2nd Sem

Negotiable
Instruments
Reviewer on Law on Negotiable Instruments
NIL (Act No. 2031)

CHAPTER 1 FORM AND INTERPRETATION

APPLICABILITY OF NIL
- Act applies only to negotiable instruments and those meet requirements in Section1.
- Any case not provided in this Act, govern by existing legislation or in default rules of law merchant.

3 FUNCTIONS & IMPORTANCE OF NI

1. Used as a substitute for money

*NI differs from money; NI is valuable/worthless depending on financial ability of parties to them

2. Media of exchange
3. Media of credit transaction

PURPOSE OF NEGOTIABILITY
- Allow men of UNDOUBTED credit to carry on business enterprise with the use of instruments knowing
that other businessmen will treat this promises as CASH.

Check for immediate payment

BofE & PN for circulation of credits

2 CHARACTERISTICS/FEATURES OF NI
1. Negotiability quality/attribute where NI give the HDC the right to hold NI & collect sum payable for
himself FREE from defences

*A bona fide holder, FREE from PERSONAL DEFENSES, but may be subject to REAL DEFENSES.

2. Accumulation of Secondary Contracts (as they are transferred from one person to another)

10 COMMON FORMS OF NI (bbbb dd cpt)

1. BofE
2. Bank check
3. Bank notes
4. Bankers acceptance
5. Bonds
6. Drafts
7. Due bills
8. Check
9. Promissory Notes
10. Trade acceptance

6 INSTRUMENTS W/ LIMITED NEGOTIABILITY

1. LETTER OF CREDIT
- letter from merchant/bank/banker in one place, addressed to another (place/country) requesting the
addressee to pay money/deliver goods to 3rd party
- letter requesting one person to make advances to 3rd person on the credit of writer

2. TREASURY WARRANT
- govt warrant for payment of money covering payment/replenishment of cash advances for official
expenditures

3. POSTAL MONEY ORDER

4. BILL OF LADING
- NO unconditional promise/order to pay a sum certain in money

5. CERTIFICATE OF STOCK
- written instrument signed by proper officer of corporation stating name of person (owner of designated
# of shares of its stock)
- NO unconditional promise/order to pay a sum certain in money
Page 2 of 16
6. WAREHOUSE RECEIPT
- NO unconditional promise/order to pay a sum certain in money

Section 1 Memorize

NI contractual obligation to pay money

To determine the negotiability of an instrument, consider the ff:

1. whole of the instrument
2. only what appears on FACE of the instrument
3. provisions of NIL esp. Section1

MAKER person issuing PN

DRAWER person issuing BofE

UNCONDITIONAL PROMISE PN
UNCONDITIONAL ORDER BofE

*Where the meaning is doubtful, the courts adopted the policy of resolving IN FAVOR OF
NEGOTIABILITY of the instrument.

*There is NO ORAL NI.

*The signature (of maker/drawer) is a prima facie evidence of his intention to be bound.

*If the signature placed in instrument, UNCLEAR what capacity person intended to sigh, he is deemed
INDORSER not maker/drawer.

*NI CEASES to be negotiable if the INDORSEMENT prohibits FURTHER negotiation of instrument.

Eg. Pay to Pedro Cruz.

*PLACE & DATE NOT ESSENTIAL to negotiability of instrument EXCEPT in cases, date IS necessary
to know the due/interest.

*Instead of promise to pay, other acceptable terms can be used:

- I agree to pay
- I will pay
- I bind myself to pay
- good to A or order
- due to A or order
- I acknowledge to be indebted

*MERE acknowledgment of debt w/o the word ORDER or BEARER (words of negotiability) DOES NOT
satisfy negotiability.

*The word TO THE ORDER OF and OR ORDER is a promise to pay as ordered/commanded by

PAYEE but may be payable to BEARER.

*When NO TIME of payment is expressed, an instrument is payable ON DEMAND.

*A note may be signed by SEVERAL persons either JOINTLY or JOINTLY AND SEVERALLY.

PN maker, payee
BofE drawer, drawee, payee (parties need NOT ALL be distinct persons. Thus, drawer may draw on
himself payable to his own order.)

December 29, 2013

Manila
P1000
Thirty days after date, pay to (unconditional order to pay) to A or order the sum of One
Thousand (P1000) Pesos. Value received and charge the same account of
(Sgd.) B
To C
Page 3 of 16
College, Sampaloc
Manila

LEGEND:
B drawer
C- drawee; not really a party to the bill, assumes liability ONLY when he accepts the bill usually by
writing the word ACCEPTED and signs his name on the face where he becomes ACCEPTOR and
NOT A DRAWEE. By being this (acceptor), he becomes primarily liable like the MAKER of a
note; DRAWER is ONLY A SURETY then.

*The words (in BofE) CHARGE THE SAME TO THE ACCOUNT OF means amount to be paid by
DRAWEE is to be charged against the funds of DRAWER. But this may be omitted.

2 IDEA & PURPOSE OF BofE

1. DRAWERs funds in hands of DRAWEE
2. Liability of DRAWEE for non-payment
- If DRAWEE refuses to accept when he has funds for purpose, he is LIABLE TO DRAWER (not to
PAYEE) for resulting damages & harm done to his (DRAWER) credit.
-If DRAWER no funds in DRAWEE, presumed that DRAWER made arrangements with DRAWEE so he
will honor the bill. In such case, DRAWEE must look to the DRAWER for reimbursement and NOT TO
BONA FIDE HOLDER.

