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Reviewer on Law on Negotiable Instruments 2 CHARACTERISTICS/FEATURES OF NI

NIL (Act No. 2031) 1. Negotiability – quality/attribute where NI give the HDC the right
to hold NI & collect sum payable for himself FREE from defences
CHAPTER 1 FORM AND INTERPRETATION
*A bona fide holder, FREE from PERSONAL DEFENSES, but may be
APPLICABILITY OF NIL subject to REAL DEFENSES.
- Act applies only to negotiable instruments and those meet 2. Accumulation of Secondary Contracts (as they are transferred
requirements in Section1. from one person to another)
- Any case not provided in this Act, govern by existing legislation or 10 COMMON FORMS OF NI (bbbb dd cpt)
in default – rules of law merchant.
1. BofE
3 FUNCTIONS & IMPORTANCE OF NI
2. Bank check
1. Used as a substitute for money
3. Bank notes
*NI differs from money; NI is valuable/worthless depending on
financial ability of parties to them 4. Banker’s acceptance

2. Media of exchange 5. Bonds

3. Media of credit transaction 6. Drafts

PURPOSE OF NEGOTIABILITY 7. Due bills

- Allow men of UNDOUBTED credit to carry on business enterprise 8. Check


with the use of instruments knowing that other businessmen will
9. Promissory Notes
treat this promises as CASH.
10. Trade acceptance
Check – for immediate payment

BofE & PN – for circulation of credits


6 INSTRUMENTS W/ LIMITED NEGOTIABILITY

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1. LETTER OF CREDIT NI – contractual obligation to pay money

- letter from merchant/bank/banker in one place, addressed to To determine the negotiability of an instrument, consider the ff:
another (place/country) requesting the addressee to pay
money/deliver goods to 3rd party 1. whole of the instrument

- letter requesting one person to make advances to 3rd person on 2. only what appears on FACE of the instrument
the credit of writer 3. provisions of NIL esp. Section1

MAKER – person issuing PN


2. TREASURY WARRANT DRAWER – person issuing BofE
- gov’t warrant for payment of money covering UNCONDITIONAL PROMISE – PN
payment/replenishment of cash advances for official expenditures
UNCONDITIONAL ORDER – BofE
3. POSTAL MONEY ORDER
*Where the meaning is doubtful, the courts adopted the policy of
4. BILL OF LADING resolving IN FAVOR OF NEGOTIABILITY of the instrument.
- NO unconditional promise/order to pay a sum certain in money *There is NO ORAL NI.
5. CERTIFICATE OF STOCK *The signature (of maker/drawer) is a prima facie evidence of his
- written instrument signed by proper officer of corporation stating intention to be bound.
name of person (owner of designated # of shares of its stock) *If the signature placed in instrument, UNCLEAR what capacity
person intended to sigh, he is deemed INDORSER not
- NO unconditional promise/order to pay a sum certain in money
maker/drawer.
6. WAREHOUSE RECEIPT

- NO unconditional promise/order to pay a sum certain in money


*NI CEASES to be negotiable if the INDORSEMENT prohibits
Section 1 Memorize FURTHER negotiation of instrument.

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Eg. Pay to Pedro Cruz. BofE – drawer, drawee, payee (parties need NOT ALL be distinct
persons. Thus, drawer may draw on himself payable to his own
*PLACE & DATE NOT ESSENTIAL to negotiability of instrument order.)
EXCEPT in cases, date IS necessary to know the due/interest.
December 29, 2013
*Instead of “promise to pay”, other acceptable terms can be used:
Manila
- I agree to pay
P1000
- I will pay
Thirty days after date, pay to (unconditional order to pay)
- I bind myself to pay to A or order the sum of One Thousand (P1000) Pesos. Value
- good to A or order received and charge the same account of

- due to A or order (Sgd.) B

- I acknowledge to be indebted To C

*MERE acknowledgment of debt w/o the word ORDER or BEARER College, Sampaloc
(words of negotiability) DOES NOT satisfy negotiability. Manila
*The word TO THE ORDER OF and OR ORDER is a promise to pay as LEGEND:
ordered/commanded by PAYEE but may be payable to BEARER.
B – drawer
*When NO TIME of payment is expressed, an instrument is payable
ON DEMAND. 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
*A note may be signed by SEVERAL persons either JOINTLY or his name on the face where he becomes ACCEPTOR and NOT A
JOINTLY AND SEVERALLY. DRAWEE. By being this (acceptor), he becomes primarily liable like
PN – maker, payee the MAKER of a note; DRAWER is ONLY A SURETY then.

