Chapter IV

RIGHTS OF THE HOLDER

RIGHTS OF THE HOLDER
1. To sue on the instrument in his own name. (even as security or for
collection only)
2. To receive payment of the instrument, and if the payment is in due
course, the instrument is discharged.
This means that the party holding the instrument with legal title to it
may sue in his own name, although there are parties beneficially
interested in it.
Holder in due course: conditions
1. That it is complete and regular upon its face;
2. That he became the holder of it before it was overdue, and without
notice that it had been previously dishonoured, if such was the fact;
3. That he took it in good faith and for value;
4. That at the time it was negotiated to him he had not notice of
infirmity in the instrument or defect in the title of the person
negotiating it.
OTHERWISE, he is not a due in course.
Holder in due course?
= is a holder who has taken the instrument under the following
conditions:
1) Complete and regular upon its face;
2) He becomes the holder before it was due, and without notice that it
had been previously dishonored, if such was the fact.
3) He took it in good faith and for value.
4) That at the time it was negotiated to him, he had no notice of any
infirmity in the instrument or defect in the title of the persons
negotiating it.
Examples: “irregular upon its face”
1) A check containing evidence on its face that it had been altered
whether innocently or not.
2) When the date had been plainly altered, and such date is material
to the instrument.
3) A printed notice in which the place of execution and the time of
payment had been altered in writing.
Rights of a holder in due course:
1) He may sue on the instrument in his own name.
2) He may receive payment if payment is in due course the instrument
is discharged;
3) He holds the instrument free from any defect of title of prior
parties.
4) He holds the instrument free from defenses available to the parties
among themselves.
5) He may enforce payment of the instrument for the full amount
thereof against all parties liable thereon.
Where an instrument payable on demand is negotiated for an
unreasonable length of time after its issue, the holder is not
deemed a holder in due course. (Sec. 53)
Where the transferee receives notice of any infirmity in
the instrument or defect in the title of the person
negotiating the same before he has paid the full
amount agreed to be paid therefor, he will be deemed
a holder in due course only to the extent of the
amount therefor paid by him. (Sec. 54)
To constitute notice of an infirmity in the instrument or
defect in the title of the person negotiating the same,
the person to whom it is negotiated must have had
actual knowledge of such facts that his action in taking
the instrument amounted to bad faith. (Sec. 56)
When title to instrument is defective
1) When he obtained the instrument or any signature through the
following means: a) fraud; b) duress or force or fear; c) other
unlawful means; d) for an unlawful consideration.
2) When he negotiates the instrument through any of the following
means: a) with breach of faith; b) under circumstances as amount
of fraud.
Define?/ Distinction?
1) Fraud in factum or esse contractus – when a person without
negligence has signed the instrument and was deceived as to the
character of the instrument and without knowledge.
2) Fraud in inducement or simple fraud – relates to the quality,
character, or value of the consideration of the instrument
In fraud in factum, the issuer has no intention to issue the instrument;
while in fraud in inducement the issuer has the intention to issue
the instrument voluntarily, only to deceive as to the character,
quality or cause of the instrument.
Kinds of defenses in general?
1) Real/absolute/legal defenses – these defenses are attached to the
instrument itself and can be set up against the whole world, including
the holder in due course. It is a defense against everybody because the
right to be enforced has never existed, or ceased to exist. The
instrument cannot be enforced against a person to whom the legal
defenses are available.
2) Personal/equitable – these are personal to the person or subsequent
holder against whom the instrument is being enforced. These defenses
grow out of the agreement or conduct of a particular person which
renders it inequitable for him to enforce it against the party sought to
be made liable, but not available against the holder in due course.
Real defenses: are those that attach to the instrument
itself and can be used as reasons against payment of a
negotiable instrument to any holder (holder in due course)
1) Incapacity of the party
2) Illegality of the contract; except when the maker or drawer
is party thereof
3) Want of delivery of an incomplete instrument;
4) Want of authority, apparent and real;
5) Forgery
6) Fraud in factum or fraud in esse contractus
7) Fraudulent alteration by the holder;
8) Prescription;
9) Other infirmities appearing on the face of the instrument;
10) Discharge at or after maturity.
Personal defenses: this refer to the acts or circumstances
leading to the issuance of the instrument rather than
instrument itself.
1) absence or failure of consideration.
2) simple fraud or fraud in inducement.
3) Want of authority to complete an instrument: filling up of blanks not in
accordance with the authority given.
4) want of delivery of complete instrument.
5) innocent alteration or spoilation.
6) acquisition of the signature in the instrument by force or fear or other
unlawful means or for illegal consideration.
7) Negotiation in breach of faith;
8) Discharge by payment or renunciation or release before maturity.
 Liabilities of the Parties