Section 2 Certainty as to sum, what constitutes

Sum payable is SUM CERTAIN although paid:
- w/ interest
- by stated installments
- by stated installments w/ provision that upon default in payment of any installment/interest, the whole
shall become due
- w/ exchange, fixed/current rate
- w/ costs of collection/attorneys fee in case payment not made at maturity

*If instrument calls for an ACT OTHER THAN payment of money NOT NEGOTIABLE

*A note giving the MAKER the right to ascertain the AMOUNT payable NON-NEGOTIABLE

*A promise to pay P1000 in two installments or in installments NON-NEGOTIABLE

*Acceleration at option of HOLDER NON-NEGOTIABLE

*Acceleration at option of MAKER NEGOTIABLE

(The MAKER can avoid acceleration by paying the installments on their due date)

*The promise/order to pay w/ exchange NEGOTIABLE

(EXCHANGE charge for providing funds, may be fixed/current rate; eg. compensating balance)

*Payment in FOREIGN CURRENCY NEGOTIABLE

*Payment w/ EXCHANGE RATE NEGOTIABLE

- applicable only to foreign bills

*If payment not made at maturity, then there is ADDED amount due (eg. Cost of collection, attorneys
fee) NEGOTIABLE

*Attorneys fee may be REDUCED by courts if found UNREASONABLE; if attorneys fee NOT
specified, it shall be in REASONABLE SUM.

*A provision of to pay ALL costs, charges and expenses incurred by PAYEE in ANY legal proceedings
for collection of debt NON-NEGOTIABLE

*Acquisition of instrument AFTER MATURITY

- a transferee acquiring an instrument when it is OVERDUE would NOT BE HDC & would hold
instrument subject to defenses, as if it were NON-NEGOTIABLE.

Page 4 of 16
Section 3 Promise is UNCONDITIONAL when:
- INDICATION of a particular fund out of w/c reimbursement is to be made or particular account to be
debited w/ the amount (NOT direct source of payment, only source of reimbursement) - NEGOTIABLE
- statement of transaction w/c gives rise to instrument - NEGOTIABLE

Promise is NOT UNCONDITIONAL an order/promise to pay OUT OF particular fund (direct source
of payment) NON-NEGOTIABLE

*The test of NEGOTIABILITY is whether the instrument carries the GENERAL PERSONAL CREDIT of
MAKER/DRAWER.

*A BARE acknowledgment of indebtedness (eg. IOU, due A P1000, for value received) ALONE NON-
NEGOTIABLE. But if words like DUE A OR ORDER, DUE B OR BEARER NEGOTIABLE although
NO express promissory words

*In BofE, there must be an ORDER TO PAY one party to another, OTHERWISE, it is NON-
NEGOTIABLE.

ORDER command/imperative direction

*A MERE request IS NOT an ORDER.

(eg. I request you to pay, I wish you would pay, I authorize you to pay)

*The MERE use of POLITE words like PLEASE does NOT convert ORDER into REQUEST.
*The NOTE/BILL must be payable ABSOLUTELY.

*It is IMMATERIAL whether the DRAWEE obeys the order to pay or not. The NEGOTIABILITY of a bill
DEPENDS upon the TERMS OF ORDER. The DRAWER has his liability under the law.

*If there is CONDITION or subject to CONTINGENCY NON-NEGOTIABLE

* If language used is AMBIGUOUS or OBSCURE, courts usually decide IN FAVOR OF

NEGOTIABILITY.

*A MERE recital of consideration for instrument is STILL UNCONDITIONAL NEGOTIABLE

(statement merely identifies the transaction w/c gives rise to instrument)
(eg. I promise to pay to order of P1000 being the price of the car this day sold and delivered to me; as
per our contract; accordance w/ our contract)

*If promise/order is subject to TERMS AND CONDITIONS NON-NEGOTIABLE

(As already stated, the negotiability of instrument is to be determined by what appears on its FACE
AND NOT ELSEWHERE.)

Section 4 Determinable future time, what constitutes

- fixed period after date/sight - NEGOTIABLE
- on/before a fixed or determinable future time specified - NEGOTIABLE
- ON/AFTER (fixed period) the occurrence of a specified event w/c is CERTAIN to happen, not known
when NEGOTIABLE (eg. Death of father); if BEFORE NON-NEGOTIABLE

*An instrument payable w/ CONTINGENCY (an uncertain future event, or an event w/c may or may not
happen) is NON-NEGOTIABLE, and the happening of the event DOES NOT cure the defect.

DEMAND INSTRUMENT payment at anytime

TERM INSTRUMENT payabe only UPON ARRIVAL of time for payment

AFTER SIGHT means AFTER the instrument is SEEN by the DRAWEE upon presentment of
acceptance
DETERMINABLE FUTURE TIME means a time that can be DETERMINED W/ CERTAINTY AFTER
execution of instrument

Page 5 of 16
Section 5 Additional provisions still NEGOTIABLE:
- authorizes SALE OF COLLATERAL securities
- authorizes a CONFESSION OF JUDGMENT (written acknowledgment by defendant of his
indebtedness/liability to plaintiff) if not paid at maturity

- waives the BENEFIT OF ANY LAW intended for advantage/protection of obligor.

(eg. Pay bearer P1000. Notice of dishonor waived.)

