MODULE LAW ON NEGOTIABLE INSTRUMENTS

CHAPTER 4-LIABILITIES OF PARTIES

Learning Objectives:

1. Identify the different liabilities of parties.

2. Recognize the drawer, acceptor and indorser of instruments.
3. Discuss the meaning of warranties.
4. Understand presentment for payment.
5. Distinguished the parties involved in presentment.

I. LIABILITIES OF PARTIES

Who are primarily liable?

1. Maker – in a promissory note

2. Acceptor – in a bill of exchange

Who are secondarily liable?

1. Drawer
2. Indorser

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Distinguish a drawer from a maker.

DRAWER MAKER

Issues a BOE Issues a PN

Only secondarily liable Primarily liable

Can limit his liability by putting “without Cannot limit liability

recourse”

What are the conditions in order for persons secondarily liable in a BOE (drawer
and indorsers) to become liable?

1. The bill is presented for acceptance (Sec. 143)

2. The bill is dishonored by non‐ acceptance or non‐payment (Sec. 70); and
3. The necessary proceedings for dishonor are duly taken. (Sec. 152)

To whom should presentment be made?

1. Promissory note – maker

2. Bill of exchange – drawee/acceptor

What are the liabilities of those secondarily liable?

MAKER

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What are the liabilities a maker?

1. Engages to pay according to the tenor of the instrument; and

2. Admits the existence of the payee and his then capacity to indorse. (Sec.60)

Note: Liability of the maker is primary and unconditional.

When is a maker precluded from setting‐up these defenses?

1. That payee is a fictitious person

2. That payee was insane, a minor, or a corporation acting ultra vires.

What are words which depict the nature of the liability of the makers/drawers?

An instrument which begins with “I”, or “Either of us” promise to pay, when signed
by two or more persons, makes them solidarily liable. Also, the phrase “joint and
several” binds the makers jointly and individually to the payee so that all may be sued
together for its enforcement, or the creditor may select one or more as the object of the
suit. (Astro Electronics Corp. v. Phil. Export and Foreign Loan Guarantee Corporation,
G.R. No. 96073, Dec. 21, 2003)

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On the right bottom margin of a PN appeared the signature of the corporation’s

president and treasurer above their printed names with the phrase “and in his
personal capacity.” The corporation failed to pay its obligation. Are the officers
liable?

Yes, persons who write their names on the face of promissory notes are makers
and liable as such. The officers are co‐makers and as such, they cannot escape liability
arising therefrom. (Republic Planters Bank v. CA, G.R. No. 93073, Dec. 21, 1992)

X draws a check against his current account with Bonifacio Bank in favor of B.
Although X does not have sufficient funds, the bank honors the check when it is
presented for payment. Apparently, X has conspired with the bank's bookkeeper
so that his ledger card would show that he still has sufficient funds.

The bank files an action for recovery of the amount paid to B because the check
presented has no sufficient funds. Decide the case.

The bank cannot recover the amount paid to B for the check. When the bank
honored the check, it became an acceptor. As acceptor, the bank became
primarily and directly liable to the payee/holder B.

The recourse of the bank should be against X and its bookkeeper who conspired
to make X's ledger show that he has sufficient funds. (1998 Bar Question)

II. DRAWER

To whom is the drawer secondarily liable?

1. The holder

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2. Any of the indorsers intervening between holder and drawer who is compelled to
pay by the holder, the drawer will be liable to that indorser so compelled to pay

III. ACCEPTOR

What are the liabilities of an acceptor?

1. Engages to pay according to the tenor of his acceptance

2. Admits the existence of the drawer, the genuineness of his signature and his
capacity and authority to draw the instrument
3. Admits the existence of the payee and his then capacity to indorse. (Sec. 62)

Note: Drawee does not become liable until he accepts the instrument in which case he
becomes an acceptor.

When is an acceptor is precluded from setting‐up these defenses?

1. That the drawer is non‐existent or fictitious

2. That the drawer’s signature is a forgery
3. That there is no consideration between him and the drawer

IV. INDORSER

Who is deemed an indorser?

