UNIT 3:

Holder and Party, Their Rights and Liabilities

Intended learning outcomes:

By the end of this module, students will be able to:

●Enumerate and analyze the classes of holder and parties.

●Know the rights of a holder in due course
●Determine the applicability of real and personal defenses of a holder;
●Determine the requisites to presume a holder in due course.
●Enumerate the different classifications of parties according to liability;
●Distinguish primary party and secondary party; and
●Examine the liabilities of parties like the maker, drawer, endorser, and acceptor.

Overview:

This unit is a brief discussion of Parties in a negotiable instrument, their rights and liabilities
covered by the Negotiable Instruments Law subject and it provides the students with
understanding of: (a) a Holder in Due Course, rights and liabilities; (b) different defenses; and (c)
distinction of primary and secondary party.

Topics to be discussed:
Holder and Party

 Holder in Due Course

 Rights of a Holder in Due Course
 Defenses
 Primary and Secondary Party
 Liabilities of Parties

Essential Questions:
a) What are the rights of a holder in due course?

b) Differentiate the two kinds of defenses that can be interposed to an action upon negotiable
instruments?

c) Explain the liabilities of the maker, drawer, indorser, and acceptor.

Lesson 1:

Party, their Rights and Liabilities

 Lesson 1: Overview and Concepts in Logistics Management

I. Overview

The topic will focus on Parties in negotiable instruments, specifically understanding and
knowing: (a) who are the parties in an instrument; (b) their rights and liabilities and (d) the
difference between primary and secondary party.

II. Objectives

At the end of the lesson you should be able to:

o Identify who are the parties in an instrument and learn their rights and
liabilities.

o Identify who are the primary and secondary party in an instrument.

III. Warm-Up Activity

Read again Sections 51 to 69 of The Negotiable Instruments Law (NIL) plus whatever
explanations, annotations or descriptions you can find on the subject.

IV. Content

Parties in an Instrument

Bill of Exchange Promissory Note

Drawer Maker
Drawee (Acceptor) Payee (Bearer)
Payee (Bearer)

Holder

“Holder” means the payee or indorsee of a bill or note, who is in possession of it,
or the bearer thereof (See Sec. 191).
 Holder of negotiable instruments maybe of three classes and the rights of each
class of holder and defenses assertable against that class may be different under
particular circumstances. The classes are:

1. Holders simply (Sec. 51);

2. Holder for value (Sec. 26); and
3. Holder in due course (Sec. 52 and 57).

Rights of Holder in General

1. To sue – a holder may sue on the instrument in his name.

2. To receive payment – He may receive payment and if the payment is made in
due course, the instrument is discharged.

Sec. 51.  Right of holder to sue; payment.  - The holder of a negotiable

instrument may to sue thereon in his own name; and payment to him in
due course discharges the instrument.

Holder in due course

Sec. 52.  What constitutes a holder in due course.  - A holder in due course
is a holder who has taken the instrument under the following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without
notice that it has been previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) 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 person negotiating
it.

A holder in due course or bona fide holder is a holder who took the instrument under
the condition enumerated in Sec. 52.

Instrument is complete and regular upon its face

An instrument is complete when it contains the entire necessary and material

particular in a negotiable instrument. If an instrument is wanting in any particular not
material or important and has no effect on the clear meaning of the instrument, the
same would not make the instrument incomplete.

An instrument is regular upon its face if it does not contain any visible alteration,
tampering or erasure. Therefore, the rule is that when a mere inspection of an
instrument shows that it has been altered, the holder is not in due course because such
instrument is not regular on its face.
 Holder before the instrument is due

Instrument is overdue after the date of maturity. The date of maturity is the time
fixed therein, the date of presentment if instrument is payable on demand. However,
presentment must be made within a reasonable time after its issue (note) or after its last
negotiation (bill). After the lapse of such reasonable time, the instrument is deemed
overdue.

An instrument in circulation on the date of its maturity carries strong indication

that it has been dishonored. However, overdue instrument is still negotiable.

Holder in good faith

Good faith in Sec. 52(c) refers only to the good faith of the indorsee or transferee.
It implies not only honesty of intention but the absence of suspicious circumstances, or
if such circumstance exist, then such inquiry as will satisfy a prudent man of the
validity of the transaction.

Holder without notice of dishonor

A holder is in due course if he holds the instrument without notice of dishonor.

Holder for value

Any consideration sufficient to support a simple contract is value. It is not

necessary that the consideration should be adequate.

