V.

NEGOTIATION

a. Modes of Transfer of an Instrument

What do you mean by Transfer? – It is the process by which property is

delivered by one person to another

There is no exclusive method of transferring negotiable instruments

prescribed by law.

4 Modes of Transferring a Negotiable Instrument

1. Issue
 It is the first delivery of the instrument, complete in form, to a
person who takes it as a holder
 It is the first transfer of an instrument to a payee
2. By Operation of Law
 ex. subrogation; succession
3. Assignment
 It may or may not involve an indorsement in the sense of
writing on the back of the instrument
 Whether or not a bill or note is negotiable, it can be transferred
by assignment
 You merely steps into the shoes of the assignor
 Merely means 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 this assignor
 Requires delivery to take effect
4. Negotiation
 Transfer from one person to another in such a manner as to
constitute him the holder thereof
 Makes it possible for the transferee to acquire a better right to a
negotiable instrument that the transferor had

1
 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 and completed by delivery.

Methods of Negotiation

1. When an instrument is payable to order

- Two steps required for its negotiation:
a. Indorsement
b. Delivery
- If an order instrument is delivered without indorsement, it is deemed
to be just an ordinary assignment. However, the assignee acquires the
right to have the indorsement of the assignor. When indorsement is
subsequently obtained, the transfer operates as a negotiation only as
of the time the indorsement is actually made

2. When an instrument is payable to bearer

- Negotiated by mere delivery
- Any person in possession of this kind of instrument is always the
bearer thereof, although he may have no legal right thereto
- Delivery means transfer of possession in actual or constructive from
one person to another.
o i.e. if M issues a note payable to bearer, and the note was stolen
from M by A who delivered the note to B, A‟s acquisition of the
note does not constitute delivery. There was no negotiation to
A because delivery must be voluntary. However, the delivery
to B, who was in good faith, constitutes negotiation. Thus,
while a thief cannot acquire title to the instrument, by virtue of

2
 the theft, he can transfer title to a subsequent innocent
purchaser.
o An example of constructive delivery is when A, without B‟s
knowledge, indorses an instrument to B and puts it in an
envelope containing other papers of B.

Negotiation vs Assignment
NEGOTIATION ASSIGNMENT
Applicable to negotiable Applicable in general to ordinary
instruments contracts
Transferee is called the holder Transferee is called the assignee
A holder in due course is subject The assignee is subject to both
only to real defences real and personal defences
A holder in due course may An assignee merely steps into the
acquire a better title or greater shoes of the assignor
rights under the instruments than
those possessed by the transferor
or a prior party
A general indorser warrants the Assignor does not warrant the
solvency of prior parties solvency of prior parties unless
expressly stipulated or the
insolvency is known to him
An indorser is not liable unless Assignor is liable even without
there be presentment and notice notice of dishonour
of dishonor
Negotiation is governed by NIL Assignment is governed by
Articles 1624 to 1635 of the Civil
Code

Can there be a negotiation to a payee?

There are two schools of thought

1. The delivery to the payee by the maker or drawer does not
constitute negotiation because delivery is part of the creation of a
negotiable instrument
3
 2. There can be such negotiation, because negotiation is not confined
to transfer after delivery to the payee because a holder may be a
payee in possession of the instrument
How do you reconcile the 2 schools of thought?

a. First delivery of instrument to payee – it is believed that the

payee, as the first holder, acquires title to the instrument not
by negotiation but by issue or issuance. If negotiation refers
to an instrument already completely executed or issued,
then only the holders subsequent to the payee can acquire
title by negotiation.
b. First delivery of instrument to other than payee – Where the
delivery by the maker or drawer is made to a person other
than the payee such as an agent of the maker or drawer, the
payee acquired title by negotiation.
c. Delivery of instrument to payee by last holder (when the
instrument is delivered back to him by the last holder) – the
indorsement of the last holder is not necessary because the
payee is remitted to his former rights and all intervening
parties are discharged from liability.

Delivery is an essential part of every negotiation. An intent to be bound is

necessary to the creation of an obligation, and delivery of the negotiable
instrument is the operative fact that evidences the intention of the maker or
drawer to become bound by it.

Delivery is presumed from possession. Except against a holder in due

course, the maker or drawer may overcome the prima facie presumption
by proof that the instrument was stolen.