A person placing his signature upon an instrument otherwise than as maker or

acceptor, is deemed to be an indorser, unless he clearly indicates by appropriate words
his intention to be bound in some other capacity. (Sec. 63)

Note: A person who places his indorsement on an instrument negotiable by

delivery incurs all liabilities of an indorser. (Sec. 67)

Distinguish an irregular indorser from a general indorser.

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An irregular indorser, not otherwise a party to the instrument, places his

signature thereon in blank before delivery to add credit thereto. A general indorser is a
regular party to the instrument like a maker, drawer or acceptor and he signs upon
delivery of the instrument. While an irregular indorser signs for accommodation, a
regular indorser signs for valuable consideration. (Sec. 64[2]) (2005 Bar Question)

Who is a qualified indorser?

A qualified indorser is a person who indorses without recourse. (Sec. 65)

Does an indorser warrant the solvency of prior parties?

A general indorser warrants the solvency of prior parties, while a qualified

indorser does not.

A issued a promissory note payable to B or bearer. A delivered the note to B. B

indorsed the note to C. C placed the note in his drawer, which was stolen by the
janitor X. X indorsed the note to D by forging C's signature. D indorsed the note
to E who in turn delivered the note to F, a holder in due course, without
indorsement. Discuss the individual liabilities to F of A, B and C.

A is liable to F. As the maker of the promissory note, A is directly or primarily

liable to F, who is a holder in due course. Despite the presence of the special
indorsements on the note, these do not detract from the fact that a bearer instrument is
always negotiable by mere delivery, until it is indorsed restrictively “for deposit only.”

B, as a general endorser, is liable to F secondarily, and warrants that the

instrument is genuine and in all respects what it purports to be; that he has good title to
it; that all prior parties had capacity to contract; that he has no knowledge of any fact
which would impair the validity of the instrument or render it valueless; that at the time
of his indorsement, the instrument is valid and subsisting; and that on due presentment,
it shall be accepted or paid, or both, according to its tenor, and that if it be dishonored

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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.

C is not liable to F since the latter cannot trace his title to the former. The
signature of C in the supposed indorsement by him to D was forged by X. C can raise
the defense of forgery since it was his signature that was forged. (2001 Bar Question)

Can a collecting bank debit the account of the depositor when the checks
indorsed to it (bank) were forged?

Yes, because the depositor of a check as indorser warrants that it is genuine and
in all respect what it purports to be. Thus, when the checks deposited had forged
indorsements and the collecting bank, as a consequence of such forgery, was made to
pay the drawee bank, the collecting bank can debit the account of the depositor for his
breach of warranty (Jai‐Alai Corporation Of The Philippines v. BPI, G.R. No. L‐ 29432,
Aug. 6, 1975).

Phebean, the drawer issued a check to James. James, subsequently indorsed it

to Trude. When Trude is about to encash the check, the drawee Union Bank
refused to encash it due to insufficiency of funds. Trude sued James for payment
of money. James alleged that the suit should be dismissed because Phebean is
an indispensable party. Does James’ argument hold water?

No. There is no privity between the drawer and the holder. The drawer is merely
secondarily liable. As indorser, the buyer warranted that upon due presentment, the
checks were to be accepted or paid, or both, according to their tenor, and that in case
they were dishonored, she would pay the corresponding amount. After an instrument is
dishonored by non‐payment, indorsers cease to be merely secondarily liable; they
become principal debtors whose liability becomes identical to that of the original obligor.
(Tuazon v. Heirs of Bartolome Ramos, G.R. No. 156262, July 14, 2005)

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Treasury warrants were indorsed by A and B. These were presented for

encashment by PNB. Subsequently, these were dishonored by the Insular
Treasurer. Because of the dishonor, PNB applied A’s deposit in the PNB for
payment of the warrant. Is the application of the deposit of A properly enforced?

No. The general indorser of a negotiable instrument engages that if it be

dishonored and the necessary proceedings of dishonor be duly taken, he will pay the
amount thereof to the holder. In this connection, it has been held that notice of dishonor
is necessary in order to charge an indorser and that the right of action against him does
not accrue until the notice is given (Gullas v. PNB, G.R. No. L‐43191, Nov. 13, 1935)

What is the order of liability among the indorsers?