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*The words (in BofE) CHARGE THE SAME TO THE ACCOUNT OF *If instrument calls for an ACT OTHER THAN payment of money –
means amount to be paid by DRAWEE is to be charged against the NOT NEGOTIABLE
funds of DRAWER. But this may be omitted.
*A note giving the MAKER the right to ascertain the AMOUNT
2 IDEA & PURPOSE OF BofE payable – NON-NEGOTIABLE

1. DRAWER’s funds in hands of DRAWEE *A promise to pay P1000 in “two installments” or “in installments” –
NON-NEGOTIABLE
2. Liability of DRAWEE for non-payment
*Acceleration at option of HOLDER – NON-NEGOTIABLE
- If DRAWEE refuses to accept when he has funds for purpose, he is
LIABLE TO DRAWER (not to PAYEE) for resulting damages & harm *Acceleration at option of MAKER – NEGOTIABLE
done to his (DRAWER) credit.
(The MAKER can avoid acceleration by paying the installments on
-If DRAWER no funds in DRAWEE, presumed that DRAWER made their due date)
arrangements with DRAWEE so he will honor the bill. In such case,
DRAWEE must look to the DRAWER for reimbursement and NOT TO *The promise/order to pay “w/ exchange” – NEGOTIABLE
BONA FIDE HOLDER. (EXCHANGE – charge for providing funds, may be fixed/current rate;
Section 2 Certainty as to sum, what constitutes eg. compensating balance)

Sum payable is SUM CERTAIN although paid: *Payment in FOREIGN CURRENCY – NEGOTIABLE

- w/ interest *Payment w/ EXCHANGE RATE – NEGOTIABLE

- by stated installments - applicable only to foreign bills

- by stated installments w/ provision that upon default in payment *If payment not made at maturity, then there is ADDED amount due
of any installment/interest, the whole shall become due (eg. Cost of collection, attorney’s fee) – NEGOTIABLE

*Attorney’s fee may be REDUCED by courts if found


- w/ exchange, fixed/current rate
UNREASONABLE; if attorney’s fee NOT specified, it shall be in
- w/ costs of collection/attorney’s fee in case payment not made at REASONABLE SUM.
maturity

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*A provision of “to pay ALL costs, charges and expenses incurred by ORDER – command/imperative direction
PAYEE in ANY legal proceedings for collection of debt” – NON-
NEGOTIABLE *A MERE request IS NOT an ORDER.

*Acquisition of instrument AFTER MATURITY (eg. I request you to pay, I wish you would pay, I authorize you to
pay)
- a transferee acquiring an instrument when it is OVERDUE would
NOT BE HDC & would hold instrument subject to defenses, as if it *The MERE use of POLITE words like PLEASE does NOT convert
ORDER into REQUEST.
were NON-NEGOTIABLE.

Section 3 Promise is UNCONDITIONAL when: *The NOTE/BILL must be payable ABSOLUTELY.

- INDICATION of a particular fund out of w/c reimbursement is to be *It is IMMATERIAL whether the DRAWEE obeys the order to pay or
made or particular account to be debited w/ the amount (NOT not. The NEGOTIABILITY of a bill DEPENDS upon the TERMS OF
direct source of payment, only source of reimbursement) - ORDER. The DRAWER has his liability under the law.
NEGOTIABLE *If there is CONDITION or subject to CONTINGENCY – NON-
- statement of transaction w/c gives rise to instrument - NEGOTIABLE
NEGOTIABLE * If language used is AMBIGUOUS or OBSCURE, courts usually
Promise is NOT UNCONDITIONAL – an order/promise to pay OUT OF decide IN FAVOR OF NEGOTIABILITY.
particular fund (direct source of payment) – NON-NEGOTIABLE *A MERE recital of consideration for instrument is STILL
*The test of NEGOTIABILITY is whether the instrument carries the UNCONDITIONAL – NEGOTIABLE (statement merely identifies the
GENERAL PERSONAL CREDIT of MAKER/DRAWER. transaction w/c gives rise to instrument)

*A BARE acknowledgment of indebtedness (eg. IOU, due A P1000, (eg. I promise to pay to order of P1000 being the price of the car this
for value received) ALONE – NON-NEGOTIABLE. But if words like day sold and delivered to me; as per our contract; accordance w/
DUE A OR ORDER, DUE B OR BEARER – NEGOTIABLE although NO our contract)
express promissory words *If promise/order is subject to TERMS AND CONDITIONS – NON-
*In BofE, there must be an ORDER TO PAY one party to another, NEGOTIABLE
OTHERWISE, it is NON-NEGOTIABLE.

