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CHAPTER 3
NEGOTIATION

Sec. 30. What constitutes negotiation.

An instrument is negotiated when it is
transferred from one person to another in
such manner as to constitute the transferee
the holder thereof.
If payable to bearer, it is negotiated by
delivery.
If payable to order, it is negotiated by the
indorsement of the holder completed by
delivery.

Methods of Negotiation
1 Instruments payable to order
First, an indorsement by the payee or
present holder
Secondly, its delivery to the next holder
This order or authority is made by
means of indorsement, followed by
delivery of the instrument to the
indorsee.
2 Instruments payable to bearer
It is negotiated by mere delivery alone
without indorsement.
bearer person in possession of a bill
or note which is payable to bearer
delivery transfer of possession,
actual or constructive, from one person
to another

Methods of transfer
1 Issue
First delivery of the instrument
complete in form, to a person who
take it as a holder. (first transfer of an
instrument to a payee)
2 Negotiation
Operates to make the transferee of a
negotiable instrument the holder
thereof.
Involves indorsement
3 Assignment
Involves a transfer of rights under a
contract
transfer is also used when
referring to assignment
4 Operation of Law

Meaning of Negotiation
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The transfer of a N.I. form one person to

another made in such a manner as to
constitute the transferee the holder
thereof.

Payment of instrument by drawee not

negotiation
The payment of a check (or other bill) by the
drawee bank is not a negotiation and does
not make the bank a holder within Section 30.
1 The bank is neither the payee nor
indorsee.
2 Writing of the name of the holder (back
of the check) before surrendering for
payment to the drawee bank is not an
indorsement. (signature serves as
receipt for the money)
Effect of delivery of order instrument
without indorsement
1 Transfer operates as an ordinary
assignment
The transfer operates as an ordinary
assignment and assignee is merely
placed in the position of the assignor,
(former, acquiring the instrument subject
to all defenses, real and personal,
available against the latter)
2 Transferee does not become holder
of instrument
Without indorsement, the transferee
would not be the holder of the
instrument, not being the payee,
indorsee, or the bearer thereof.

3 Where indorsement subsequently

obtained
The transfer operates as a negotiation
only as of the time the indorsement is
actually made.
Can there be a negotiation to a payee?
Meaning of Assignment
-

The transfer of the title to an instrument,

with the assignee generally taking only
such title or rights as his assignor has,
subject to all defenses available against
his assignor.

Negotiation & assignment distinguished

N.I. may either be negotiated or assigned
Non-N.I. can only be assigned or transferred
Negotiation
Refers to negotiable
instruments
The transferee is a
holder
A holder in due
course is subject
only to real defense
A holder in due
course may acquire
a better title or
greater rights under
the instrument than
those possessed by
the transferor or a
prior party
A general indorser
warrants
the
solvency of prior
parties

Assignment
Refers to an ordinary
contracts
The transferee is an
assignee
Assignee is subject
to both real and
personal defenses
An assignee merely
steps into the shoes
of the assignor

An assignor does not

warrant the solvency
of
prior
parties
unless
expressly
stipulated or the
insolvency is known
to him
An indorser is not Assignor is liable
liable unless there be even without notice
presentment
and of dishonor
notice of dishonor
Governed by the Governed by Articles
Negotiable
1624 to 1635 of the
Instruments Law
Civil Code

1 First delivery of instrument to payee

(not by negotiation but by issue or
issuance)
Only the holders subsequent to payee
can acquire title by negotiation.
2 First delivery of instrument to other
than payee
Such as an agent of the maker or
drawer, the payee acquires title by
negotiation.
3 Delivery of instrument to the payee
by last holder
There may also be negotiation
The indorsement of the last holder in not
necessary because the payee is
remitted to his former rights and all
intervening parties are discharged from
liability.

Sec. 31. Indorsement; how made.