- gives HOLDER the election to require something to be done in lieu of payment of money
(eg. I promise to pay P1000 to A or order or an air conditioner at the option of the holder
NEGOTIABLE;
I promise to pay P1000 to A or order or air conditioner NON-NEGOTIABLE because HOLDER cannot
COMPEL him to make payment in MONEY)

Section 6 OMISSIONS; SEAL; PARTICULAR IN MONEY

Still NEGOTIABLE:
- NO DATE
(If there is a date stated but there is no such date in calendar, the law will deem the NEAREST DATE of
the month the date intended; eg. Note dated Apr31 will be construed to be intended for Apr30)

- NO VALUE given
(eg. NO written for value received)

- NO PLACE where it is drawn or is payable

(An instrument that does not specify the place of payment is presumed to be payable at the
place/residence/business of MAKER/DRAWER.)

- WITH SEAL

- Designates a PARTICULAR KIND of current money as payment

(eg. I promise to pay A or order P1000 in Central Bank of fifty peso bills.)

Section 7 Payable on DEMAND when:

- EXPRESSED to be payable ON DEMAND, at sight, or on presentation

- NO TIME for payment is expressed

(eg. Pay to A or order P1000)

Where the instrument is issued, accepted, or indorsed when OVERDUE, it is, as regards the person so
issuing, accepting, or indorsing it, PAYABLE ON DEMAND.
*An OVERDUE instrument is a DEMAND paper. A HOLDER has immediate right of payment for money
promised/ordered to be paid.
Instead of ON DEMAND, other acceptable terms can be used:
- at sight (used in BofE)
- on presentation
- on call
- at anytime called for

*PAYABLE ON DEMAND as regards the MAKER (late issuance), the ACCEPTOR (late received), the
INDORSER (late indorsed)

Section 8 Instrument may be drawn PAYABLE TO THE ORDER of:

- PAYEE; not maker/drawer/drawee

- drawer
(eg. Pay to the order of myself P1000)
or maker
(eg. I promise to pay to the order of myself P1000)

- 2 or more PAYEES jointly

(eg. Pay to the order of A and B P1000)

- 1 or more of several PAYEES

(eg. Pay to the order of A or B P1000)
Page 6 of 16
- HOLDER OF AN OFFICE at the time being
(eg. Pay to the order of the Commissioner of BIR)

*An instrument is PAYABLE TO ORDER where it is drawn payable:

1. to the order of a specified person
2. to him or his order
Consequently, an instrument payable to a SPECIFIED person (eg. Pay to A) is NON-NEGOTIABLE as
the promise/order is LIMITED to paying one person.

*to the order of, or order, to A and his assigns can be used.

*NO PAYEE, not named, not described NON-NEGOTIABLE because there would be nobody who
could indorse the instrument and nobody who could give the order or authority to collect.

Section 9 PAYABLE TO BEARER WHEN:

- Expressed to be SO PAYABLE.
(But an instrument payable to bearer, A is NON-NEGOTIABLE, since the word BEARER in such case
describes A, therefore, payable to A DEFINITE PERSON ONLY)

- Payable to person named therein or BEARER.

(eg. Pay to A or bearer P1000; Pay to B or holder P1000)

- Payable to order of FICTITIOUS PERSON and such fact was KNOWN to person making it so
payable.
(eg. Pay to King Kong or order P1000)
* The bill is PAYABLE TO BEARER and NOT TO ORDER because King Kong is
a fictitious(feigned/pretended) person.

- Name of PAYEE is not name of any person.

(eg. Pay to the order of Queen of Planet Venus)
(eg. Pay to cash, Pay to money, Pay to sundries)
*The intention of the DRAWER is to make the instrument a BEARER PAPER negotiable by delivery.

- Only/last INDORSEMENT is indorsement in BLANK.

*The word INDORSEMENT, as used in the law, refers only to NI.

Section 10 Terms, sufficient when:

CLEARLY INDICATE THE INTENTION to conform the requirements thereof.

*A MERE defect in language/grammatical error still NEGOTIABLE

Section 11 Presumption as to date

If instrument BEARS A DATE, it is PRESUMED to be the TRUE DATE (prima facie) made by maker,
drawn by drawer, accepted by drawee, or indorsed by payee/holder.
*He who claims that some other date is the true date has the burden to ESTABLISH the CLAIM.
Section 12 Ante-dated and Post-dated
Instrument is VALID although it is ANTE-DATED (earlier than true date) or POST-DATED (later than
true date), provided that it is NOT DONE for illegal/fraudulent purpose (eg. Bouncing check, NSF).
The person TO WHOM an instrument is dated is delivered acquires the TITLE thereto as of the date of
delivery.
The ANTE-DATED/POST-DATED may be negotiated BEFORE/AFTER the date given as long as it is
NOT NEGOTIATED AFTER ITS MATURITY.

Section 13 Date may be inserted when:

1. an instrument is payable at a fixed period AFTER DATE but is ISSUED UNDATED,
2. an instrument is payable at a fixed period AFTER SIGHT but the ACCEPTANCE is UNDATED

ANY HOLDER may insert therein the true date of issue/acceptance and the instrument shall be payable
accordingly.
Page 7 of 16
The insertion of a WRONG DATE DOES NOT avoid the instrument in the hands of the SUBSEQUENT
HDC; but as to him the date so inserted is to be regarded as the TRUE DATE.

*The insertion of WRONG DATE constitutes MATERIAL ATERATION.