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(As already stated, the negotiability of instrument is to be Section 5 Additional provisions still NEGOTIABLE:
determined by what appears on its FACE AND NOT ELSEWHERE.)
- authorizes SALE OF COLLATERAL securities

- authorizes a CONFESSION OF JUDGMENT (written


Section 4 Determinable future time, what constitutes acknowledgment by defendant of his indebtedness/liability to
plaintiff) if not paid at maturity
- fixed period after date/sight - NEGOTIABLE
- waives the BENEFIT OF ANY LAW intended for
- on/before a fixed or determinable future time specified - advantage/protection of obligor.
NEGOTIABLE
(eg. Pay bearer P1000. Notice of dishonor waived.)
- ON/AFTER (fixed period) the occurrence of a specified event w/c is
CERTAIN to happen, not known when – NEGOTIABLE (eg. Death of - gives HOLDER the election to require something to be done in lieu
father); if BEFORE – NON-NEGOTIABLE of payment of money

*An instrument payable w/ CONTINGENCY (an uncertain future (eg. I promise to pay P1000 to A or order or an air conditioner at the
event, or an event w/c may or may not happen) is NON- option of the holder – NEGOTIABLE;
NEGOTIABLE, and the happening of the event DOES NOT cure the
I promise to pay P1000 to A or order or air conditioner – NON-
defect.
NEGOTIABLE because HOLDER cannot COMPEL him to make
DEMAND INSTRUMENT – payment at anytime payment in MONEY)

TERM INSTRUMENT – payabe only UPON ARRIVAL of time for


payment
Section 6 OMISSIONS; SEAL; PARTICULAR IN MONEY
AFTER SIGHT – means AFTER the instrument is SEEN by the DRAWEE
upon presentment of acceptance Still NEGOTIABLE:

DETERMINABLE FUTURE TIME – means a time that can be - NO DATE


DETERMINED W/ CERTAINTY AFTER execution of instrument (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)

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- NO VALUE given Instead of ON DEMAND, other acceptable terms can be used:

(eg. NO written “for value received”) - at sight (used in BofE)

- NO PLACE where it is drawn or is payable - on presentation

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

- WITH SEAL *PAYABLE ON DEMAND as regards the MAKER (late issuance), the
ACCEPTOR (late received), the INDORSER (late indorsed)
- 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 8 Instrument may be drawn PAYABLE TO THE ORDER of:

- PAYEE; not maker/drawer/drawee

Section 7 Payable on DEMAND when: - drawer

- EXPRESSED to be payable ON DEMAND, at sight, or on (eg. Pay to the order of myself P1000)
presentation or maker
- NO TIME for payment is expressed (eg. I promise to pay to the order of myself P1000)
(eg. Pay to A or order P1000) - 2 or more PAYEES jointly
Where the instrument is issued, accepted, or indorsed when (eg. Pay to the order of A and B P1000)
OVERDUE, it is, as regards the person so issuing, accepting, or
indorsing it, PAYABLE ON DEMAND. - 1 or more of several PAYEES

*An OVERDUE instrument is a DEMAND paper. A HOLDER has (eg. Pay to the order of A or B P1000)
immediate right of payment for money promised/ordered to be
paid.

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- HOLDER OF AN OFFICE at the time being - Payable to order of FICTITIOUS PERSON and such fact was KNOWN
to person making it so payable.
(eg. Pay to the order of the Commissioner of BIR)
(eg. Pay to King Kong or order P1000)
*An instrument is PAYABLE TO ORDER where it is drawn payable:
* The bill is PAYABLE TO BEARER and NOT TO ORDER because King
1. to the order of a specified person Kong is a fictitious (feigned/pretended) person.
2. to him or his order - Name of PAYEE is not name of any person.
Consequently, an instrument payable to a SPECIFIED person (eg. Pay (eg. Pay to the order of Queen of Planet Venus)
to A) is NON-NEGOTIABLE as the promise/order is LIMITED to paying
one person. (eg. Pay to cash, Pay to money, Pay to sundries)

*”to the order of”, “or order”, “to A and his assigns” can be used. *The intention of the DRAWER is to make the instrument a BEARER
PAPER negotiable by delivery.
*NO PAYEE, not named, not described – NON-NEGOTIABLE because
there would be nobody who could indorse the instrument and - Only/last INDORSEMENT is indorsement in BLANK.
nobody who could give the order or authority to collect.
*The word INDORSEMENT, as used in the law, refers only to NI.