Meaning of Indorsement
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The writing of the name of the payee on

the instrument with the intent either to
transfer the title to the same, or to
strengthen the security of the holder by
assuming a contingent liability for its
future payment, or both.

Indorsement alone without delivery

conveys no title and creates no
holder. Indorsement means an
indorsement completed by delivery.

Nature of Indorsement
Indorsement is not only a mode of
transfer
Involves also a new contract & an
obligation on the part of the indorser
(implied guaranty that the instrument
will be duly paid according to terms)

Each indorsement generates an

additional contract between the
indorser and all subsequent holders.

Necessity of Indorsement
1 Essential to the execution of an
instrument payable to the order of the
maker or drawer.
2 Essential to the negotiation of an order
instrument, not of a bearer instrument.
3 Without indorsement of an order
instrument he cannot be a holder in due
course thereof even though he is
entitled to have the indorsement made.

Form of Indorsement

Sec. 32. Indorsement must be of entire

instrument.

General rule: indorsement must be of the

entire instrument
Reason: The instrument must be delivered to
the indorsee and there cannot be partial
delivery of one instrument.
Object of the provision: To avoid multiplicity of
suits or actions in court, divides a single cause
of action, ground for the complaint.

must be written or be in writing

As writing includes print
1 The word assign does not make a
negotiation a mere assignment.
2 The signature of the indorser, without
additional words, is a sufficient
indorsement. (blank indorsement)
3 If name of indorsee is specified, it is
called special Indorsement.
The indorser may add words which
prohibit the further negotiation of the
instrument.

Place of Indorsement
The instrument may be written:
1 On the instrument, itself
- Latin word indorsa, writing on the
back
- It may be written on the face
- The law looks at the intention of the
parties rather than to the form as to
indorsement.
2 Upon a paper attached thereto
- Indorsement is on a slip of paper
physically attached to the instrument so
as to become a part of it, the paper is
known as allonge.
- When it is not clear in what capacity a
person intended to sign, he shall be
deemed an indorser.

Indorsement
indorsees

to

multiple

payees

or

1 Joint payees
An indorsement purporting to transfer
the instrument to 2 or more persons
severally (independently) does not
operate as a negotiation.
- However, the negotiation is valid where
the indorsees are joint (combined or
joined together)
2 Alternative payees
- The negotiation of the instrument may
be made by the indorsement of either of
the payees.

When partial indorsement is allowed

If part of the amount has already been paid, the
unpaid balance may be indorsed as this is
expressly authorized by law.

a One that specifies the person to

whom the instrument is to be paid
b One that specifies the person to
whose order the instrument is to be
payable

Sec. 33. Kinds of Indorsement

Classifications of Indorsement
1 As to the methods of negotiation
a Special
b Blank
2 As to the kind of title transferred
a Restrictive
b Non-restrictive
3 As to scope of liability of indorser
a Qualified
b Unqualified or general
4 As to presence
limitations
a Conditional
b Unconditional

or

absence

of

5 The other kinds of indorsements

a Joint
b Successive
c Irregular or anomalous
d Facultative
Note: Once an instrument as issued satisfies
all the requirements of negotiability, no
indorsement, even restrictive one, can negate
its negotiable status.

Sec. 34. Special Indorsement; Indorsement

in blank.
Special Indorsement explained
-

Is one where the name of the payee is

specified
specific indorsement or indorsement
in full
Special and blank indorsements are
unqualified indorsements

1 Forms

Restrictive indorsement is one so

worded that it either restricts or prohibits
entirely the further negotiation of an
instrument, or modifies the rights of the
holder or the liabilities of the indorser
Sec. 35. Blank indorsement; how
changed to special indorsement
How to convert a blank indorsment
into a special indorsement?
-By writing over the signature of the
indorser in blank any contract
consistent with the character of the
indorsement

An instrument made payable to order on

its face becomes payable to bearer if
the only or last indorsement is in
blank
An instrument made payable to bearer
by an indorsement in blank may be
convert into an order instrument by
writing over the signature of the
indorser in blank any contract
consistent with the character of the
indorsement.
But a bearer instrument always remains
a bearer instrument negotiable by mere
delivery whether the last indorsement is
a blank or a special one.