1. Among themselves – Liable prima facie in the order in which they indorse (Sec.
68)
2. To the holder – In any order

Note: Every indorser is liable to all indorsers subsequent to him, but not those indorsers
prior to him.

Carmelo indorsed a check to Linas. Paolo stole the check from Linas, forged the
latter’s signature and indorsed it to Johan. Denver Bank encashed the check
upon presentment thereof by Johan. Who is the party liable?

The bank is the party liable. It is the primary duty of the bank to know that the
check was duly indorsed by the original payee and, where it pays the amount of the
checks to a third person who has forged the signature of the payee, the loss falls on
such bank who cashed the checks. A bank engaged in business is invested with public
interest and it is its duty to pretect its clients and all persons who transact businesswith
it. (Traders Royal Bank v. RPN, G.R. No. 138510, Oct. 10, 2002)

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What is the liability of an agent or broker who negotiates an instrument without

indorsement?

He incurs all the liabilities prescribed to a general indorser unless he discloses

the name of his principal and the fact that he is acting only as an agent. (Sec. 69)\

Note: Parol evidence is not admissible to relieve an agent or broker whose

endorsement brings him within the above liability.

V. WARRANTIES

What are the warranties provided by the person negotiating an instrument?

1. That the instrument is genuine and in all respects what it purports to be

2. That he has good title to it
3. That all prior parties had capacity to contract
4. That he has no knowledge of any fact which would impair the validity of the
instrument or render it useless.

VI. PRESENTMENT FOR PAYMENT

What is presentment for payment (PP)?

The presentation of an instrument to the person primarily liable for the purpose of
demanding and receiving payment.

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How should presentment be made?

1. GR: Instrument must be exhibited to the person from whom payment is

demanded; when paid, it must be delivered to person paying it. (Sec. 74)
2. XPN: When exhibition is excused:
 Debtor does not demand to see the instrument and refuses payment on
some other grounds; or
 Instrument is lost or destroyed.

What is the liability of a bank paying a certificate of deposit payable to bearer

without requiring its surrender?

The bank remains liable to the holder if it paid the certificate of deposit payable to
bearer without requiring its surrender (Far East Bank & Trust Company v. Querimit,
G.R. No. 148582, Jan. 16, 2002).

Can a payee claim payment for a promissory note which was stolen and as such
is not in his possession?

No because he is not a holder of the promissory note. To make presentment for

payment, it is necessary to exhibit the instrument, which he cannot do because he is not
in possession thereof.

VII. NECESSITY OF PRESENTMENT FOR PAYMENT

When is PP necessary?

1. PP is only necessary to charge persons secondarily liable (Sec. 70). But PP is

not necessary in the following instances:
2. As to drawer, where he has no right to expect or require that the drawee or
acceptor will pay the instrument (Sec. 79)

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3. As to indorser where the instrument was made or accepted for his

accommodation and he has no reason to expect that the instrument will be paid if
presented (Sec. 80)
4. When dispensed with under Sec. 82, such as:
 Where, after the exercise of reasonable diligence, presentment cannot be made
 Where the drawee is a fictitious person
 By waiver of presentment, express or implied
 When the instrument has been dishonored by non‐acceptance

What is the rule if the instrument is, by its terms, payable at a special place (at a
bank or at an office or at a residence but not in an unspecified place like Manila
City)?

If he is able and willing to pay it there at maturity, such ability and willingness are
equivalent to a tender of payment upon his part. (Sec. 70)

PN is the holder of a negotiable promissory note. The note was originally issued
by RP to XL as payee. XL indorsed the note to PN for goods bought by XL. The
note mentions the place of payment on the specified maturity date as the office of
the corporate secretary of PX Bank during banking hours. On maturity date, RP
was at the aforesaid office ready to pay the note but PN did not show up. What PN
later did was to sue XL for the face value of the note, plus interest and costs. Will
the suit prosper? Explain.