Section 9 PAYABLE TO BEARER WHEN:


Section 10 Terms, sufficient when:
- Expressed to be SO PAYABLE.
CLEARLY INDICATE THE INTENTION to conform the requirements
(But an instrument payable to bearer, A is NON-NEGOTIABLE, since thereof.
the word BEARER in such case describes A, therefore, payable to A
DEFINITE PERSON ONLY) *A MERE defect in language/grammatical error – still NEGOTIABLE

- Payable to person named therein or BEARER.

(eg. Pay to A or bearer P1000; Pay to B or holder P1000) Section 11 Presumption as to date

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If instrument BEARS A DATE, it is PRESUMED to be the TRUE DATE ANY HOLDER may insert therein the true date of issue/acceptance
(prima facie) made by maker, drawn by drawer, accepted by and the instrument shall be payable accordingly.
drawee, or indorsed by payee/holder.
The insertion of a WRONG DATE DOES NOT avoid the instrument in
*He who claims that some other date is the true date has the the hands of the SUBSEQUENT HDC; but as to him the date so
burden to ESTABLISH the CLAIM. inserted is to be regarded as the TRUE DATE.

*The insertion of WRONG DATE constitutes MATERIAL ATERATION.

Section 12 Ante-dated and Post-dated

Instrument is VALID although it is ANTE-DATED (earlier than true Section 14 INCOMPLETE and DELIVERED (personal defense)
date) or POST-DATED (later than true date), provided that it is NOT
DONE for illegal/fraudulent purpose (eg. Bouncing check, NSF). (4) RULES

The person TO WHOM an instrument is dated is delivered acquires 1. AUTHORITY TO FILL UP THE BLANKS
the TITLE thereto as of the date of delivery. - The HOLDER/person in possession has prima facie authority TO
The ANTE-DATED/POST-DATED may be negotiated BEFORE/AFTER COMPLETE an INCOMPLETE INSTRUMENT by filling up the blanks
the date given as long as it is NOT NEGOTIATED AFTER ITS therein
MATURITY. 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
Section 13 Date may be inserted when: be filled up.

1. an instrument is payable at a fixed period AFTER DATE but is *The authority to complete is not an authority to alter. So, the
ISSUED UNDATED, 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
2. an instrument is payable at a fixed period AFTER SIGHT but the
name of the PAYEE.
ACCEPTANCE is UNDATED
2. AUTHORITY TO PUT ANY AMOUNT

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- A signature on a BLANK paper delivered in order to be converted ANY HOLDER, as against any person whose signature was placed
into a NI is a prima facie authority to fill it up as such for any thereon before delivery.
amount.
In the absence of any delivery, the instrument though complete in
3. RIGHT AGAINST PARTY PRIOR TO COMPLETION all particulars, there is NO CONTRACT.

- If an instrument is incomplete when delivered, the HOLDER has (2) RULES


prima facie authority to fill up the blanks thereon.
1. DEFENSE EVEN AGAINST HDC
- 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 - Law is specific that instrument is NOT a VALID CONTRACT in the
the person making the signature INTENDED TO CONVERT it into NI. hands of any HOLDER even HDC.

- In either case of the above (2) situations, the presumption is that 2. DEFENSE AVAILABLE TO PARTIES PRIOR TO DELIVERY
the BLANK was filled in ACCORDANCE W/ THE AUTHORITY GIVEN - The invalidity of the instrument is only w/ reference to the parties
and W/IN REASONABLE TIME. whose signatures appear on the instrument BEFORE and NOT AFTER
4. RIGHT OF HDC DELIVERY.

(eg. A(maker) – P(steals) – B – C – D; Instrument can be enforced


- not enforceable; personal defenses
against P, B, C because, as indorsers, they warrant that the
- The rule is founded upon the principle that where one of 2 persons instrument is GENUINE and in all respects what it purports to be,
must suffer by the bad faith of another, the loss must fall upon the etc. As their signatures appear on the instrument after delivery, the
one who FIRST REPOSED confidence and made it possible for the instrument is valid as to them; In case of P, he is liable not merely
loss to occur. 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 15 INCOMPLETE and UNDELIVERED (real defense)

When an INCOMPLETE instrument is UNDELIVERED, if completed & Section 16 COMPLETE and UNDELIVERED (personal defenses)
negotiated w/o authority, be a VALID CONTRACT in the hands of
(4) RULES

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1. UNDELIVERED – Every contract on NI even if it is completely - When delivery is made, it is presumed to be made w/ the intention
written is INCOMPLETE AND REVOCABLE UNTIL it is delivery for the to transfer ownership of the instrument to the payee.
purpose of giving it effect.
- (eg. A delivers the note to B on condition that it will not be binding
a. DELIVERY – transfer of possession, actual/constructive, from one on him UNTIL co-maker has been procured or for safekeeping, or for
person to another. It may be made either by the maker/drawer collection only.
himself or through a duly authorized agent.
B cannot enforce the instrument against A because A can set up the
b. ISSUE – FIRST delivery of the instrument, complete in form, to a defense that the delivery was conditional or for a special purpose
person who takes it as HOLDER. only and not for the purpose of transferring title to the instrument.