Sec. 36. When indorsement

restrictive
An indorsement is restrictive which
either:
(a)
Prohibits the further
negotiation of the instrument
(b)
Consitutes the indorsee the
agent of the indorser
(c)
Vests the title in the indorsee
in trust for or to the use of some
other person
Note: There mere absence of words
implying power to negotiate does NOT
make an indorsement restrictive.

A restrictive indorsement.
(1)
Limits the rights of
indorsee - the indorser notifies all
prospective holders that the
indorsee has only the authority to
deal with the instrument as thereby
directed and that the indorsee has
only a restrictive title thereto
(2)
Destroys negotiability of
the instrument such
indorsement destroys negotiability
and bars further negotiation to a
holder in due course
- all subsequent indorsees acquire
ONLY the title of the first indorsee
under the restrictive indorsement

3 Classes of restrictive indorsement:

(a)
Prohibits further
negotiation
Pay to A only ; Pay to A and to no
other person
[Here, A is the only one authorized to
receive payment]

(b)
Constitutes indorsee
agent of indorser
Pay to A for collection (only) ; Pay to A
for deposit
Pay to A for collection and remittance
[A does NOT acquire title over the
instrument. The indorsements also
prohibits the further negotiation of the
instrument]

(c)
Vests title in indorsee for
the benefit of the indorser or a
3rd party

Pay to A in trust for B ; Pay to A as

trustee for P
Pay to A as agent of P ; Pay to A for
my use
Pay to A for the use of B
[The indorsements transfer the legal title
to the instrument to A as trustee for B or
P, the beneficial owner. They give notice
that the paper cannot be negotiated by A
for his own debt or for his own benefit]

Effect of absence of words of

negotiability
The mere absence of words implying
power to negotiate DOES NOT make an
indorsement restrictive.
Pay to A is the same as
Pay to order of A or Pay to A or order

Qualified indorsement is one which

constitutes the indorser a mere
assignor of the title to the instrument
How made?
An indorsement may be qualified by
adding to the indorsers signature these
following words to either a blank or a
special indorsement:
without recourse
sans recourse
at indorsees own risk
indorser not holder
Examples:
Pay to the order of A without recourse
on me. (Sgd.)P.
Pay to A, indorser not holder. (Sgd.) P.
Recourse means a resort to a person
who is secondarily liable after the default
of the person who is primarily liable

Sec. 37. Effect of restrictive

indorsement; rights of indorsee
A restrictive indorsement confers
upon the indorsee the right:
(a) ..to receive payment of the
instrument
(b)..to bring any action thereon that
the indorser could bring
(c) ..to transfer his rights as such
indorsee, where the form of the
indorsement authorizes him to do
so
Rights of indorsee in restrictive
indorsement:
(same as above but in simpler
terms)
(1)Receive payment on the instrument
(2)Sue thereon in his name
(3)Negotiate the instrument except
when it is prohibited in the
indorsement

Sec 38. Qualified indorsement

Effect of qualified indorsement

(1)

Indorser, a mere assignor

The purpose of a qualified indorsement

is to transfer title WITHOUT guaranteeing
payment.
Unlike a special or blank indorsement
which transfers title while guaranteeing
its payment if the holder is unable to
obtain payment from the maker,
acceptor, or drawee at maturity.
(2)
Indorsers liability
limited
The effect of the indorsement is merely
to limit his liability. He is secondarily
laible for breach of his warranties as an
indorser under Section 65.
The qualified indorser is not liable to the
indorsee if the instrument is dishonoured
for some other reason like the insolvency
of the person primarily liable.

(3)
Negotiability of
instrument NOT affected
It is a good precaution to indorse without
recourse where the instrument has a long
period of maturity so that there is danger
that the principal debtor might become
insolvent.