Section 14 INCOMPLETE and DELIVERED (personal defense)

(4) RULES
1. AUTHORITY TO FILL UP THE BLANKS
- The HOLDER/person in possession has prima facie authority TO COMPLETE an INCOMPLETE
INSTRUMENT by filling up the blanks therein
The law speaks of MATERIAL PARTICULAR (blanks for date, due date, name of PAYEE, amount, rate
of interest) may be filled in. It has been held that even the blank for the name of the DRAWER may be
filled up.

*The authority to complete is not an authority to alter. So, the HOLDER has NO AUTHORITY to change
the amount after it has been filled in, or to insert the words OR ORDER or OR BEARER after the name
of the PAYEE.

2. AUTHORITY TO PUT ANY AMOUNT

- A signature on a BLANK paper delivered in order to be converted into a NI is a prima facie authority to
fill it up as such for any amount.

3. RIGHT AGAINST PARTY PRIOR TO COMPLETION

- If an instrument is incomplete when delivered, the HOLDER has prima facie authority to fill up the
blanks thereon.
- If a blank paper is delivered by the person making the signature, the HOLDER has prima facie
authority to fill it up for any amount if the person making the signature INTENDED TO CONVERT it into
NI.
- In either case of the above (2) situations, the presumption is that the BLANK was filled in
ACCORDANCE W/ THE AUTHORITY GIVEN and W/IN REASONABLE TIME.

4. RIGHT OF HDC
- not enforceable; personal defenses
- The rule is founded upon the principle that where one of 2 persons must suffer by the bad faith of
another, the loss must fall upon the one who FIRST REPOSED confidence and made it possible for the
loss to occur.

Section 15 INCOMPLETE and UNDELIVERED (real defense)

When an INCOMPLETE instrument is UNDELIVERED, if completed & negotiated w/o authority, be a
VALID CONTRACT in the hands of ANY HOLDER, as against any person whose signature was placed
thereon before delivery.

In the absence of any delivery, the instrument though complete in all particulars, there is NO
CONTRACT.

(2) RULES
1. DEFENSE EVEN AGAINST HDC
- Law is specific that instrument is NOT a VALID CONTRACT in the hands of any HOLDER even HDC.

2. DEFENSE AVAILABLE TO PARTIES PRIOR TO DELIVERY

- The invalidity of the instrument is only w/ reference to the parties whose signatures appear on the
instrument BEFORE and NOT AFTER DELIVERY.
(eg. A(maker) P(steals) B C D; Instrument can be enforced against P, B, C because, as
indorsers, they warrant that the instrument is GENUINE and in all respects what it purports to be, etc.
As their signatures appear on the instrument after delivery, the instrument is valid as to them; In case of
P, he is liable not merely because he is an indorser but also because he is the one responsible for the
theft, and the completion and negotiation of the instrument.)

Section 16 COMPLETE and UNDELIVERED (personal defenses)

(4) RULES
1. UNDELIVERED Every contract on NI even if it is completely written is INCOMPLETE AND
REVOCABLE UNTIL it is delivery for the purpose of giving it effect.
Page 8 of 16
a. DELIVERY transfer of possession, actual/constructive, from one person to another. It may be
made either by the maker/drawer himself or through a duly authorized agent.

b. ISSUE FIRST delivery of the instrument, complete in form, to a person who takes it as HOLDER.

C. HOLDER PAYEE/INDORSEE of bill/note who is in possession of it, or the BEARER thereof.

2. IN POSSESSION OF PARTY OTHER THAN HDC

- If a complete instrument is found in the possession of an IMMEDIATE PARTY (know the
conditions/limitations placed upon delivery of instrument) or a REMOTE PARTY (indirect contractual
relation to each other) other than HDC, there is prima facie presumption of delivery but subject to
rebuttal.
- An UNDELIVERED instrument is INOPERATIVE because DELIVERY is a PREREQUISITE to
LIABILITY. However, if instrument is NO LONGER in the possession of the person who signed it and it
is COMPLETE in its terms, a VALID AND INTENTIONAL delivery by him is PRESUMED until the
contrary is proved.

3. DELIVERED UNCONDITIONALLY OR FOR A SPECIAL PURPOSE

- If delivery was made/authorized, it may be shown to have been conditional, or for a special purpose
only and not for the purpose of transferring the property (title) to the instrument.
- When delivery is made, it is presumed to be made w/ the intention to transfer ownership of the
instrument to the payee.
- (eg. A delivers the note to B on condition that it will not be binding on him UNTIL co-maker has been
procured or for safekeeping, or for collection only.
B cannot enforce the instrument against A because A can set up the defense that the delivery was
conditional or for a special purpose only and not for the purpose of transferring title to the instrument.

4. IN THE HANDS OF HDC

- If a COMPLETE instrument is in the hands of HDC, a valid delivery thereof by all parties PRIOR to
him is CONCLUSIVELY PRESUMED.
A presumption is said to be CONCLUSIVE when it admits of no evidence to the contrary

Section 17 Construction where instrument is AMBIGUOUS

a. Sum payable expressed both in WORDS and in FIGURES, and there is discrepancy between the
two, SUM in WORDS is SUM PAYABLE; but if WORDS are AMBIGUOUS/UNCERTAIN, FIGURES
may be the reference.

b. Instrument w/ interest but NO DATE specifies, interest runs from the date of instrument; if instrument
is UNDATED, from issue thereof.

c. Instrument UNDATED, considered to be dated as of time it was ISSUED.

d. Conflict between WRITTEN and PRINTED provisions of instrument, WRITTEN provisions prevail.
*The reason for the rule is that the written words are deemed to express the true intention of the
MAKER/DRAWER because they are placed there by himself w/o any particular contract in view.