C. HOLDER – PAYEE/INDORSEE of bill/note who is in possession of it, 4. IN THE HANDS OF HDC


or the BEARER thereof.
- If a COMPLETE instrument is in the hands of HDC, a valid delivery
2. IN POSSESSION OF PARTY OTHER THAN HDC thereof by all parties PRIOR to him is CONCLUSIVELY PRESUMED.

- If a complete instrument is found in the possession of an A presumption is said to be CONCLUSIVE when it admits of no
IMMEDIATE PARTY (know the conditions/limitations placed upon evidence to the contrary
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. Section 17 Construction where instrument is AMBIGUOUS
- An UNDELIVERED instrument is INOPERATIVE because DELIVERY is a. Sum payable expressed both in WORDS and in FIGURES, and
a PREREQUISITE to LIABILITY. However, if instrument is NO LONGER there is discrepancy between the two, SUM in WORDS is SUM
in the possession of the person who signed it and it is COMPLETE in PAYABLE; but if WORDS are AMBIGUOUS/UNCERTAIN, FIGURES may
its terms, “a VALID AND INTENTIONAL delivery by him is PRESUMED be the reference.
until the contrary is proved”.
b. Instrument w/ interest but NO DATE specifies, interest runs from
3. DELIVERED UNCONDITIONALLY OR FOR A SPECIAL PURPOSE the date of instrument; if instrument is UNDATED, from issue
- If delivery was made/authorized, it may be shown to have been thereof.
conditional, or for a special purpose only and not for the purpose of
transferring the property (title) to the instrument.

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c. Instrument UNDATED, considered to be dated as of time it was *”We promise to pay” signed by 2 or more persons – JOINT
ISSUED. LIABILITY (there are as many debts are there are debtors, each debt
being considered distinct and separate from each other)
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 Section 18 Liability of person signing in trade or assumed name
express the true intention of the MAKER/DRAWER because they are
GENERAL RULE: Only persons whose signatures appear on an
placed there by himself w/o any particular contract in view.
instrument ARE LIABLE thereon.
e. Instrument is AMBIGUOUS whether note or bill, the HOLDER may
treat it as EITHER at HIS ELECTION. EXCEPTIONS:

f. Signature placed in instrument UNCLEAR what capacity person a. Where a person signs in a trade or assumed name.
making the same intended to sign, he is deemed INDORSER. b. The PRINCIPAL is liable if a duly authorized agent signs on his own
*Signature of: (usually) behalf.

MAKER – lower right-hand corner c. In case of forgery, the FORGER is LIABLE even if his signature does
not appear on the instrument.
DRAWEE – lower left-hand corner
d. When the ACCEPTOR makes his acceptance of a bill on a
HOLDER - back SEPARATE paper.

g. Instrument contain words “I promise to pay” signed by TWO OR e. Where a person makes a WRITTEN promise to ACCEPT a BILL
MORE PERSONS, they are deemed to be JOINTLY AND SEVERALLY BEFORE it is drawn.
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 Section 19 Signature by agent; authority; how shown
amount of instrument) - The MAKER/DRAWER may sign the instrument PERSONALLY or by
another DULY AUTHORIZED by him.

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- The authority of the AGENT may be shown, as in other cases of - has special and technical meaning; gives a WARNING that the
agency, to have been given ORALLY or in WRITING subject to the AGENT has but a LIMITED AUTHORITY so that IT IS the duty of the
provisions of the STATUTE OF FRAUDS. It has been held competent person dealing w/ him to INQUIRE into the extent of his (AGENT)
for the AGENT to sign simply the PRINCIPAL’S NAME and to show his authority.
authority to do so by other evidence.
*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.
Section 20 Liability of person signing as agent, etc.
(eg. A signature by procuration may be made as follows:
(3) When agent MAY ESCAPE personal liability:
A Mercado
1. He is duly authorized;
Per Procuration: B San Miguel
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 Instead of “per procuration”, “per proc.”, “P.P.”, or “pp” may be
capacity; used.