Pay to A if he marries before he reaches

the age of 25.
(4)Blank and restrictive
For collection only. (Sgd.) A
(5)Blank and qualified
Without recourse. (Sgd.) A
(6)Blank and conditional

Sec. 39. Conditional Indorsement

Absolute indorsement is one by
which the indorser binds himself to pay,
upon no other condition than the failure
of prior parties to do so, and of due
notice to him of such failure

Payable upon completion of my house in

Pateros, Metro Manila. (Sgd.) A
(7)Special, unrestrictive,
unqualified
Pay to B. (Sgd.) A

Conditional indorsement is one by

which the indorser imposes some other
condition to his liability, or on the
indorsees right to collect the proceeds of
the instrument
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Does NOT prohibit the further

negotiation of the instrument,
regarldes, of whether the condition
has been fulfilled or not

Note: Condition appearing

..in the indorsement = DOES NOT
destroy negotiability; ..on the face of
the instrument = renders the
instrument NON-NEGOTIABLE.

Different combinations of
indorsements

Sec 40. Indorsement of instrument

payable to bearer

All indorsements are either special or in

blank; restrictive or non-restrictive, etc.
Thus, different combinations are possible.

Effct of special indorsement where

instrument originally payable to
bearer

Examples:

An instrument payable to bearer is NOT

converted into an instrument payable to
order by being indorsed specially.
Therefore, the indorsee may further
negotiate the instrument by mere
delivery.

(1)Special and restrictive

Pay to A only. (Sgd.) P
(2)Special and qualified
Pay to A without recourse. (Sgd.) P
(3)Special and conditional

In such a case, the person indorsing

specially is liable ONLY to those holders
who can trace their title to the

instrument by a series of unbroken

indorsements from such special indorser.

Example: BEARER INSTUMENT

indorsement

delivery
issue
M ------------P --------------A
--------------- B

Story:
M issues a promissory note payable to P.
P indorses the instrument to A.
A delivers the instrument to B.
Notes:
To negotiate the note to A, P has only to
deliver it to A. Remember that the
instrument is a bearer instrument. It can
be transferred by mere delivery because
indorsement is NOT necessary in a
bearer instrument for A to become a
holder. Pero magbuot man ka gi indorse
man gyud ni P kay A. So even though
nadawatan ni A through indorsement,
pwede ra japun ma transfer ni A to B
through delivery since it is still a bearer
instrument.
Effects:
B will have NO right against P since B
did not obtain his title through the
indorsement of P.
In other words, P is NOT LIABLE to B.
but A (as indorser) and M (as maker)
are LIABLE to B.
Supposing A indorsed the note to B, P
will be liable to both A and B.
Application of Section 40
This section applies ONLY to instruments
ORIGINALLY payable to bearer. Therefore,
it cannot apply where the paper is
originally made payable to order and
indorsed in blank because by Section 9, a
note or bill which upon its face, is
payable to order, becomes payable to
bearer only when the last indorsement is
in blank.
Sec. 41. Indorsement where payable
to two or more persons
Indorsement where instrument
payable to two or more joint payees
or indorsees

Note: This sections refers to a JOINT

indorsement; not severally. This section
applies to an instrument payable to the
order of two or more payees jointly;
NOT two or more payees severally
If the instrument is originally payable to
the order of two or more payees or
indorsees, ALL must indorse in order for
the transaction to operate as a
negotiation.

2 exceptions when joint indorsement

by all payees or indorsees not
required:
(1)Where the payees or indorsees are
partners
(2)Where the payees or indorsee
indorsing has authority to indorse
for the others
Indorsement of instrument payable
to partners
An indorsement of an instrument payable
to P and A as partners doing businesss
under a firm name must be in the
name of such firm and not in the name
of P and A as joint payees or indorsees.