a) Primarily liable: maker; acceptor of a bill of exchange

b) Secondarily liable: drawer of a bill; indorser of a note or a bill
c) Not liable: the drawee until he accepts the instrument in which case
he becomes an acceptor
Liability or warranty of a maker:
1) That he will pay the instrument according to its tenor.
2) Admits the existence of the payee and his then capacity to indorse.
Liability of the Maker
• It engages that he will pay the instrument according to its tenor; (is
undoubtedly the party primarily liable; holder will look first for
payment)
• Admits the existence of the payee and his then capacity to indorse
(no negotiable instrument until it is delivered to the payee)
• Due presentment and due notice of dishonour are not necessary for
the purpose of charging the maker with liability; but these are for the
drawer and indorser.
Liabilities?
1) Drawer: a) admits the existence of the payee and his
then capacity to indorse; b) that if the instrument is
presented, it will be accepted, or paid, or both; c) that if
dishonored, and the proceedings for dishonor are duly
taken, he binds himself to pay the holder, or any of the
subsequent indorsers who may be compelled to pay it.
2) Acceptor – 1) by accepting the instrument, he admits
the existence of the payee and his then capacity to
indorse; 2) he engages that he will pay it according to
the tenor of his acceptance. 3) admits the existence of
the drawer, the genuineness of his capacity and
authority to draw the instrument.
Liability/warranty: qualified indorser
or person negotiating by delivery:
QUALIFIED INDORSER WARRANTS:
1) That the instrument is genuine and in all respects what it purports to be.
2) That he has a 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.
To whom? To all subsequent parties who acquire title through his
indorsement whether they are holders in due course or not.
The person negotiating by delivery extends only his warranty in favor of his
immediate transferee.
Liability/warranty of general
indorser
1) That the instrument is genuine
2) That he has a good title
3) That all prior parties are capacitated
4) That the instrument is valid and subsisting
5) That the instrument must be paid or accepted when presented for
payment or acceptance; with the ff. conditions: a) the bill is
presented to the drawee for acceptance or for payment; b) the
drawee dishonors; c) the proceedings on dishonor have been duly
taken.
To whom warranties of general
indorser extend:
• Subsequent holders in due course;
• Persons who derive their title from the holders in due course;
• Immediate transferees although they are not holders in due course.
When person deemed an indorser (Sec 63)
1) He places his signature upon the instrument other than as a drawer,
maker or acceptor;
2) He does not clearly indicate by appropriate words his intention to
be bound in some other capacity.
Distinguish between a general
indorser and irregular indorser
1) An irregular indorser indorses the instrument before its
delivery to the payee; while a general indorser indorses it
after its delivery to the payee.
2) An irregular indorser indorses it always in blank; while a
general indorser may indorse it either specially or in blank.
3) An irregular indorser is always an accommodation indorser,
while a general indorser may or may not be an
accommodation indorser.
4) The liability of an irregular indorser extends to all parties
subsequent to the maker or drawer, unless he signs for the
accommodation of the payee in which case he is liable to all
parties subsequent to the payee; while the liability of a
general indorser shall only extend to all parties subsequent
to him.
Irregular or anomalous indorser is one who is not
otherwise a party to an instrument who places his
signature in blank before delivery.
LIABILITIES:
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.
3) If he signs for the accommodation of the payee, he is liable to all
parties subsequent to the payee.
Liability of indorser when intrument
is negotiable by delivery:
• He incurs all the liabilities of an indorser depending on the kind of his indorsement.
• Negotiation of bearer instrument:
1) By mere delivery;
2) Indorsement completed by delivery.
Liability of indorser of bearer instruments:
a) General indorser- indorser without qualification with warranties under Sec. 66;
b) Qualified indorser – person who makes qualified indorsement with warranties
under Sec. 65;
c) Special indorser- where a bearer instrument is indorsed specially, the special
indorser is liable to only such holders as make title through his indorsement.
Order of liability among indorsers:
1) With respect to one another, indorsers are liable prima-facie in the
order in which they indorse. But with respect to the holder, against
any one of the indorsers.
Note: Any stipulation among the indorsers is valid only among
themselves, but not valid as to the holder.
Joint payees or joint indorsers are deemed to indorsee solidarily.
Liability of an agent or broker: liability prescribed in Sec 65 unless: he
discloses the name of his principal and the fact that he is acting only
as agent.
CHAPTER VI