3. He discloses his PRINCIPAL.

*The MERE addition of DESCRIPTIVE WORDS w/o DISCLOSING the Section 22 Effect of indorsement by INFANT or CORPORATION
PRINCIPAL will not relieve signer from personal liability, although he
The indorsement/assignment of the instrument by a corporation or
add to his signature the word AGENT, TRUSTEE, ADMINISTRATOR,
GUARDIAN, or DIRECTOR (words added are but description by an infant PASSES the property therein, notwithstanding that from
personae – describing the person who signed the instrument) want of capacity, the corporation or infant may incur NO LIABILITY
thereon.

EFFECT OF INDORSEMENT BY INCAPACITATED PERSONS


Section 21 Effect of signature by PROCURATION
1. MINORS
PROCURATION – act by w/c a PRINCIPAL gives power to another to
- As a general rule, contracts entered into by a minor ARE
act in HIS PLACE as he could himself.
VOIDABLE at his instance or at the instance of his guardian.

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a. While MINOR NOT BOUND by his indorsement for lack of - a REAL DEFENSE even against HDC
capacity, he CAN TRANSFER certain RIGHTS. Minority is a real
defense available to MINOR. (2) Cases where SIGNATURE is wholly INOPERATIVE and NO RIGHT
can be acquired through the FORGED SIGNATURE:
b. A MINOR may be BOUND where he is guilty of ACTUAL
FRAUD committed by specifically stating that he is of age, when, in 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
fact he is not.
person whose signature he has forged; and
2. OTHER INCAPACITATED PERSONS
2. Where signature is affixed by one who purports to be an AGENT
- As far as such persons (incapacitated, insane, demented, deaf- BUT NO AUTHORITY to bind the ALLEGED principal.
mutes, etc) are concerned, THEIR CAPACITY IS A REAL DEFENSE, that
is, available even against HDC. (2) CASES OF FORGERY IN GENERAL

EFFECT OF INDORSEMENT BY A CORPORATION 1. Forgery of PROMISSORY NOTES

As regards corporations, Section 22 applies to cases where - indorsement of the note


corporation has committed ultra vires acts (acts beyond its powers). - MAKER’s signature
It has been held that a corporation IS NOT LIABLE on notes in a suit 2. Forgery of BILLS OF EXCHANGE
thereon by an indorsee, where the corporation is WITHOUT
CAPACITY to make the contract in fulfilment of w/c they are - indorsement of the bill
executed.
- DRAWER’s signature (either w/ acceptance by DRAWEE; or w/o
such acceptance but the bill is paid by DRAWEE)

Section 23 Effect of FORGED signature *Section 23 DOES NOT purport to declare the instrument TOTALLY
VOID nor the GENUINE signatures thereon INOPERATIVE. IT IS ONLY
FORGERY – counterfeit-making or fraudulent alteration of any THE FORGED/UNAUTHORIZED SIGANTURE that is declared to be
writing w/ INTENT TO DEFRAUD (eg. Signing of another’s name; INOPERATIVE.
alteration of an instrument in the name,a mount, description of
person and the like)

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In other words, RIGHTS MAY STILL EXIST and be enforced by virtue 2. Where forged signature is NOT necessary to the HOLDER’S TITLE
of such instrument as to those whose signature thereto are found to in w/c case the forgery may be DISREGARDED.
be genuine.
(2) PERSONS PRECLUDED FROM SETTING UP THE DEFENSE OF
M – P – A, X (obtains possession of note and forged A’s signature) – FORGERY
B–C
1. Those who by their acts, silence, or negligence are estopped from
C cannot enforce the instrument against M and P because C’s rights setting up the defense of forgery; and
against them are CUT OFF by the FORGED SIGNATURE of A w/c is
WHOLLY INOPERATIVE. 2. Those who warrant/admit the genuineness of the signatures in
question, namely:
Neither can C enforce the note against A because A’s signature is
wholly inoperative. C has NO RIGHT to retain, discharge, or a. indorsers
ENFORCE PAYMENT OF, the note UNDER the forged signature of A. b. acceptors
But C may go against B whose signature is GENUINE and therefore, c. persons negotiating by delivery
OPERATIVE. B is a GENERAL INDORSER who warranted to C that the
instrument is GENUINE and was VALID and SUBSISTING (existing) at READ pp.76-77
the time of B’s indorsement.
(4) RIGHTS OF PARTIES IN CASES OF FORGED INSTRUMENTS
Of course, B or C has a right of recourse against X, the forger.
1. Where note payable to order
A can recover from M and P because his rights against them WERE
- Where the note is payable to ORDER, the party whose
NOT affected by forgery. The signature of M and P are genuine and
indorsement (inoperative) is forged IS NOT LIABLE to any holder
they are liable to A on their contract.
even HDC.
2 EXCEPTIONS TO THE GENERAL RULE THAT NO RIGHT/TITLE CAN BE
- The other parties (including the MAKER) prior to the party whose
ACQUIRED TO AN NI THROUGH OR UNDER A
signature is forged ARE NOT ALSO LIABLE to ANY HOLDER. The
FORGED/UNAUTHORIZED SIGNATURE
instrument being payable to order, can be negotiated ONLY BY
1. If the party against whom it is sought to enforce such right is INDORSEMENT COMPLETED BY DELIVERY. But since the
PRECLUDED (stopped) from setting up forgery or want of authority; indorsement is forged, it is INOPERATIVE, and therefore, cannot
and operate to transfer ANY RIGHT/TITLE over the instrument.

