REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS

LIABILITIES OF PARTIES
POINTS TO CONSIDER:
1. Primary and secondary liability distinguished
2. Liability distinguished from warranties
3. Liability and/or warranties of parties
4. Warranties (Admissions)

PRIMARILY LIABLE SECONDARILY LIABLE

Liability
Unconditionally bound Conditionally bound
Nature of Liability
Undertakes to pay ONLY after the following
conditions have been fulfilled:
1. Due presentment for payment or
acceptance to primary party (Sec. 143,
NIL);
2. Dishonor by such party (Sec. 70, NIL);
and
3. Taking of proceedings required by law
(Sec. 152, NIL).

Note:

Absolutely required to pay the instrument Secondary liability is conditioned upon the
upon maturity. note or bill being dishonored upon
presentment for payment/acceptance to the
primarily liable party.

When a party primarily liable dishonors an

instrument, the holder may seek payment from
third parties who previously signed or
transferred that instrument.

The ability to receive payment from previous

signors and transferors is based upon theories
of warranty. (Ex.: Transferors warranting to
later transferees or holders that the
instrument passed or negotiated is valid and
payable.)
Parties
Parties Primarily Liable:
1. The MAKER of the Promissory Note;
2. The ACCEPTOR of the Bill of
Exchange; and
3. The CERTIFIER of the Check.
Parties Secondarily Liable:
Note: The drawee is not liable for payment of
1. The DRAWER of a bill; and
a bill of exchange until he accepts the
2. The INDORSER of a note or a bill.
instrument, in which case, the drawee
becomes the acceptor.

The mere issuance of a bill of exchange does

not Operate as an assignment of the funds in
the hands of a drawee.

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LIABILITY OF THE LIABILITY OF THE

MAKER ACCEPTOR
The maker of a negotiable instrument, by The acceptor, by accepting the instrument:
making such instrument: 1. Engages that he will pay the NI
1. Engages that he will pay it according to according to the tenor of his
its tenor; and acceptance;
2. Admits the existence of the payee and 2. Admits the existence of the drawer, the
his then capacity to indorse. (Sec. 60, genuineness of his signature and his
NIL). capacity and authority to draw the
instrument; and
Note: 3. Admits the existence of the payee and
- The maker is liable the moment he makes his then capacity to indorse (Sec. 62,
the NI. NIL).
- The liability of the maker is PRIMARY
and unconditional. Note:
- Once the drawee accepts, he becomes the
acceptor. Being so, the acceptor is
LIABILITY OF THE somehow in the same position as the
DRAWER maker of the NI.
- The liability of the acceptor is
The drawer, by drawing the instrument: PRIMARY and unconditional.
1. Admits the existence of the payee and - The liability of the acceptor depends on
his then capacity to indorse; the tenor of the acceptance which may
2. Engages that on due presentment the not be the same as the tenor of the bill
instrument will be accepted or itself because the acceptance may be
dishonored; and qualified.
3. That if the necessary proceedings on
dishonor be duly taken, he will pay the PARTY WHO CAN ACCEPT THE BILL
amount thereof to the holder, or to any OF EXCHANGE
subsequent indorser who may be - GR: Only the drawee may accept. A
compelled to pay it. (Sec. 61, NIL) stranger or volunteer is not bound by the
acceptance.
Note: - EXC: In case of a bill which is accepted
- Always remember that the drawee of a for honor supra protest (Sec. 161, NIL).
bill is not liable thereon before
acceptance. HONOR SUPRA PROTEST OR
- The drawee is not obligated to the payee ACCEPTANCE FOR HONOR – it is an
or any holder to accept a bill. undertaking by a stranger to a bill after
- Unless the drawee accepts, he owes no protest for the benefit of any party liable
duty to either the payee or any other thereon or for the honor of the person for
holder. whose account the bill is drawn which
- The drawer is SECONDARILY LIABLE acceptance inures also to the benefit of all
to the holder or to any subsequent parties subsequent to the person for whose
indorser who may be compelled to pay. honor it is accepted, and conditioned to pay
- Being secondarily liable, the three the bill when it becomes due if the original
conditions must be met in order to make drawee does not pay it (De Leon, 2010).
the drawer liable.
- “Any subsequent indorser” refers to any DIFFERENCE BETWEEN THE
of the indorsers between the drawer and LIABILITY OF AN ACCEPTOR OR
the holder. They may also be calles as DRAWEE-ACCEPTOR AND A MAKER
“intervening indorser”. - While both are primarily liable, the
- However, the drawer may insert in the NI acceptor engages to pay the negotiable
an express stipulation negating or instrument according to the tenor of his
limiting his own liability to the holder acceptance.
(Sec. 61, NIL).
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REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS

