145. Real and Personal Defenses to Negotiable Instruments. Defenses to negotiable instruments are usually classified as real and personal. If they are good only against a particular person, they are said to be personal. If they are good as against everyone, they are said to be real. If the instrument is forged, given by an infant, a person under legal age, is illegal—for example given for a gambling contract made illegal by statute—or has been materially altered, it is void, regardless of who holds it. These defenses are called real defenses. If the instrument is lost or stolen, and purchased by an innocent party, if given by reason of duress or fraud, or if there is no consideration, the defense is good only as against the guilty party. These defenses are called personal defenses.
146. Consideration. A consideration is usually defined to be something beneficial to the party making a promise, or something detrimental to the party to whom a promise is made. Every ordinary contract must be supported by a consideration. Negotiable instruments differ from ordinary contracts in that they are made to circulate like money. In order that they may circulate like money the maker is not permitted in some instances, to assert that the instrument lacks consideration. As between the immediate parties to a negotiable instrument, there must be a consideration. The maker may successfully defend against an action based thereon for this reason. If, however, the instrument has passed before due, to an innocent purchaser for value, the maker cannot refuse payment on the ground of no consideration. In case of a negotiable instrument, consideration is presumed. Consideration need not be stated in the instrument. It amounts to a defense, only as between immediate parties. If A gives B his promissory note payable to B's order, with the understanding that B is not to use the note, but is to show it to C, his grocer, for the purpose of obtaining credit, and B endeavors to collect the note from A, A may successfully defend on the ground of no consideration. If, however, B sells the note to D before it is due, and for value, D, not knowing there is no consideration, can collect the note from A.
147. Presentment and Acceptance of Drafts. Drafts payable at sight, or after sight, must be presented to the drawee for acceptance. This is for the reason that the time of payment of such drafts is uncertain. If a draft of which presentment is necessary, is not presented for acceptance, the drawer and indorsers are discharged. Presentment for acceptance must be made to the acceptor within a reasonable time after receipt by the payee or indorsee. What consitutes reasonable time for presentment depends upon the circumstances connected with each particular case. Presentment for acceptance is made by exhibiting the bill for acceptance to the person upon whom is it drawn. Presentment for acceptance may be made by the payee, or his indorsee, and may be made to the drawee, his authorized agent or legal representative. Presentment may be made either at the person's place of business, or at his residence. If made at his place of business, it must be made during business hours. It cannot lawfully be made after noon on Saturdays, nor can it be made on Sundays or legal holidays. Acceptance may be indicated by writing accepted or words to that effect on the bill, by a separate writing to that effect, or by oral agreement of the drawee. If the bill contains a stipulation not requiring acceptance, this is called waiver of acceptance, and the bill need not be presented for acceptance. If acceptance is refused, or not made for any reason, anyone may accept the bill. This is called acceptance for honor, or acceptance supra protest. The liability of an acceptor for honor is that if the bill is presented to the drawee at maturity for payment and refused, and notice thereof given the acceptor for honor, the latter will pay it.
A bill or draft payable at a definite time or date need not be presented for acceptance. For example, if a bill is drawn payable December 23, 1909, it need not be presented for acceptance. The time of payment is certain, and if presented for payment on December 23, and dishonored, notice of non-payment to the drawer and prior indorsers is sufficient to enable the payee to hold them liable. If, however, the bill is payable at sight, or three days after sight, or any time after sight, it must be presented for acceptance to fix the date of maturity, If a bill is not paid by the acceptor after acceptance, notice must be given the drawer and prior indorsers by the holder, to enable him to hold the drawer and prior indorsers liable. This is sufficient in case of an inland bill. In case of a foreign bill, one drawn on a person, or made payable to a person in another state or country from the drawee, formal protest must be made in case of non-payment or non-acceptance. Protest is a formal act of a notary public. This is explained under a separate section.