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- In case the bill is originally payable to BEARER, the DRAWEE may
debit the DRAWER’s account in spite of the forged indorsement. The
2. Where note payable to bearer reason is that the forged instrument is NOT NECESSARY to the title
- Where the note, mechanically complete, is originally payable to of the holder. The DRAWEE cannot recover from the HOLDER.
bearer, the party whose indorsement is forged is LIABLE to HDC but
NOT to one who IS NOT HDC.
Section 30 What constitutes negotiation
- The other parties (including the MAKER) prior to the party whose
signature is forged, MAY ALSO BE HELD LIABLE by one who is NOT Negotiation – to constitute the transferee the HOLDER thereof
HDC.

The reason is that the instrument being originally payable to bearer,


it can be negotiated by MERE DELIVERY even w/o indorsement. 2 METHODS OF NEGOTIATION
Hence, even if the indorsement is forged, the FORGERY MAY BE 1. BEARER – delivery
DISREGARDED.
2. ORDER – indorsement then delivery
3. Where bill payable to order
*ANY person in possession of BEARER instrument is ALWAYS the
- Where the bill is payable to ORDER, the party whose indorsement bearer thereof, although he may have NO legal RIGHT thereto.
(inoperative) is forged IS NOT LIABLE to any holder even HDC. Meaning, if instrument is negotiated to HDC, the latter may acquire
a. If DRAWEE pays under a forged indorsement, DRAWER BETTER RIGHT than transferor.
NOT LIABLE on the bill and DRAWEE may not debit the DRAWER’s
account.
*NO NEGOTIATION if the transfer does NOT make the transferee
b. Where, however, checks received MERELY FOR the HOLDER of instrument.
COLLECTION and deposit, the bank, as agent, CANNOT BE EXPECTED
to know/ascertain the GENUINENESS of all PRIOR indorsements. (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
4. Where bill payable to bearer transfer, DOES NOT become the HOLDER.) – just an ordinary
ASSIGNMENT because it is ORDER instrument but NOT indorsed.

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*PAYMENT of check (or other bill) by drawee-bank is NOT *Indorsement NOT ONLY mode of transfer but also involves NEW
NEGOTIATION and does NOT make bank the HOLDER; BANK is not CONTRACT and OBLIGATION on part of INDORSER – an IMPLIED
the payee or indorsee; check is EXTINGUISHED and CANNOT be put guaranty that instrument be paid according to terms thereof.
in circulation again to bind the drawer or indorser.

* The writing of HOLDER’s name on the back of the check before


surrendering for PAYMENT to drawee-bank is NOT INDORSEMENT. NEGOTIATION ASSIGNMENT
Signature merely serves as RECEIPT OF MONEY. Upon payment, the Only to NI All contracts
CHECK becomes merely a VOUCHER, NOT a transfer of TITLE
thereto. Transferee is HOLDER Transferee is ASSIGNEE

HDC - REAL defenses ASSIGNEE – PERSONAL and REAL


defenses
3 BASIC METHODS TO TRANSFER NI
May acquire BETTER title Merely steps in shoes of ASSIGNOR
1. ISSUE – 1st DELIVERY of instrument COMPLETE in form to a
than PRIOR party
person who takes it as HOLDER

- 1st TRANSFER of instrument to PAYEE


GENERAL INDORSER warrants ASSIGNOR does NOT warrant
SOLVENCY of PRIOR parties SOLVENCY of prior parties (unless
2. NEGOTIATION - to constitute the transferee the HOLDER thereof
stipulated or INSOLVENCY known to
3. ASSIGNMENT – assignee is placed in the position of assignor; him)
assignee acquires instrument subject to personal and real defenses
INDORSER NOT LIABLE ASSIGNOR IS LIABLE even w/o
available against assignor (unless there is PRESENT-MENT NOTICE OF DISHONOR
and NOTICE of DISHONOR)
*NI can be NEGOTIATED or ASSIGNED; NON-NI can only be
ASSIGNED/TRANSFERRED, NOT negotiated. Governed by NIL Governed by CIVIL CODE on
assignment of credits
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Can there be negotiation to a PAYEE? *Indorsement w/o delivery conveys NO TITLE and NO HOLDER.