Delivery may also be conditional:

4
1. Condition Precedent – parol evidence is admissible to show that
notwithstanding deliver, the instrument was to become operative as
a contract only upon the happening of a future, contingent event

2. Condition Subsequent – where an instrument is unconditionally

delivered as an operative contract, parol evidence is not admissible to
show a parol condition attached to the obligation of the contract.

b. Indorsement

- is 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 is not only a mode of transfer. It also involves a
new contract and an obligation on the part of the indorser – an
implied guaranty that the instrument will be duly paid
according to the terms thereof

- It involves the certainty of two things:

o The identity of the indorser
o The genuineness of his signature

Necessity of Indorsement

o Indorsement is essential to the execution of an instrument

payable to the order of the maker or drawer
o It is also essential to the negotiation of an order
instrument, but not of a bearer instrument

5
 o It is not necessary to a mere assignment of a negotiable or
non-negotiable instrument
o Under proper circumstances, an estoppel may take the
place of an indorsement to uphold the transfer of a bill or
note such as where the indorsement is forged or
unauthorized and the party against whom the instrument
is sought to be enforced is precluded from setting up the
defense of forgery or want of authority

Indorsement, How Made

Sec. 31. Indorsement; how made. - The indorsement

must be written on the instrument itself or upon a
paper attached thereto. The signature of the indorser,
without additional words, is a sufficient indorsement.

- The law does not require an exclusive form by which an

indorsement may be accomplished
- But it must be written: includes print, rubber stamp or
typewritten
- The signature of the indorser, without additional words, is a
sufficient indorsement (indorsement in blank); where the name
of the indorsee is specified (special indorsement)
- May be written

a. On the instrument itself – where on the instrument is not

essential because the law states that when it is not clear in
what capacity a person intended to sign, he shall be
deemed an indorser
b. Upon a paper attached thereto

6
 Sec. 32. Indorsement must be of entire instrument. -
The indorsement must be an indorsement of the entire
instrument. An indorsement which purports to transfer
to the indorsee a part only of the amount payable, or
which purports to transfer the instrument to two or
more indorsees severally, does not operate as a
negotiation of the instrument. But where the
instrument has been paid in part, it may be indorsed as
to the residue.

- General Rule: An indorsement must be an indorsement of

the entire instrument
- A part indorsee is considered merely an assignee
o Exception: Partial indorsement is allowed if part of the
amount has already been paid; the unpaid balance
may be indorsed

- Indorsement to Multiple Payees or Indorsees

i. Joint Payees – an indorsement purporting to transfer

the instrument to two or more persons severally does
not operate as a negotiation of the instrument.
However, the negotiation is valid where the indorsees
are joint
ii. Alternative Payees – the negotiation of the instrument
may be made by the indorsement of either of the
payees

7
Classes of Indorsement

Sec. 33. Kinds of indorsement. - An indorsement may

be either special or in blank; and it may also be either
restrictive or qualified or conditional.

Classification of Indorsement

1. Methods of Negotiation
a. Special
b. Blank

2. Kind of title Transferred

a. Restrictive
b. Non-restrictive

3. Scope of liability of indorser

a. Qualified
b. Unqualified or General

4. Presence or absence of limitation

a. Conditional
b. Unconditional

5. Other kinds of indorsement

a. Joint
b. Successive
c. Irregular or anomalous
d. Facultative

8
 Sec. 34. Special indorsement; indorsement in blank. -
A special indorsement specifies the person to whom, or
to whose order, the instrument is to be payable, and
the indorsement of such indorsee is necessary to the
further negotiation of the instrument. An indorsement
in blank specifies no indorsee, and an instrument so
indorsed is payable to bearer, and may be negotiated
by delivery.

 Special Indorsement
o The name of the payee is specified
o Also known as „specific‟ indorsement or indorsement in full
o Special and blank indorsements are unqualified indorsements
o Forms:
- One that specifies the person to whom the instrument is
payable (Pay to A)
- One that specifies the person to whose order the
instrument is to be payable (Pay to the order of A; Pay to
A or order)

 Blank Indorsement
o Is one which specifies no particular indorsee
o Consists only of the signature of the payee or indorser
o An instrument so indorsed is payable to bearer or whoever
possesses it and may be negotiated by the indorser by delivery
alone regardless of whether the instrument is originally payable
to bearer or not

9
 Sec. 35. Blank indorsement; how changed to special
indorsement. - The holder may convert a blank
indorsement into a special indorsement by writing
over the signature of the indorser in blank any contract
consistent with the character of the indorsement.

- You can convert a blank indorsement to a special

indorsement by simply putting the name of the indorsee
- An instrument made payable to bearer by an indorsement in
blank may be converted into an order instrument by writing
over the signature of the indorser in blank any contract not
inconsistent with the character of the indorsement
- A bearer instrument always remains a bearer instrument
negotiable by mere delivery whether the last indorsement is
a blank or special one
- If the instrument is originally payable to bearer, it may
nevertheless be further negotiated by mere delivery even if
the original bearer indorsed it specially. But the special
indorser is liable only to such holders as make title through
his indorsement.

Sec.36. When indorsement restrictive. - An

indorsement is restrictive which either: (a) Prohibits
the further negotiation of the instrument; or (b)
Constitutes the indorsee the agent of the indorser; or
(c) Vests the title in the indorsee in trust for or to the
use of some other persons. But the mere absence of
words implying power to negotiate does not make an
indorsement restrictive.