e. Instrument is AMBIGUOUS whether note or bill, the HOLDER may treat it as EITHER at HIS
ELECTION.

f. Signature placed in instrument UNCLEAR what capacity person making the same intended to sign,
he is deemed INDORSER.
*Signature of: (usually)
MAKER lower right-hand corner
DRAWEE lower left-hand corner
HOLDER - back

g. Instrument contain words I promise to pay signed by TWO OR MORE PERSONS, they are deemed
to be JOINTLY AND SEVERALLY LIABLE thereon.
*I promise to pay signed by 2 or more persons SOLIDARY LIABILITY (anyone of the signers may
be held liable for the whole amount of instrument)
*We promise to pay signed by 2 or more persons JOINT LIABILITY (there are as many debts are
there are debtors, each debt being considered distinct and separate from each other)

Page 9 of 16
Section 18 Liability of person signing in trade or assumed name
GENERAL RULE: Only persons whose signatures appear on an instrument ARE LIABLE thereon.
EXCEPTIONS:
a. Where a person signs in a trade or assumed name.
b. The PRINCIPAL is liable if a duly authorized agent signs on his own behalf.
c. In case of forgery, the FORGER is LIABLE even if his signature does not appear on the instrument.
d. When the ACCEPTOR makes his acceptance of a bill on a SEPARATE paper.
e. Where a person makes a WRITTEN promise to ACCEPT a BILL BEFORE it is drawn.

Section 19 Signature by agent; authority; how shown

- The MAKER/DRAWER may sign the instrument PERSONALLY or by another DULY AUTHORIZED
by him.

- The authority of the AGENT may be shown, as in other cases of agency, to have been given ORALLY
or in WRITING subject to the provisions of the STATUTE OF FRAUDS. It has been held competent for
the AGENT to sign simply the PRINCIPALS NAME and to show his authority to do so by other
evidence.

Section 20 Liability of person signing as agent, etc.

(3) When agent MAY ESCAPE personal liability:
1. He is duly authorized;
2. He add words to his signature indicating that he signs AS AN AGENT, that is, for or on behalf of a
principal, or I a representative capacity;
3. He discloses his PRINCIPAL.

*The MERE addition of DESCRIPTIVE WORDS w/o DISCLOSING the PRINCIPAL will not relieve
signer from personal liability, although he add to his signature the word AGENT, TRUSTEE,
ADMINISTRATOR, GUARDIAN, or DIRECTOR (words added are but description personae
describing the person who signed the instrument)

Section 21 Effect of signature by PROCURATION

PROCURATION act by w/c a PRINCIPAL gives power to another to act in HIS PLACE as he could
himself.
- has special and technical meaning; gives a WARNING that the AGENT has but a LIMITED
AUTHORITY so that IT IS the duty of the person dealing w/ him to INQUIRE into the extent of his
(AGENT) authority.

*The PRINCIPAL is NOT BOUND if the agent has exceeded the ACTUAL LIMITS of his authority,
although he may acted w/in the general scope of the agency.

(eg. A signature by procuration may be made as follows:

A Mercado
Per Procuration: B San Miguel

Instead of per procuration, per proc., P.P., or pp may be used.

Section 22 Effect of indorsement by INFANT or CORPORATION

The indorsement/assignment of the instrument by a corporation or by an infant PASSES the property
therein, notwithstanding that from want of capacity, the corporation or infant may incur NO LIABILITY
thereon.

EFFECT OF INDORSEMENT BY INCAPACITATED PERSONS

1. MINORS
- As a general rule, contracts entered into by a minor ARE VOIDABLE at his instance or at the instance
of his guardian.
a. While MINOR NOT BOUND by his indorsement for lack of capacity, he CAN TRANSFER
certain RIGHTS. Minority is a real defense available to MINOR.
b. A MINOR may be BOUND where he is guilty of ACTUAL FRAUD committed by specifically
stating that he is of age, when, in fact he is not.

Page 10 of 16
2. OTHER INCAPACITATED PERSONS
- As far as such persons (incapacitated, insane, demented, deaf-mutes, etc) are concerned, THEIR
CAPACITY IS A REAL DEFENSE, that is, available even against HDC.

EFFECT OF INDORSEMENT BY A CORPORATION

As regards corporations, Section 22 applies to cases where corporation has committed ultra vires
acts(acts beyond its powers).
It has been held that a corporation IS NOT LIABLE on notes in a suit thereon by an indorsee, where the
corporation is WITHOUT CAPACITY to make the contract in fulfilment of w/c they are executed.

Section 23 Effect of FORGED signature

FORGERY counterfeit-making or fraudulent alteration of any writing w/ INTENT TO DEFRAUD (eg.

Signing of anothers name; alteration of an instrument in the name,a mount, description of person and
the like)
- a REAL DEFENSE even against HDC

(2) Cases where SIGNATURE is wholly INOPERATIVE and NO RIGHT can be acquired through
the FORGED SIGNATURE:
1. Where signature on instrument is affixed by one who DOES NOT claim to act as an agent and who
has NO AUTHORITY to bind the person whose signature he has forged; and
2. Where signature is affixed by one who purports to be an AGENT BUT NO AUTHORITY to bind the
ALLEGED principal.