PRESENTMENT FOR PAYMENT

What is presentment for payment?
1) It is the presentation of the instrument to the persons primarily
liable for the purpose of demanding and receiving the payment.
2) The instrument must be exhibited to the person from whom
payment is demanded and when it is paid must be delivered up to
the party paying it.
Necessity of presentment for
payment
1) As against party primarily liable: not necessary to charge him;
2) As against persons secondarily liable: necessary to charge the drawer and
indorders.
Exceptions: drawers and indorsers are liable without even without presentment
for payment.
a) drawer- when he has no right to expect or require that the drawee or acceptor
will pay the instrument;
b) Indorser – where the instrument was made or accepted for his
accommodation and he has not reason to expect that the instrument will paid
if presented;
c) When presentment is dispensed with. (see next page)
c) When presentment is dispensed
with:
1) when is cannot beamed after the exercise of reasonable diligence;
2) When the drawee is a fictitious person;
3) By waiver or presentment, express or implied;
4) When a bill is dishonoured by non-acceptance.
What constitutes sufficient
presentment?
When these elements are present:
1) By the holder, or by some person authorized to receive payment on his behalf
2) At a reasonable hour on a business day
3) At the proper place
4) To the person primarily liable on the instrument
Presentment for payment must be made on the date fixed without grace, unless
delay is excused when it is caused by circumstances beyond the control of the
holder, and not imputable to his default, misconduct or negligence. When the
cause of delay ceases to operate, presentment for payment must be made with
reasonable diligence.
Time and date of presentment
• Time – must be made at a reasonable hour on a business day
• Date:
1) If instrument is payable on demand:
a) PN – reasonable time after issuance;
b) BOE – reasonable time after the last negotiation
2) If instrument is not payable on demand, if for fixed date or
determinable future time – when it falls due.
Place of presentment:

1) At the place specified in the instrument

2) If no place is specified but the address of the person to make the
payment is given, it is to be presented there.
3) If no place is specified, and no address is given, at the usual place of
business or residence of the person to make payment,
4) If none of the above, where he can be found or last known place of
business or residence.
What are the rules on presentation
as to the following?
1) Payable at a bank: present it during banking hours
2) Debtor is dead: place specified, or else to his personal
representative.
3) Persons or partners: to any one of them.
4) Joint debtors: to all of them.
What is the time of maturity of an
instrument
1) On the time fixed without grace.
2) Falling due on Sunday or Holiday, next succeeding
business day.
3) Falling due on Saturday, next succeeding business
day.
Note:
4) But if the instrument falls due on a Saturday and it is
payable on demand, the holder has the option to
present it before 12 o’ clock noon on that day.
5) Computation of time if payable at a fixed period
after date, after sight: Exclude the first day and
include the last day.
When delay in making presentment
is excused
1) Delay in making presentment for payment is excused when the
delay is caused by circumstances beyond the control of the holder
and not imputable to his default, misconduct, or negligence. When
the cause of delay ceases to operate, presentment must be made
with reasonable diligence.
When presentment itself is excused:
Presentment for payment is excused:
1) Where, after the exercise of reasonable diligence, presentment, as
required by the Act, cannot be made;
2) Where the drawee is a fictitious person;
3) By waiver of presentment, express or implied.
 What are the essential elements that
constitute “payment in due course” of a
negotiable instrument?

They are:
1) The payment must be made at or after maturity.
2) It must be paid to the holder.
3) It must be made in good faith and without notice that the holder’s
title is defective.