CHAPTER 3 NEGOTIATION

Transfer, Defined
It is a process by which property is delivered by one person to another.

3 MODES OF TRANSFER:
1. Issue
2. Negotiation
3. Assignment

ISSUE
- The first delivery of the instrument, complete in form, to a person who takes it as holder;
it is the first transfer of an instrument to a payee.

Note: The life of NI does not begin until it is issued by maker or drawer to the first holder.

NEGOTIATION
- The transfer of a NI from one person to another made in such a manner as to constitute
the transferee the holder thereof

NOTE:
- If NI is payable to order, it is negotiable by delivery with necessary indorsement.
- If NI is payable to bearer, it is negotiable by mere delivery.

Methods of Negotiation
Instrument payable to order Instrument payable to bearer
st
1: Mere delivery without indorsement
Indorsement [by the payee of present holder]

2nd:
delivery [to the next holder]

What is delivery?
Sec 191, par 6: transfer of possession actual or constructive, from one person to
another

Example:
M issues a note payable to bearer. The note was stolen by T from Ms home. T delivered
the note to P. Decide.

Ans: Ts acquisition of the note does not constitute delivery. There is no negotiation to T
because delivery must be voluntary. However, the delivery by T to P constitute
negotiation, provided P acted in good faith. While a thief or finder cannot acquire title to
the instrument, by virtue of the theft, he can transfer title to a subsequent innocent
purchaser.
NOTE:
Payment of NI by drawee NOT negotiable:
Reasons:
1. Bank is neither the payee nor indorsee.
2. The writing of the name of the holder on the back of the check before surrendering it
for payment to the drawee-bank is not indorsement. Such signature merely serves as a
receipt for the money.

Who is a bearer?
Sec 191, par 4: a bearer is the person in possession of a bill or note which is payable to
bearer.
Who is a holder?
Sec 191, par 7: a holder is the payee or indorsee of a bill or note, who is in possession of
it, or the bearer thereof.

Who is holder for value?

Sec 26: A holder of an instrument for which value, which need not be in full, has
been given at any given time but only with respect to all parties who have
become parties to the instrument prior to the time at which value has been
given.

Who is holder in due course?

Sec 52: A holder in due course is a holder who has taken the instrument under the
following conditions:
(COGI)
(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.

ASSIGNMENT
- A transfer of the title to the instrument, with the assignee generally taking only such title
as his assignor has, subject to all defenses available against his assignor.

NEGOTIATION ASSIGNMENT

Refers to NI only Refers to ordinary contracts, in general

Transferee is a holder Transferee is an assignee

A holder in due course is subject only to real An assignee is subject to both real and
defenses personal defenses

A holder in due course may acquire a better Generally, an assignee merely steps into the
title or greater rights under the instrument shoes of the assignor.
than those possessed by the transferor or a
prior party.

A general indorser warrants the solvency of a An assignor does not warrant the solvency of
prior parties prior parties unless expressly stipulated or the
insolvency is known to him

An indorser is not liable unless there be An assignor is liable even without notice of
presentment and notice of dishonor dishonor

Governed by NIL Governed by NCC (Art 1624 to 1635)

INDORSEMENT
- 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.

Who is an indorser?
- The payee who signs the instrument and delivers it to another person.

Who is an indorsee?
- The person who receives the indorsed instrument. He can indorse the instrument to
someone else and thus becomes an indorser as well.

NOTE:
Sec 191, par 8 xxx an indorsement completed by delivery. Xxx applies to both bills and
notes.
Indorsement is an implied guaranty:
The identity of indorser (as the payee or true owner); and
The genuineness of his signature.