- On the other hand, the maker engages to

pay the negotiable instrument according GENERAL IRREGULAR
to the tenor of the bill itself. INDORSER INDORSER
Not a party to the
ILLUSTRATION: A regular party to instrument but he
the instrument and becomes one
If the bill is drawn for Php10,000.00 but signs upon delivery because of his
the drawee accepts it only for of the document. signature in the
Php9,000.00, the acceptor is liable only instrument.
for Php9,000.00, which is the tenor of his Makes either a
acceptance. Always makes a
blank or special
blank indorsement.
indorsement.
LIABILITY OF THE Indorses the
Indorses before its
instrument after its
INDORSER delivery to the
delivery to the
payee.
Payee.
WHEN A PERSON IS DEEMED AN Liable to the payee
INDORSER and subsequent
- A person placing his signature upon an parties unless he
instrument otherwise than as maker or signs for the
acceptor is deemed to be an indorser, Liable only to
accommodation of
unless he clearly indicates by appropriate parties subsequent
the payee, in which
words his intention to be bound in some to him.
case, he is liable
other capacity (Sec. 63, NIL). only to all parties
subsequent to the
Note: payee.
- A person who places his indorsement on
a bearer instrument incurs all liabilities QUALIFIED INDORSER - A qualified
of an indorser (Sec. 67, NIL). indorser is a person who indorses without
- Section. 17 of the NIL provides for the recourse.
rules of construction where instrument is
ambiguous. IRREGULAR OR ANOMALOUS
- Under Section 17, where the language of INDORSEMENT
the instrument is ambiguous, or there are - This term usually denotes an
admissions therein, the following rules of indorsement for some purpose other than
construction apply: to transfer the instrument, or an
“. . . . (f) Where a signature is so placed indorsement by a stranger to the
upon the instrument that it is not clear instrument or by one not in the actual or
in what capacity the person making the apparent chain of title, especially an
same intended to sign, he is deemed an indorsement made prior to the delivery of
indorser. . .” the instrument to the payee.
- The purpose of the indorsement is
DRAWER INDORSER usually to add the signer’s credit to the
Party either a bill or instrument.
Party only to a bill. - Here the irregular indorser indorses the
note
Makes admission instrument in an unusual, singular or
as to peculiar manner.
the existence of the - The name of the irregular indorser
No such admission. appears where we would naturally
payee and his
capacity expect another name.
to indorse.
ILLUSTRATION:
Makes no
warranties,
For example, Matthew issued a note payable
but engages to pay
Has warranties. to the order of Andy. As such, being the
after certain
payee, Andy’s name should be the first to
conditions are
appear at the back of the instrument as the
complied with.

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REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS

first indorser. However, it was the name of

Allan which was found. Here, Allan is an Q: Who is the person primarily liable on the
irregular indorser. note?
A: It is the maker, Andy. As such, Andy is
ORDER OF LIABILITY AMONG THE absolutely required to pay the instrument
INDORSERS upon maturity on 15 June 2021.
1. AMONG THEMSELVES – Liable
prima facie in the order in which they Q: What happens if Andy dishonors the not?
indorse. A: Ester, the holder can now go after the
2. TO THE HOLDER – In any order. parties who are secondarily liable. In this
(Sec. 68, NIL) case, the indorsers of the note.