148. Time of Payment and Days of Grace. A negotiable instrument is payable at the time mentioned in the instrument. If a negotiable instrument is payable a stipulated time after date, and the instrument bears no date, its date is the time it was delivered. The term month, is held to mean calendar month, and not a certain number of days. If a note is dated February 6th, and is payable thirty days after date, it matures March 6th. When a negotiable instrument is payable a specified number of days after date, the time is counted by excluding the day on which the instrument is given, and including the final day stipulated. Negotiable instruments may be made payable on demand of the payee or holder. Such paper is payable at the option of the holder. It is sometimes called paper payable on call. Negotiable instruments may be made payable on or before a certain day. These instruments are valid negotiable instruments. They really mature at the day fixed in the instrument, but may be paid at any time after delivery at the option of the payee or holder. According to the Law Merchant, three days were allowed the party liable on a bill or note to make payment, in addition to the time fixed for payment. These were called days of grace. In the majority of the states, days of grace have been abolished by statute. When not abolished by statute, days of grace are still allowed.
149. Innocent Purchaser for Value Without Notice. The feature that distinguishes negotiable instruments from ordinary contracts is that negotiable instruments may be transferred in such a manner that the transferee receives the instrument free from certain defenses which are good against the transferror. For example, one who purchases another's rights under an ordinary contract takes the exact position of the transferror. Any defenses good against the seller are good against the purchaser. However, a purchaser for value before maturity of negotiable instrument, who has no notice of any defenses to the instrument, takes it free from all but real defenses. Real defenses are infancy of the maker, forgery, material alteration, and illegality. But such a defense as fraud, want of consideration, duress, or any except a real defense is not available against an innocent purchaser for value without notice. An innocent purchaser for value without notice, of a negotiable instrument, is also called a bonâ fide holder, or a holder in due course. A person who purchases a negotiable instrument showing defects or defenses on its face, cannot claim to be a bonâ fide holder. A person who purchases negotiable instruments after maturity, takes them subject to all defenses good against the seller. Such a purchaser is not a bonâ fide holder.
150. Presentment for Payment of Negotiable Instruments. So far as the maker or acceptor of negotiable instruments is concerned, in the absence of a place for payment stipulated in the instrument, a negotiable instrument does not have to be presented for payment. As a matter of practice, however, negotiable instruments are presented to the maker and acceptor at their places of business or at their residences for payment at maturity. In order to hold indorsers, however, a negotiable instrument must be presented to the maker or acceptor at maturity, and, in case of failure to pay, notice must be given indorsers, else they are relieved from liability. When a place for payment is specified in a negotiable instrument, presentment at that place is sufficient. When no place of payment is designated in the instrument, presentment to the maker or acceptor personally, wherever he may be found, or at his residence or place of business is sufficient.
151. Notice of Dishonor and Protest. When a negotiable instrument has been presented to a maker or acceptor for payment, and payment has been refused, the holder should notify the drawer, if the instrument is a bill of exchange or draft, and the indorsers, no matter what the form of the negotiable instrument, of the fact of dishonor. If such notice is not given, the acceptor or indorsers are discharged from liability. This notice should be given by the holder of the paper, or his agent, within a reasonable length of time after dishonor. The notice may be given by a verbal notification, by the delivery of written message, or by mailing notice to the residence or place of business of the indorsers or drawer. Everyone whom a holder desires to hold liable, must be notified in case of dishonor. If a drawer of a bill or an indorser of a note waives notice of dishonor by so stipulating in the instrument, notice as to them is unnecessary. In case of an inland bill, mere notice in writing mailed to their usual address, or actual notice is sufficient. By inland bill is meant one made payable, or to be accepted in the same state or country where drawn. In case of a foreign bill of exchange, or one made payable, or to be accepted, in a state or country other than where made or drawn, notice of dishonor must be by protest. This is true of notice to the drawer for failure of a drawee to accept, as well as for failure of an acceptor to pay. Protest is a formal declaration of a notary public, an officer recognized by all countries as authorized to administer oaths. Technically, only bills of exchange need be protested. By practice, however, promissory notes and checks are protested as well.
152. Certificate of Protest. The following is a common form of protest:
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