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LIABILITIES OF PARTIES IN NEGOTIABLE INSTRUMENTS
LIABILITIES OF PARTIES IN NEGOTIABLE INSTRUMENTS
Sec. 60. Liability of maker. - The maker of a negotiable instrument, by making it, engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse.
MAKER PRIMARILY LIABLE
• Engagement of the maker is to pay absolutely for the note according to its tenor
• His liability is primarily and unconditional
• One who has signed an instrument as a maker is presumed to have acted with care and to have signed the instrument with full knowledge of its contents, unless of course, if fraud is proved
MAKER MUST PAY ACCORDING TO THE TERMS OF THE NOTE
• The maker bound himself to pay personally. He cannot shift the obligation without the consent of the payee. He cannot allege that he spend the money on expenses which should be charged to a trust administered by a creditor because it is not the payee’s concern to know how the proceeds should be spent. That is the sole concern of the maker. The payee’s interest is merely to see that the note is paid according to its term.
LIABILITY OF 2 OR MORE MAKERS
• When 2 or more makers sign jointly or severally, each of them is individually liable for the payment of the full amount of their obligation even if one of them didn’t receive part of the value given therefor, as he would be considered as an accommodation party
PAYEE’S EXISTENCE, ETC.
• The maker also admits of the existence of the payee and his then capacity to indrose
• He is precluded from setting up the following defenses:
o That the payee is a fictitious person because by making the note, he admits that the payee exists
o That the payee was insane, a minor, or a corporation acting ultra vires because by making the note, he admits the then capacity of the payee to indorse
Sec. 61. Liability of drawer. - The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored 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 it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder.
DRAWER SECONDARILY LIABLE
• He engages merely that the bill will be accepted or paid or both, according to its tenor, and that he will pay only when
1. It is dishonored
2. And the necessary proceedings of dishonor are duly taken
• The liability of the drawer is subject to the two conditions and attaches only upon their fulfillment
• The drawer, by merely drawing the bill and signing his name in the bill as such drawer, without more, impliedly engages to be so secondarily liable, as if he has incorporated the provisions of Section 61 in the bill
• If the bill is not paid, accordingly, if a bill is not paid, the drawer becomes liable for the payment of its value to the holder provided that notice of dishonor is given
TO WHOM DRAWER IS SECONDARILY LIABLE
1. The holder
2. Or if any of the indorsers intervening between the holder and the drawer is compelled to pay by the holder, the drawer, will be liable to that indorser so compelled to pay
IS DRAWER OF UNACCEPTED BILL PRIMARILY LIABLE?
• It was held that until the bill has been accepted, the drawer is the principal debtor and after acceptance, the drawee or acceptor is the principal debtor and the drawer becomes secondarily liable
• Like the maker, the drawer admits to the existence of the payee and his capacity to indorse
NEGATIVES HIS LIABILITY
• The law allows the drawer to negative or limit his liability by express stipulation
• By adding words such as “without recourse” or “I shall not be liable in case of non-payment or non-acceptance”
Sec. 62. Liability of acceptor. - The acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance and admits:
(a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
ACCEPTOR PRIMARILY LIABLE
• Acceptor engages to pay absolutely according to the tenor of its acceptance
• His liability is not subject to any condition
• The acceptor is the drawee who accepts the bill
• His acceptance immediately places a legal liability on him for the payment of the bill in favor of one who became a holder thereof after acceptance, and if he wants to escape liability, it is up to him to show that he is a mere agent of the drawer, or allege and prove any other defense which he has to the liability
EFFECT OF MORTGAGE EXECUTED BY ACCEPTOR
• Where being unable to pay certain bills of exchange which the drawee has accepted, the latter makes a mortgage in favor of the holder of said bills upon certain merchandise the value of which is sought to be collected through said bills, in order to secure the payment of said amount if the merchandise is sold and the integrity thereof while the sale is not effected, the execution of said mortgage doesn’t constitute a Novation of the obligation represented by said accepted bills unless it is expressly stated in the mortgage
ACCEPTOR TO PAY ACCORDING TO TENOR OF HIS ACCEPTANCE
• While the maker of a note engages to pay according to the tenor of the note, an acceptor engages to pay according to the tenor of his acceptance, not of the bill he accepts
• Tenor of his acceptance may be different from the tenor of the bill, as the acceptor may accept the bill with qualifications
• If his acceptance is general, the tenor of then bill is the same tenor as the tenor of his acceptance
WHERE ORIGINAL TENOR IS ALTERED BEFORE ACCEPTANCE
• Suppose the bill is originally for P1000. Before the drawee X accepts it, it is altered by the payee B to P4000. Then X accepts it. How much is X liable to a holder in due course?
• According to one view, X is liable for P4000 and not P1000. The reason is that the tenor of X’s acceptance is for P4000.
EFFECT OF SECTION 124
• Under the first view, what is the effect of Section 124 which provides that a holder in due course can recover only the original tenor of the instrument?
• It seems that this refers to the original tenor of instrument taken from the standpoint of the person primarily liable, in X’s standpoint. In other words, the original tenor of the instrument is P4000, which is the tenor of X’s acceptance.
• If after his acceptance, a subsequent indorsee alters the bill to read P9000, then X could be liable for P4000 only, the original tenor of his acceptance, even as to a holder of due course.
ADMISSION OF DRAWER’S EXISTENCE, ETC.
• Drawer’s existence
• The genuineness of the drawer’s signature
• The capacity and authority of the drawer to draw the instrument
• He doesn’t admit the genuineness of the indorser’s signatures
EFFECT OF ACCEPTOR’S ADMISSIONS
1. Acceptor consequently precluded from setting up the defense that the drawer is non-existent or fictitious because of his admission of the drawer’s existence
2. Neither can he claim the drawer’s signature is a forgery because he admits the genuineness of the drawer’s signature
3. Neither can the drawee escape liability by alleging want of consideration between him and the drawer as by accepting the bill, he admits the capacity and authority of the drawer to draw