer; or
2. His agent (Sec. 97)
3. Where party is dead – to a personal representative or sent to the last residence
or last place of business of the deceased (Sec. 98)
4. When the parties to be notified are partners – notice to any one partner though
there has been a dissolution (Sec. 99)
 Notice to joint parties who are not partners must be given to each of them (Sec.
100)
 Where a party has been adjudged a bankrupt – to the party himself or to his
trustee or assignee (Sec. 101)

The instrument was dishonored in the hands of the agent. To whom and when
may he give notice?

1. To the parties secondarily liable – Within the time fixed by Secs. 102‐104, and
107, otherwise, they are discharged

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 2. To his principal – The principal must give notice to parties secondarily liable as if
he were the holder. (Sec. 94)

IV. PARTIES WHO MAY GIVE NOTICE OF DISHONOR

Who gives the notice?

1. Holder
2. Another in behalf of the holder
3. Any party to the instrument who may be compelled to pay and who, upon taking
it up, would have a right to reimbursement from the party to whom notice is
given. (Sec. 90)

V. EFFECT OF NOTICE

What is the effect of notice of dishonor if given by or on behalf of the holder?

Notice of dishonor inures to the benefit of:

1. All holders subsequent to the holder who has given notice; and
2. All parties prior to the holder but subsequent to the party to whom notice has
been given and against whom they may have a right of recourse. (Sec. 92)

What is the effect of notice of dishonor if given by party entitled thereto?

Notice of dishonor inures to the benefit of:

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 1. The holder; and
2. All parties subsequent to the party to whom notice is given (Sec. 93).

VI. FORM OF NOTICE

What is the form and contents of a notice of dishonor?

1. Oral; or
2. In writing
3. It may be given by personal delivery, or by mail (Sec. 96)
4. Must contain the following:
 Description of the instrument;
 Statement that it has been presented for payment or for acceptance and that it
has been dishonored (If protest is necessary, notice must also contain a
statement that it has been protested).
 Statement that the party giving the notice intends to look for the party addressed
for payment.

Note: A written notice need not be signed, and an insufficient notice may be
supplemented or validated by verbal communication. A misdescription of the instrument
does not vitiate the notice unless the party to whom the notice is given is in fact misled
thereby. (Sec. 95)

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To know more information about CHAPTER 5 DISHONOR BY NON-PAYMENT

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REFERENCE:

Law on Negotiable Instruments

Author: Hector S. De Leon
Hector S. De Leon, Jr.

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