(2) CASES OF FORGERY IN GENERAL

1. Forgery of PROMISSORY NOTES
- indorsement of the note
- MAKERs signature

2. Forgery of BILLS OF EXCHANGE

- indorsement of the bill
- DRAWERs signature (either w/ acceptance by DRAWEE; or w/o such acceptance but the bill is paid
by DRAWEE)

*Section 23 DOES NOT purport to declare the instrument TOTALLY VOID nor the GENUINE
signatures thereon INOPERATIVE. IT IS ONLY THE FORGED/UNAUTHORIZED SIGANTURE that is
declared to be INOPERATIVE.
In other words, RIGHTS MAY STILL EXIST and be enforced by virtue of such instrument as to those
whose signature thereto are found to be genuine.

M P A, X (obtains possession of note and forged As signature) B C

C cannot enforce the instrument against M and P because Cs rights against them are CUT OFF
by the FORGED SIGNATURE of A w/c is WHOLLY INOPERATIVE.

Neither can C enforce the note against A because As signature is wholly inoperative. C has NO
RIGHT to retain, discharge, or ENFORCE PAYMENT OF, the note UNDER the forged signature of
A.

But C may go against B whose signature is GENUINE and therefore, OPERATIVE. B is a

GENERAL INDORSER who warranted to C that the instrument is GENUINE and was VALID and
SUBSISTING (existing) at the time of Bs indorsement.

Of course, B or C has a right of recourse against X, the forger.

A can recover from M and P because his rights against them WERE NOT affected by forgery.
The signature of M and P are genuine and they are liable to A on their contract.

2 EXCEPTIONS TO THE GENERAL RULE THAT NO RIGHT/TITLE CAN BE ACQUIRED TO AN NI

THROUGH OR UNDER A FORGED/UNAUTHORIZED SIGNATURE
1. If the party against whom it is sought to enforce such right is PRECLUDED (stopped) from setting up
forgery or want of authority; and
2. Where forged signature is NOT necessary to the HOLDERS TITLE in w/c case the forgery may be
DISREGARDED.
(2) PERSONS PRECLUDED FROM SETTING UP THE DEFENSE OF FORGERY
Page 11 of 16
1. Those who by their acts, silence, or negligence are estopped from setting up the defense of forgery;
and
2. Those who warrant/admit the genuineness of the signatures in question, namely:
a. indorsers
b. acceptors
c. persons negotiating by delivery

READ pp.76-77

(4) RIGHTS OF PARTIES IN CASES OF FORGED INSTRUMENTS

1. Where note payable to order
- Where the note is payable to ORDER, the party whose indorsement (inoperative) is forged IS NOT
LIABLE to any holder even HDC.
- The other parties (including the MAKER) prior to the party whose signature is forged ARE NOT ALSO
LIABLE to ANY HOLDER. The instrument being payable to order, can be negotiated ONLY BY
INDORSEMENT COMPLETED BY DELIVERY. But since the indorsement is forged, it is
INOPERATIVE, and therefore, cannot operate to transfer ANY RIGHT/TITLE over the instrument.

2. Where note payable to bearer

- Where the note, mechanically complete, is originally payable to bearer, the party whose indorsement
is forged is LIABLE to HDC but NOT to one who IS NOT HDC.
- The other parties (including the MAKER) prior to the party whose signature is forged, MAY ALSO BE
HELD LIABLE by one who is NOT HDC.
The reason is that the instrument being originally payable to bearer, it can be negotiated by MERE
DELIVERY even w/o indorsement. Hence, even if the indorsement is forged, the FORGERY MAY BE
DISREGARDED.

3. Where bill payable to order

- Where the bill is payable to ORDER, the party whose indorsement (inoperative) is forged IS NOT
LIABLE to any holder even HDC.
a. If DRAWEE pays under a forged indorsement, DRAWER NOT LIABLE on the bill and
DRAWEE may not debit the DRAWERs account.
b. Where, however, checks received MERELY FOR COLLECTION and deposit, the bank, as
agent, CANNOT BE EXPECTED to know/ascertain the GENUINENESS of all PRIOR indorsements.

4. Where bill payable to bearer

- In case the bill is originally payable to BEARER, the DRAWEE may debit the DRAWERs account in
spite of the forged indorsement. The reason is that the forged instrument is NOT NECESSARY to the
title of the holder. The DRAWEE cannot recover from the HOLDER.

Section 30 What constitutes negotiation

Negotiation to constitute the transferee the HOLDER thereof

2 METHODS OF NEGOTIATION
1. BEARER delivery
2. ORDER indorsement then delivery

*ANY person in possession of BEARER instrument is ALWAYS the bearer thereof, although he may
have NO legal RIGHT thereto. Meaning, if instrument is negotiated to HDC, the latter may acquire
BETTER RIGHT than transferor.

*NO NEGOTIATION if the transfer does NOT make the transferee the HOLDER of instrument.
(eg. If M makes a note payable to P or order, then P delivers w/o indorsement to A, negotiation is NOT
affected because A, by such transfer, DOES NOT become the HOLDER.) just an ordinary
ASSIGNMENT because it is ORDER instrument but NOT indorsed.

*PAYMENT of check (or other bill) by drawee-bank is NOT NEGOTIATION and does NOT make bank
the HOLDER; BANK is not the payee or indorsee; check is EXTINGUISHED and CANNOT be put in
circulation again to bind the drawer or indorser.

Page 12 of 16
* The writing of HOLDERs name on the back of the check before surrendering for PAYMENT to
drawee-bank is NOT INDORSEMENT. Signature merely serves as RECEIPT OF MONEY. Upon
payment, the CHECK becomes merely a VOUCHER, NOT a transfer of TITLE thereto.