Every negotiable instrument is deemed to have been issued for a valuable

consideration. Every person whose signature appears thereon is presumed to have
become a party thereto for value.

Love and affection do not constitute value within the meaning of law.

Rights of a Holder in Due Course

The following are the rights of a holder in due course.
1. He may sue on the instrument in his own name (Sec. 51)
2. He may receive payment and if the 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 prior parties among themselves.
5. He may enforce payment of the instrument for the full amount thereof against all parties
liable thereon.

Rights of a Holder Not in Due Course

 A holder not in due course is the one who became a holder of an instrument without any,
some or all of the requisites under Sec. 52 of the NIL. The following are the rights of a holder
not in due course:
1. He may sue on the instrument in his own name (Sec. 51);
2. He may receive payment and if the payment is in due course, the instrument is
discharged;
3. He holds the instrument subject to defenses as if it were not negotiable; and
4. He may enforce payment of the instrument for the full amount thereof against all parties
liable thereon.

Defenses
The defenses are grounds or reason pleaded or offered by the defendant in a
case, showing why the plaintiff, as a matter of law or fact, should not be given the relief
he seeks.

Kinds of defenses
1. Real or absolute defenses are those that are assertable against all parties, both
immediate and remote, including holders in due course or holders through the
latter. They are called real because they are attached to the res, the instrument
itself regardless of the merits or demerits of the holder. They challenged the
validity of the instrument itself. This does not imply, however, that the
instrument is valueless and can never be enforced. It is only unenforceable
against the party entitled to set up the defense but not against those to whom
such a defense is not available such as, in the case of forgery, person precluded
from setting it up.

Example

- Incapacity as far as the incapacitated person is concerned

- Illegality of the contract when declared by law
- Want of delivery of incomplete instrument
- Forgery
- Want of authority, apparent and real
- Duress amounting to forgery. The duress must be so overwhelming that
the victim is entirely deprived of his will.
- Fraud in factum or fraud in esse contractus (Sec. 14)
- Fraud alteration by holder
- Prescription
- Other infirmities appearing on the face of the instrument
- Discharge at or after maturity.

2. Personal or universal defenses are those available to prior parties among

themselves but which are not good against a holder in due course. They include
 every defense available in actions under ordinary contract law. They can be
asserted only against ordinary holders, but not against holders in due course or
holders with all the rights of a holder in due course. They are available only
against that person subsequently holder. Personal or universal defense affects
only the validity of the agreement for which the instrument was issued not the
validity of the instrument.

Example

- Filling of wrong date

- Filling up of blanks not in accordance with the authority given and within
reasonable time
- Want of delivery of complete instrument
- Absence or failure of consideration
- Simple fraud or fraud in inducement
- Acquisition of instrument by duress or force or fear
- Acquisition of instrument by unlawful means
- Acquisition of instrument for an illegal consideration
- Negotiation in breach of faith
- Negotiation under circumstances that amount to fraud
- Innocent alteration or spoliation
- Set-off between immediate parties
- Discharged of party secondarily liable by discharge of prior party
- Want of authority of the agent who has apparent authority, but if the
principal can show that the agent had no express, implied, or apparent
authority to sign, the defense is real.

LIABILITIES OF PARTIES

Classification of Parties According to Liability.

The parties to a negotiable instrument may be classified according to their

liability as follows:
(1) Primary liable
(a) The maker of a promissory note;
(b) The acceptor of a bill of exchange; and
(c) The certifier of a check.
(2) Secondarily (conditionally) liable:
(a) The drawer of a bill; and
(b) The indorser of a note or a bill.
(3) Not liable:
(a) The drawee until he accepts the instrument in which case he becomes an
acceptor.

Primary party and secondary party distinguished

 Under the law (Sec. 192), the “person primarily liable on the instrument is the
person who by the terms of the instrument is absolutely required to pay the same. All
other parties are secondarily liable”.

The principal distinction between a primarily liable party and secondarily liable
party is that, while the former is unconditionally bound, the latter is conditionally
bound. Being unconditionally liable, the primary party is absolutely required to pay
the instrument upon its maturity. On the other hand, the secondary party undertakes to
pay the instrument only after certain conditions have been fulfilled, to wit: due
presentment for payment or acceptance to primary party (see Sec. 70.), dishonor by
such party (see Secs. 184 and 151.), and the taking of proceedings required by law after
dishonor. (see Secs. 89 and 118.) Secondary parties are liable in the reverse order in
which they signed the instrument. (see Sec. 68)

Generally, the liability of all secondary parties to an instrument ends when the
primary party pays the full .amount of the instrument to the proper party. (see Secs.
119-120.)
Liability of Maker

Sec. 60. Liability of maker – The maker of negotiable instrument by

making it engage that he will pay it according to its tenor, and admits the
existence of the payee and his then capacity to indorse.