Yes. The suit will prosper as far as the face value of the note is concerned, but
not with respect to the interest due subsequent to the maturity of the note and the costs
of collection. RP was ready and willing to pay the note at the specified place of payment
on the specified maturity date, but PN did not show up. PN lost his right to recover the
interest due subsequent to the maturity of the note and the costs of collection. (2000
Bar Question)

What are the requisites for a sufficient PP?

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1. Made by the holder, or his agent

2. At a reasonable hour on a business day
3. At a proper place
4. PP was made to the person primarily liable, or if he is absent or inaccessible, to
any person found at the place where the presentment is made (Sec. 72)

Note: Where the person/s primarily liable is/are:

 Dead – payment must be made to his personal representative (Sec. 76)

 Liable as partners and no place of payment specified – payment may be made to
any of them though there has been a dissolution of the firm (Sec. 77)
 Several persons, not partners, and no place of payment is specified – payment
must be made to all of them (Sec. 78)

When must presentment for payment be made?

INSTRUMENT TIME FOR PRESENTMENT

Payable at a fixed or determinable future GR: On the day it falls due. (Sec.85)
time
XPN: If the due date falls on a Saturday,
presentment must be made on the next
Monday.

Note: If presentment for payment is made

before maturity; it will not result ot a
discharge of the instrument (Sec. 50)

Promissory note payable on demand Within a reasonable time after its issue.

Bill of exchange payable on demand Within a reasonable time after the last
negotiation thereof (Sec. 71)

Note: “Last negotiation” means the last

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transfer for value.

Subsequent transfer between banks for

purposes of collection are not negotiations
within Sec. 71

Note: Reasonable time means not more than 6 months from the date of issue. Beyond
said period the check becomes stale and valueless and thus, should not be paid.

Is the bank liable to the payee for depositing and encashing the crossed checks
to an unauthorized person?

Yes. The effects of crossing a check relate to the mode of its presentment for
payment. Under Sec. 72 of the NIL, presentment for payment, to be sufficient, must be
made by the holder or by some person authorized to receive on his behalf. Who the
holder or authorized person depends on the instruction stated on the face of the check.
The checks here had been crossed and issued “for payee’s account only.” This only
signifies that the drawers had intended the same for deposit only by the person
indicated (Associated Bank v. CA, G.R. No. 89802, May 7, 1992).

What is the order of preference with regard to the place of presentment?

1. Specified place in the instrument

2. Address of the person to make the payment if given in the instrument
3. Usual place of business or residence of the person to make the payment
4. Wherever he can be found; or
5. At his Last known place of business or residence (Sec. 73)

How must presentment be made where the instrument is payable at a bank?

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Must be made during banking hours, unless the person to make payment has no
funds there to meet it at any time during the day, in which case presentment at any hour
before the bank is closed on that day is sufficient. (Sec. 75)

VIII. PARTIES TO WHOM PRESENTMENT FOR PAYMENT SHOULD BE MADE

Who are the parties to whom presentment for payment should be made?

Presentment for payment must be made the primary party – to the (1) maker in
case of a promissory note, or to the (2) acceptor in case of an accepted bill. If the bill of
exchange or check is payable on demand, the presentment must be made to the
drawee although he is not liable on the bill.

Note: If the person primarily liable is absent or inaccessible, then presentment

must be made to person of sufficient discretion at the proper place of presentment

IX. DISPENSATION WITH PRESENTMENT OF PAYMENT

What is the effect when presentment is not made?

Drawer and the indorsers are discharged from their secondary liability unless
such presentment is excused.

When is the delay in making presentment excused?

1. When caused by circumstances beyond the control of the holder; and

2. Not imputable to his default, misconduct, or negligence (Sec. 81).

Note: Only the delay in presentment is excused and not the presentment itself. Hence,
as soon as the cause of delay ceases to operate, presentment must be made with
reasonable diligence (Sec. 81).

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To know more information about CHAPTER 4-LIABILITIES OF PARTIES

PLEASE CLICK THE LINK: https://www.youtube.com/watch?v=hbFPZij-4ko

To know more information about Chapter 4-Presentment for Payment

PLEASE CLICK THE LINK: https://www.youtube.com/watch?v=oKET-3NKcpo

REFERENCE:

Law on Negotiable Instruments

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

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