Note: Q: Among whom from the indorsers can

- Joint payees or joint indorsees who Ester go after?
indorse are deemed to indorse jointly and A: Ester can go after any of the indorsers.
severally. Remember that as to the holder, the
indorsers are liable in any order.
ILLUSTRATION:

Matthew makes a PN to the order of Q: If Ester goes after Bea and Bea pays the
Andy for Php10,000.00. note, does Bea have a remedy?
A: Bea can go after the indorsers who are
Here, the back of the note shows that liable to him.
Andy indorsed the PN to “Ana and Bea.”
Q: Who can Bea go after?
The note was later on indorsed by both A: Bea can go after Ana and Matthew but not
Ana and Bea to Chris. Here, Ana and Bea Chris and Diane.
are liable jointly and severally (solidarily)
under the instrument. Note:
- Remember, every indorser is liable prima
Note: facie to all indorsers subsequent to him,
- Every indorser is liable prima facie to all but not those indorsers prior to him.
indorsers subsequent to him, but not - Here, Bea is considered as an indorser
those indorsers prior to him. (Sec. 68, subsequent to Ana and Matthew. As
NIL). such, Ana and Matthew are liable to Bea
- As respect one another, indorsers are for the payment of the Php10,000.00 that
liable prima facie in the order in which Bea paid to Ester.
they indorse. - Also, Chris and Diane are not liable to
- However, evidence is admissible to show Bea because they are indorsers
that as between or among themselves subsequent to Bea.
they have agreed otherwise. - This means that Bea cannot go after Chris
and Diane for the Php10,000.00 since it is
ILLUSTRATION: Bea who has the liability towards them
May 18, 2021
and not the other way around.
Ilocos Sur - It is Bea who should be paying the
Php10,000.00 Php10,000.00 in favor of Chris or Diane
I promise to pay to the order of Matthew the amount of
and not the other way around.
(Php10,000.00) on 15 June 2021.

(Sgd.) Andy Q: In what instance can Bea go after Chris

and Diane?
A: Bea can go after Chris and Diane if there is
Pay to order of Ana
(Sgd.) Matthew an agreement not to be liable in the order in
Pay to order of Bea.
(Sgd.) Ana
which they indorse.
Pay to order of Chris.
(Sgd.) Bea
Pay to order of Diane
(Sgd.) Chris
Pay to order of Ester
(Sgd.) Diane

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REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS

LIABILITY OF AN AGENT OR BROKER Note:

WHO NEGOTIATES AN INSTRUMENT - It must be noted that every indorser
WITHOUT INDORSEMENT makes certain warranties or guarantees
- The agent or broker incurs all the about the instrument that they are
liabilities prescribed to a general negotiating.
indorser, unless he discloses the name of - This warranty liability is unconditional.
his principal and the fact that he is acting - As such, it is not conditioned upon
only as an agent (Sec. 69, NIL). proper presentment and dishonor of the
instrument and the giving of a notice of
dishonor.

WARRANTIES AND LIABILITIES OF PARTIES WHO ARE SECONDARILY LIABLE

ABSOLUTE LIABILITY LIMITED LIABILITY

Drawer Qualified Indorser
Warrants that:
1. The instrument is genuine and in all
respects what it purports to be;
2. He has good title to it;
3. All prior parties had capacity to contract;
and
4. He has no knowledge of any fact which
would impair the validity of the
instrument or render it valueless. (Sec.65,
Warrants:
NIL).
1. The existence of payee and his then
capacity to indorse;
Note:
2. That the instrument will be accepted or
- Here, the indorser does not assume to pay
paid upon due presentment by the party
the instrument in the event of its dishonor,
primarily liable according to its tenor; and
UNLESS the dishonor is based on the four
3. That if dishonored, he will pay the party
implied warranties as provided by Section
entitled to be paid. (Sec. 61, NIL)
65.
- He is liable to all subsequent parties who
derive their title through his indorsement,
whether they are holders in due course or
not.
- The provisions of (3) do not apply to a
person negotiating public or corporation
securities other than bills and notes.