The term "maker" applies only to the promissory note. It includes an

accommodation maker and a surety who signs as maker. The maker is undoubtedly a
party primarily liable as he engages to pay the note according to its terms, subject to no
condition whatsoever. He promises to pay not only to the payee but to any subsequent
holder who is legally entitled to the instrument. Moreover, he "admits the existence of
the payee and his then capacity to indorse" at the time of the making of the note.

Due presentment for payment (Sec.70.), and due notice of dishonor (Sec. 89) are
not necessary for the purpose of charging the maker with liability, which is necessary,
however, to fix the liability of any drawer or indorser.

EXAMPLE:

M issue a promissory note to P for P500.00 payable on demand. P

indorses the note to A.
Upon being sued by A, M cannot say that the agreement between
him and P was to pay only P300.00. Neither can he allege that P is a non-
existent nor fictitious person. He is also precluded from setting up such
defenses as minority, insanity or ultra vires act of a corporation.

Liability of Drawer

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.

Just as the maker of a note, the drawer, by merely signing his name on the bill as
drawer, admits the existence of the payee and his then capacity to indorse the
instrument at the time it was executed. However, the drawer does not promise to pay
the bill absolutely. He makes no warranties but he engages to pay after certain
conditions are complied with, to wit:

(1) The bill is presented for acceptance (see Sec. 143.) or for payment (see Sec.
70.), as the case may be, to the drawee;
(2) The bill is dishonored by non-acceptance or non-payment, as the case may be;
and
(3) The necessary proceedings of dishonor are duly taken. Such proceedings are:
(a) Notice of dishonor is given to the drawer (Sec. 89.) subject to certain
exceptions (see Sec. 114,); and
(b) In case of foreign bills, protest is made followed by a notice of protest.
(see Sec. 152.)

The drawer, therefore, is only secondarily liable to the holder, or to any

subsequent indorser, who may be compelled to pay it (Sec, 61.)

There is a slight difference between the liability of a drawer of a check and that of
a drawer of other bills of exchange. (see Sec. 186.)

EXAMPLE:

Suppose R, as drawer, draws a bill on W, as drawee, payable to the order of P.

The bill is indorsed successively by P to A, by A to B, and by B to C, the present holder.
In this case, R is liable only to C if W dishonors the bill by non-acceptance or
non-payment and the necessary proceedings of dishonor are taken. After such
proceedings are taken, the indorsers P, A, and B would also be liable to C and if, say, B
pays C, B may, in turn, recover from R, P, or A. P, A, and B are the intervening
indorsers.

Liability of Acceptor

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.
 As already pointed out, the drawee of a bill is not liable thereon before
acceptance. (see Sec. 189.) He is not obligated to the payee or any holder to accept a bill
although he may be liable to the drawer for breach of contract if he refuses without
valid reason to accept the bill. Once he accepts, he becomes an acceptor. The acceptor is
primarily bound on the instrument for by his acceptance, he engages to pay it according
to the terms of his acceptance, subject to no condition whatsoever.

Liability Depends on Tenor of Acceptance

In general, no one but the drawee may accept; a stranger or volunteer is not
bound by acceptance. The exception is when a bill is accepted for honor supra protests.
(see Secs. 158, 161.) It is to be noted that while the maker of a note or the drawer of a bill
engages to pay according to the tenor of the instrument, the acceptor engages to pay
according to the tenor of his acceptance, which is not the same as the tenor of the bill
itself because the acceptance may be qualified. (Secs. 139, 141.)

The nature of acceptance is important only in the determination of the kind of

liabilities of the parties involved, but not in the determination of whether a commercial
paper is a bill of exchange or not. As long as a commercial paper conforms to the
definition of a bill of exchange (Sec. 126.), that paper is considered a bill of exchange.

1. Act No. 2031, The Negotiable Instruments Law.

Primary 2. De Leon, Hector S & De Leon Hecotr Jr, M. The Philippine Negotiable Instruments Law (and Allied
References Laws) Annotated. Manila: REX Book Store, 2004.
Other References 1. Sundiang, Jose R. & Aquino, Timoteo B. Reviewer on Commercial Law. Manila: REX Book Store, 2011.