3 BASIC METHODS TO TRANSFER NI

1. ISSUE 1st DELIVERY of instrument COMPLETE in form to a person who takes it as HOLDER
- 1st TRANSFER of instrument to PAYEE
2. NEGOTIATION - to constitute the transferee the HOLDER thereof
3. ASSIGNMENT assignee is placed in the position of assignor; assignee acquires instrument subject
to personal and real defenses available against assignor

*NI can be NEGOTIATED or ASSIGNED; NON-NI can only be ASSIGNED/TRANSFERRED, NOT

negotiated.
--------------------------------------------------------------------------
*Indorsement NOT ONLY mode of transfer but also involves NEW CONTRACT and OBLIGATION on
part of INDORSER an IMPLIED guaranty that instrument be paid according to terms thereof.

NEGOTIATION ASSIGNMENT
Only to NI All contracts
Transferee is Transferee is ASSIGNEE
HOLDER
HDC - REAL defenses ASSIGNEE PERSONAL and REAL defenses
May acquire BETTER Merely steps in shoes of ASSIGNOR
title than PRIOR party
GENERAL ASSIGNOR does NOT warrant SOLVENCY of prior parties (unless stipulated
INDORSER warrants or INSOLVENCY known to him)
SOLVENCY of PRIOR
parties
INDORSER NOT ASSIGNOR IS LIABLE even w/o NOTICE OF DISHO-NOR
LIABLE (unless there
is PRESENT-MENT
and NOTICE of
DISHONOR)
Governed by NIL Governed by CIVIL CODE on assignment of credits

Can there be negotiation to a PAYEE?

MAKER/DRAWER PAYEE payee acquires title by ISSUANCE, NOT negotiation
MAKER/DRAWER AGENT of MAKER/DRAWER PAYEE payee acquires title
by NEGOTIATION

*If negotiation refers to instrument already completely executed/ISSUED, then ONLY HOLDERS
SUBSEQUENT TO PAYEE can acquire title by NEGOTIATION.

*There is NEGOTIATION also to PAYEE when instrument delivered BACK to him by LAST HOLDER.
(In such case, indorsement of LAST HOLDER not necessary because PAYEE is remitted to his
FORMER RIGHTS, and all intervening parties are DISCHARGED from LIABILITY.)

Section 31 Indorsement; how made

Indorsement be written on INSTRUMENT itself or upon paper attached (allonge) thereto.
Signature of INDORSER, w/o additional words, is SUFFICIENT INDORSEMENT.

INDORSEMENT (from Latin in dorsa writing on the back) writing of indorsers name on the
instrument w/ the intent EITHER 1.) to transfer TITLE to the same, or 2.) to STRENGTHEN security of
HOLDER by assuming contingent liability for its future payment, OR BOTH.

*Indorsement w/o delivery conveys NO TITLE and NO HOLDER.

NECESSITY (SIGNIFICANCE) OF INDORSEMENTS

1. Essential to the execution and for FURTHER NEGOTATION of ORDER instrument.
(eg. Note payable: to the order of P, P must indorse it BEFORE it can be further negotiated)
2. Not necessary to a mere ASSIGNMENT.
Page 13 of 16
(Thus, one can acquire title w/o indorsement of ORDER instrument but he CANNOT be HDC thereof
although entitled to indorsement made.)
3. Determines SUBSEQUENT negotiations or transfer of instrument.
(Indorsement may determine whether another indorsement can be further negotiated [special
indorsement] w/ indorsee name;
or NO further indorsement required for negotiation because it is converted into a BEARER instrument
negotiated by DELIVERY [blank instrument] w/ indorsee signature only;
or RESTRICTED for further negotiation [restrictive indorsement] w/ additional words w/c
prohibit/limit further negotiation)

FORM OF INDORSEMENT
Law does NOT require EXCLUSIVE FORM by w/c indorsement be accomplished but it must be IN
WRITING.
Just like signature of maker/drawer, INDORSEMENT may be written in INK, PRINTED, (RUBBER)
STAMPED, TYPEWRITTEN, or any means that will create a mark.

LOCATION OF INSTRUMENT
1. On instrument itself
*As a matter of practice, indorsement is WRITTEN AT THE BACK of instrument (referred to as dorsal
portion of instrument) but it may be written on the face (although it would entail risk of being held liable
as co-maker [PN] or co-drawer [BofE].
2. Upon paper attached thereto (allonge)
*A paper that is merely clipped/pinned to an instrument is NOT an ALLONGE, and anything written on it
CANNOT be considered as INDORSEMENT. Accordingly, person in possession of instrument is NOT
the HOLDER.

*If there is still space for indorsements, the use of ALLONGE should be avoided so as not to cause
CONFUSION on ORDER OF LIABILITY of indorsers.

Section 32 Indorsement must be of entire instrument

(object of provision: to avoid multiplicity of suits/actions in court)
NO NEGOTIATION if indorsement transfer ONLY PART of AMOUNT payable (not HOLDER but merely
is an ASSIGNEE; renders instrument NON-NEGOTIABLE, NOT PAYEE/BEARER of note, NOT
INDORSEE.
(eg. The total payable is P10 000, Pay to A P8 000 NOT VALID NEGOTIATION)
Exception to entirety: Where instrument has been paid in part, it may be indorsed as to the RESIDUE.
(eg. The total payable is P10 000, P2 000 is already paid. Pay to A P8 000 VALID NEGOTIATION)

NO NEGOTIATION if indorsement transfer instrument to 2 or more indorsees severally.