10
 Restrictive Indorsement
o Is one so worded that it either
- prohibits entirely the further negotiation of an
instrument;
- restricts its further negotiation to a particular person or
for a particular purpose;
- modifies the rights of the holders or the liabilities of the
indorser.

Limits Rights of Indorsee

- An 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

Destroys Negotiability of Instrument

- Such indorsement destroys the negotiability of the

instrument and bars further negotiation to a holder in due
course
- All subsequent indorsees acquire only the title of the first
indorser under the restrictive indorsement

Three classes of restrictive indorsement

a. Prohibits further negotiation

o Ex. Pay to A only (as signed by the indorser)
o The only kind of indorsement which stops the further
negotiation of an instrument
o The prohibition to transfer or negotiate must be written in
express words at the back of the instrument

11
b. Constitutes indorsee agent of indorser

M  P  A  B (collecting as agent)  C

o Ex. Pay to B for Collection (signed A)

o Ex. Pay to B as agent of A (signed A)
o While B can pass the instrument to C, he can only pass on the
same position he has himself. Thus C can also only act as an
agent.

c. Vests title in indorsee for the benefit of the indorser or a third

party

M  P  A  B (holding it for A)  C

o Ex. Pay to B in trust for A

o B can still pass on the instrument
o B is not necessarily an agent. What is transferred is merely
the title and not the value of the instrument
o The indorsement transfers the legal title to the instrument to
B as trustee for A, the beneficial owner. Thus, this gives
notice that the paper cannot be negotiated by B for his own
debt or for his own benefit.

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. But all subsequent indorsees
acquire only the title of the first indorsee under the
restrictive indorsement.
12
- This article applies to the 2nd and 3rd type or restrictive
indorsement
- Under any form or restrictive indorsement, the indorsee may receive
payment on the instrument; sue there on his name; and also
negotiate the instrument except when it is prohibited in the
indorsement

Sec. 38. Qualified indorsement. - A qualified

indorsement constitutes the indorser a mere assignor
of the title to the instrument. It may be made by adding
to the indorser's signature the words "without
recourse" or any words of similar import. Such an
indorsement does not impair the negotiable character
of the instrument.

 Qualified Indorsement
o is one which constitutes the indorser a mere assignor of the title
to the instrument
o Examples of qualified indorsement:
- “without recourse”
- “sans recourse”
- “at indorsee‟s own risk”
- “indorser not holder”
o The word “recourse” in ordinary legal and commercial usage
means a resort to a person who is secondarily liable after the
default of the person who is primarily liable
o Such indorsement shows only an unwillingness to be
answerable for the solvency of prior parties – a prudent
precaution, particularly where the note has a long time to run

13
 before it matures (it does not warrant the solvency of prior
party)

o Effect of Qualified Indorsement:

1. The purpose of a qualified indorsement “without recourse”
is to transfer title without guaranteeing payment by the
primary party. In other words, it makes the indorser a mere
assignor to the instrument
2. The effect of qualified indorsement is merely to limit one‟s
liability. Warranty liability is still present even if the
indorsement is qualified unless such indorsement
specifically excludes warranties. Thus, he is liable if the
instrument is dishonored by non-acceptance or non-
payment due to:
a. Forgery
b. Lack of good title to the instrument indorsed
c. Lack of capacity to contract on the part of prior parties
d. The fact that the instrument was valueless or not valid
at the time of the indorsement which fact was known
to him

Sec. 39. Conditional indorsement. - Where an

indorsement is conditional, the party required to pay
the instrument may disregard the condition and make
payment to the indorsee or his transferee whether the
condition has been fulfilled or not. But any person to
whom an instrument so indorsed is negotiated will
hold the same, or the proceeds thereof, subject to the
rights of the person indorsing conditionally.

14
 Conditional Indorsement
o Absolute Indorsement
- 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
o Conditional Indorsement
- The indorser imposes some other conditions to his
liability or on the indorsee‟s right to collect the proceeds
of the instrument
- It has no effect on the further negotiation of the
instrument. The party required to pay, if he chooses, may
make payment, disregarding the condition without
incurring any liability because he is expressly authorized
to do so under Section 39. But the person who received
payment will hold the proceeds subject to the right of the
conditional indorser
- Example: Maturity date is May 20, 2020. But condition is
to pay when A passes the Bar on 2021.

M  P  A  B (conditionally indorsed)  C  D

- M can pay on May 20, 2020 so that he can extinguish his

obligation. But C is only a holder in trust for B because he
is not yet the owner until he passes the bar exam
- Same goes with D as his ownership of the money will
depend on the ownership of C (holder in trust for the one
making the condition)
- A condition on the face of the instrumetn is not allowed.
But a condition on an indorsement is allowed.