General Indorser Person Negotiating by Delivery

1. Every indorser who indorses without Same warranties as a qualified indorser. But
qualification, warrants to all subsequent unlike a qualified indorser, a person
holders in due course that: negotiating by mere delivery is liable only to
a. The instrument is genuine and in all his immediate transferee. (Sec. 65, par. 2,
respects what it purports to be; NIL).
b. He has a good title to it;
c. All prior parties had capacity to The same with a qualified indorser, a person
contract; and negotiating by delivery does not assume to pay
d. The instrument is, at the time of his the instrument in the event of its dishonor,
indorsement, valid and subsisting; UNLESS the dishonor is based on the four
2. On due presentment, it shall be accepted implied warranties as provided by Section 65.
or paid, or both according to its tenor; and
3. If the instrument be dishonored and the Note: Person negotiating by mere delivery and
necessary proceedings on dishonor be duly a qualified indorser’s secondary liability is
taken, he will pay the amount thereof to limited, namely, to their warranties.

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REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS

the holder, or to any subsequent indorser

who may be compelled to pay it. (NIL, Sec.
66)
Irregular indorser
The liability of an irregular indorser is in
accordance with the following rules:
1. If the instrument is payable to the order of
a third person, he is liable to the payee and
to all subsequent parties;
2. 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; and
3. If he signs for the accommodation of the
payee, he is liable to all parties subsequent
to the payee. (Sec. 64, NIL).

Note: Section 64 provides only for the parties

to whom an irregular indorser is liable. His
warranties are the same as those of a general
indorser under Section 66 inasmuch as his
indorsement is in blank, which, in itself, is an
indorsement without qualification.

THAT THE INSTRUMENT IS GENUINE valuable consideration, a general

AND IN ALL RESPECTS WHAT IT indorser is LIABLE even if he was not
PURPORTS TO BE aware of such facts.
- The indorser cannot claim that the
signature of the maker was forged or that THAT HE HAS NO KNOWLEDGE OF
there was material alteration in the ANY FACT WHICH WOULD IMPAIR
instrument or that the instrument is THE VALIDITY OF THE INSTRUMENT
invalid because of “want of delivery of an OR RENDER IT VALUELESS
incomplete instrument. - The indorser is liable if he knows at the
time of his indorsement that the maker
THAT HE HAS GOOD TITLE TO IT was insolvent, or that the maker did not
- The indorser is liable to the holder if he receive any valuable consideration or that
obtained the instrument or any signature the consideration for the issuance or
thereto, by means of fraud, duress, or negotiation of the instrument was illegal.
force or feat, or other unlawful means, or - The indorser is NOT LIABLE if he had no
for an illegal consideration. knowledge of maker’s insolvency at the
time he negotiated the instrument.
THAT ALL PRIOR PARTIES HAD
CAPACITY TO CONTRACT DIFFERENCE BETWEEN SECTION 65
- He is liable although the drawer, maker, AND 66
or any indorser prior to him is a minor, - The first three warranties are the same.
insane, or demented person, or otherwise - However, take note of the difference
incapacitated or a corporation between the 4th warranties.
performing an ultra-vires act because he - Section 65: “He has no knowledge of any fact
warrants that they have the capacity to which would impair the validity of the
contract. instrument or render it valueless.”
- Section 66: “The instrument is, at the time of
THAT THE INSTRUMENT IS, AT THE his indorsement, valid and subsisting.”
TIME OF HIS INDORSEMENT, VALID
AND SUBSISTING
- If the person primarily liable is insolvent
or he issued the note for an illegal
consideration or he did not receive any

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REFERENCES:
De Leon & De Leon, Jr. 2013. "The Philippine Negotiable Instruments Law".
Soriano. 2011. “Notes on Business Law.”
UST Golden Notes. 2018. Mercantile Law Reviewer
The Negotiable Instruments Law

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