(eg. Pay to A P8 000 and pay to B P2 000 NOT VALID NEGOTIATION)

However, there is VALID NEGOTIATION if indorsees are JOINT.

(eg. Pay to A and B P10 00 VALID NEGOTIATION) A and B must BOTH indorse UNLESS they are
PARTNERS, or one is authorized to indorse for both of them, in w/c case, only one may indorse.

Section 33 Kinds of Indorsement

5 CLASSIFICATIONS OF INDORSEMENT
1. As to the METHODS OF NEGOTIATION
Special
Blank
2. As to the KIND OF TITLE TRANSFERRED
Restrictive
Non-restrictive
3. As to the SCOPE OF LIABILITY OF INDORSER
Qualified
Unqualified (general)
4. As to the PRESENCE/ABSENCE OF LIMITATIONS
Conditional
Unconditional
5. Other kinds of indorsements
JOINT payable to two or more persons jointly
SUCCESSIVE in succession by several indorsers who are liable prima facie in ORDER in w/c they
indorse
REGULAR Delivery Indorsement
IRREGULAR (ANOMALOUS) (placed signature in blank before delivery) Indorsement Delivery
Page 14 of 16
FACULTATIVE indorser ENLARGES his liability by writing over his signature a WAIVER of usual
demand (formal protest) and NOTICE OF NON-PAYMENT (dishonor).

Section 34 Special, and blank indorsement

SPECIAL indorsement w/ indorsee name; can be further negotiated.
[eg. Pay to A; Pay to the order of A; Pay to A or order (Sgd.) B]

*If instrument originally payable to ORDER, INDORSEMENT NECESSARY for FURTHER negotiation
of instrument.

*If instrument originally payable to BEARER, it may be further negotiated by indorsement or even by
mere delivery but REMAINS a BEARER instrument even if specially indorsed. (BEARER ALWAYS A
BEARER.)

BLANK indorsement specifies no indorsee; can be negotiated by DELIVERY because it becomes a

BEARER instrument.
[eg. I promise to pay A or order P10 000 (Sgd.) B
A (payee) may indorse the instrument in blank by SIMPLY writing his signature at BACK of instrument:
(Sgd.) A ]

*If instrument is payable to ORDER on its face and the ONLY or LAST indorsement is in BLANK, it is
CONVERTED into BEARER instrument.

*If instrument is payable to BEARER on its face, ANY indorsement, whether SPECIAL or BLANK, does
NOT change as BEARER instrument. (BEARER ALWAYS A BEARER.)

*A BLANK INDORSEMENT may be negotiated by delivery, or by indorsement and delivery.

However, ORDER instrument SPECIALLY INDORSED AFTER BLANK INDORSEMENT reacquires
status as ORDER INSTRUMENT.
(eg. ORDER instrument indorsed: SPECIAL SPECIAL BLANK (becomes a BEARER instrument)
SPECIAL (becomes ORDER instrument, again) SPECIAL)

Section 35 Blank SPECIAL

- Done by writing APPROPRIATE words OVER the signature of indorser in blank.
- The INDORSEE CANNOT add to the indorsement ANY contract INCONSISTENT w/ character of
indorsement. (eg. Adding protest waived; Demand and notice waived; Without recourse; if such
was NOT THE INTENTION of parties. Also, adding I hereby guaranty payment will make INDORSER
LIABLE as GUARANTOR and thus NOT ENTITLED to NOTICE in case of DISHONOR.)

*The INSERTION of UNATHORIZED contracts constitutes MATERIAL ALTERATION and AVOIDS

INDORSEMENT.

[eg. BLANK SPECIAL

M P (special) A (blank) B (beomes BEARER) (if indorse specially, negotiation will be effected only
indorsement) C (special indorsee)
In example, the indorsement by P A and A B may appear:
Pay to A
(Sgd.) P
(sgd.) A

B, as HOLDER of instrument w/ BLANK indorsement, may PROTECT himself by converting it into

SPECIAL indorsement, as for example, by writing Pay to B, thereby indorsing it to himself. Thus, the ff
will appear:

Pay to A
(Sgd.) P
Pay to B
(sgd.) A
Section 36 Restrictive indorsement:
RESTRICTIVE INDORSEMENT RESTRAINS the negotia-bility of instrument for purpose or to the
person stated therein.

a. Prohibits further negotiation of instrument.

(becomes NON-NEGOTIABLE)
Pay to A only
Pay to A and to no other person
Page 15 of 16
Here, A is the only one authorized to receive payment.

b. Constitutes INDORSEE the AGENT OF INDORSER (AGENCY type: AGENT NO TITLE to

instrument; holds instrument as AGENT of principal, the restrictive indorser subject to restrictive
indorsement.)
Pay to B for collection
Pay to B for collection and remittance
Pay to B for collection only
Pay to B for deposit

c. Vests title in INDORSEE in TRUST for or use of some other person

(TRUST type: transfers TITLE to INDORSEE NOT FOR HIMSELF but in trust of for BENEFIT of
another person including INDORSER. The INDORSEE CANNOT NEGOTIATE instrument for OWN
BENEFIT BUT FOR BENEFICIAL OWNER.)
Pay to C in trust for D
Pay to C as trustee for D
Pay to A for my use
Pay to C for the use of D

Mere absence of words of negotiability does NOT make the indorsement restrictive.

*BUT if there are restrictive words stated like only, it prevents further negotiation, become restrictive
indorsement, and NON-NEGOTIABLE.

Page 16 of 16