15
Consequences or Effects of Indorsement

Sec. 40. Indorsement of instrument payable to bearer.

- Where an instrument, payable to bearer, is indorsed
specially, it may nevertheless be further negotiated by
delivery; but the person indorsing specially is liable as
indorser to only such holders as make title through his
indorsement.

- This section applies only to instruments ORIGINALLY

payable to BEARER.

M  P  (specially indorsed) A (del.)  B

- 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
- B will have no right against P since he (B) did not obtain his
title through the indorsement of P. But A, as indorser and M,
as maker, will be liable to B.

- Note that a bearer instrument cannot be converted into an

order instrument, meaning that if an instrument is originally
a bearer instrument, even if it is indorsed, you can continue
to indorse it by mere delivery.

M P (del.)  A (del.)  B (Ind. + del.)  C

16
 Sec. 41. Indorsement where payable to two or more
persons. - Where an instrument is payable to the order
of two or more payees or indorsees who are not
partners, all must indorse unless the one indorsing has
authority to indorse for the others.

 Joint Indorsement

- This section refers to a JOINT indorsement

- 2 exceptions to the rule requiring joint indorsment:
i. Where the payees or indorsees are partners
ii. Where the payee or indorsee indorsing has authority to indorse
for the others

Sec. 42. Effect of instrument drawn or indorsed to a

person as cashier. - Where an instrument is 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.

Sec. 43. Indorsement where name is misspelled, and

so forth. - 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.

17
 Sec. 44. Indorsement in representative capacity. -
Where any person is under obligation to indorse in a
representative capacity, he may indorse in such terms
as to negative personal liability.

Sec. 47. Continuation of negotiable character. - An

instrument negotiable in its origin continues to be
negotiable until it has been restrictively indorsed or
discharged by payment or otherwise.

- General Rule: An instrument negotiable in origin is always negotiable

until paid
o An instrument indorsed after it become overdue is considered
payable on demand but can nevertheless be negotiated. The
holder in this case will not be considered a holder in due
course.
o Exception:
i. When the instrument has been restrictively indorsed
ii. When it has been discharged by payment or otherwise

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.

- By virtue of this section, for an instrument payable to bearer on its

face, the holder may strike out all intervening indorsements or any of
them for none of them is necessary to his title

18
 MPABCD

- If C cancels P‟s indorsemnet, then P, whose indorsement is struck

out, and A and B “indorsers subsequent to him”, are released from
liability on the instrument
- C can only claim against M because A and B are also discharged from
liability because they are deprived of their right of recourse against P.

- For an instrument originally payable to order - When a blank

indorsement is followed by special indorsements and the holder
strikes out all indorsements subsequent to the blank indorsement, the
instrument would become payable to bearer as the last indorsement
would be in blank.
- But the indorser may not strike out the payees indorsement. Since
the instrument is payable to order, it cannot be validly negotiated
without his indorsement.

Sec. 49. Transfer without indorsement; effect of. -

Where the holder of an instrument payable to his order
transfers it for value without indorsing it, the transfer
vests in the transferee such title as the transferor had
therein, and the transferee acquires in addition, the
right to have the indorsement of the transferor. But for
the purpose of determining whether the transferee is a
holder in due course, the negotiation takes effect as of
the time when the indorsement is actually made.

19
 Sec. 50. When prior party may negotiate instrument. -
Where an instrument is negotiated back to a prior
party, such party may, subject to the provisions of this
Act, reissue and further negotiable the same. But he is
not entitled to enforce payment thereof against any
intervening party to whom he was personally liable.

- If a prior party reacquires an instrument before maturity, he may

negotiate the same further. But after paying the holder, he may not
claim payment from any of the intervening parties

- Ex. Order instrument

-
MPABCA

o If A is the holder at Maturity date, A will go to M. There is no

problem if M will pay. If M will not pay, A cannot go after
intervening parties to whom he was personally liable. A can
claim from P
o If A is a holder before Maturity date, A can still further
negotiate it.
o Limitations on Renegotiation In the following cases, 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 was made or accepted for accommodation and
has been paid by the party accommodated
3. In other cases, where the instrument is discharged when
acquired by a prior party

20
Time and Place of Indorsement

Sec. 45. Time of indorsement; presumption. - Except

where an indorsement bears date after the maturity of
the instrument, every negotiation is deemed prima
facie to have been effected before the instrument was
overdue.

- Negotiation is presumed to have been made before the instrument

has matured
- If made at maturity, it becomes due the day after the date of maturity
- This section is important because in order to constitute one a holder
in due course, he must have taken the instrument before it was
overdue

Sec. 46. Place of indorsement; presumption. - Except

where the contrary appears, every indorsement is
presumed prima facie to have been made at the place
where the instrument is dated.

- Every indorsement is presumed to have been made at the place

where the instrument is dated - The presumption is rebuttable.

21