Sec. 42. Effect of instrument drawn

or indorsed to a person as cashier
An instrument drawn or indorsed to a
person as cashier or other fiscal officer
of a bank or corporation, it is deemed
prima facie to be payable to the bank or
corporation of which he is such officer,
and may be negotiated by either the
indorsement of the bank or corporation
or the indorsement of the officer.
This presumption may be disproved by
sufficient evidence to the contrary. It may
be shown that the instrument really
belongs personally to the cashier.
Sec. 43. Indorsement where name is
misspelled, etc.
Where the name of a payee or indorsee
is wrongly designated or misspelled, he
may indorse the instrument as therein

described adding, if he thinks fit, his

proper signature.

Sec. 44. Indorsement in

representative capacity
An instrument may be indorsed by a
person either personally or through an
agent. The authority of the agent need
not be in writing.
[Review] Requisites in order that an
agent may escape personal liability:
(1)he is duly authorized; (2)he adds
words to his signature indicating that he
signs as an agent, for or on behalf of a
principal, or in a representative capacity;
(3)he discloses his principal

Sec. 45. Time of indorsement;

presumption
Presumption as to time of
indorsement
Every negotiation is deemed prima facie
to have been effected before the
instrument was overdue
If the indorsement bears a date, the
presumption is that it is the true date.
If the indorsement is without a date, the
presumption is that it was negotiated
before maturity.

Sec. 46. Place of indorsement;

presumption
Presumption as to place of
indorsement
In the absence of evidence to the
contrary, an indorsement is presumed to
have been made to the place where the
instrument is dated

Sec. 47. Continuation of negotiable

character
General rule: An instrument negotiable
in origin is always negotiable.
Exceptions:

(a)
When the instrument has
been restrictively indorsed
(b)
When it has been discharged
by payment or otherwise
Notes:
It is still deemed negotiable although the
negotiable instrument is already overdue,
but any holder who acquires the
instrument can no longer be a holder in
due course.
It should be remembered that not every
restrictive indorsement prohibits further
negotiation of the instrument (Sec. 36).

Sec. 48. Striking out indorsement

The holder may at any time strike out
any indorsement which is NOT
NECESSARY to his title.
The indorser whose indorsement is struck
out, and ALL indorsers subsequent to
him, are thereby relieved from liability
on the instrument.
(see page 136-138 for
examples/cases of striking out for
both bearer and order instruments)

Sec. 49. Transfer without

indorsement; effect of
Effect of transfer without
indorsement
Situation: The payee or indorsee
delivers an instrument payable to order
FOR VALUE, without indorsing it.
(1)The transaction operates as an
EQUITABLE ASSIGNMENT and the
transferee acquires the instrument
subject to defences and equities
available among prior parties
(2)He cannot negotiate it
(3)The transferee acquires legal title and
the right to have the indorsement of
the transferor
(a) The transferee qualifies as a
holder ONLY upon receiving the
indorsement and thus is capable of
negotiating the instrument further

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(b)Before the indorsement, the

transferee is NOT a holder.
Note: The negotiations takes effect as of
the time of the indorsement is actually
made for the purpose of determining
whether or not the transferee is a holder
in due course.

Right of prior party to negotiate

If a prior party reacquires an instrument
before maturity, he may negotiate
further.
But after paying the holder, he may not
claim payment from any of the
intervening parties. This is to avoid
multiplicity of suites.
[Example on page 141]

Effect of indorsement after transfer

The indorsement converts the transfer
into a negotiation and makes the
transferee/indorsee the holder.

Sec. 50. When prior party may

negotiate instrument
Reacquirer a holder who negotiates
an instrument and then subsequently
reacquires it

Limitations on renegotiation
Cases where a prior party cannot
further negotiate the instrument:
(1)
Where it is payable to the
order of a third person, and has
been paid by the drawer
(2)
Where it is made or accepted
for accommodation and has been
paid by the party accommodated
(3)
In other cases, where
instrument is discharged when
acquired by a prior party