MAKER/DRAWER → PAYEE – payee acquires title by ISSUANCE, NOT


negotiation
NECESSITY (SIGNIFICANCE) OF INDORSEMENTS
MAKER/DRAWER → AGENT of MAKER/DRAWER →PAYEE – payee
1. Essential to the execution and for FURTHER NEGOTATION of
acquires title by NEGOTIATION
ORDER instrument.
*If negotiation refers to instrument already completely
executed/ISSUED, then ONLY HOLDERS SUBSEQUENT TO PAYEE can (eg. Note payable: “to the order of P”, P must indorse it BEFORE it
acquire title by NEGOTIATION. can be further negotiated)

*There is NEGOTIATION also to PAYEE when instrument delivered 2. Not necessary to a mere ASSIGNMENT.
BACK to him by LAST HOLDER. (In such case, indorsement of LAST (Thus, one can acquire title w/o indorsement of ORDER instrument
HOLDER not necessary because PAYEE is remitted to his FORMER but he CANNOT be HDC thereof although entitled to indorsement
RIGHTS, and all intervening parties are DISCHARGED from made.)
LIABILITY.)
3. Determines SUBSEQUENT negotiations or transfer of instrument.

(Indorsement may determine whether another indorsement can be


Section 31 Indorsement; how made further negotiated [special indorsement] – w/ indorsee name;
Indorsement be written on INSTRUMENT itself or upon paper or NO further indorsement required for negotiation because it is
attached (allonge) thereto. converted into a BEARER instrument negotiated by DELIVERY [blank
Signature of INDORSER, w/o additional words, is SUFFICIENT instrument] – w/ indorsee signature only;
INDORSEMENT. or RESTRICTED for further negotiation [restrictive indorsement] –
INDORSEMENT (from Latin in dorsa – writing on the back) – writing w/ additional words w/c prohibit/limit further negotiation)
of indorser’s name on the instrument w/ the intent EITHER 1.) to FORM OF INDORSEMENT
transfer TITLE to the same, or 2.) to STRENGTHEN security of
HOLDER by assuming contingent liability for its future payment, OR Law does NOT require EXCLUSIVE FORM by w/c indorsement be
BOTH. accomplished but it must be IN WRITING.

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Just like signature of maker/drawer, INDORSEMENT may be written instrument NON-NEGOTIABLE, NOT PAYEE/BEARER of note, NOT
in INK, PRINTED, (RUBBER) STAMPED, TYPEWRITTEN, or any means INDORSEE.
that will create a mark.
(eg. The total payable is P10 000, “Pay to A P8 000” – NOT VALID
LOCATION OF INSTRUMENT NEGOTIATION)

1. On instrument itself Exception to entirety: Where instrument has been paid in part, it
may be indorsed as to the RESIDUE.
*As a matter of practice, indorsement is WRITTEN AT THE BACK of
instrument (referred to as dorsal portion of instrument) but it may (eg. The total payable is P10 000, P2 000 is already paid. “Pay to A
be written on the face (although it would entail risk of being held P8 000” – VALID NEGOTIATION)
liable as co-maker [PN] or co-drawer [BofE].

2. Upon paper attached thereto (allonge)


NO NEGOTIATION if indorsement transfer instrument to 2 or more
*A paper that is merely clipped/pinned to an instrument is NOT an indorsees severally.
ALLONGE, and anything written on it CANNOT be considered as
INDORSEMENT. Accordingly, person in possession of instrument is (eg. Pay to A P8 000 and pay to B P2 000 – NOT VALID
NOT the HOLDER. NEGOTIATION)

*If there is still space for indorsements, the use of ALLONGE should However, there is VALID NEGOTIATION if indorsees are JOINT.
be avoided so as not to cause CONFUSION on ORDER OF LIABILITY of (eg. Pay to A and B P10 00 – VALID NEGOTIATION) – A and B must
indorsers. 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 32 Indorsement must be of entire instrument Section 33 Kinds of Indorsement

(object of provision: to avoid multiplicity of suits/actions in court) 5 CLASSIFICATIONS OF INDORSEMENT

NO NEGOTIATION if indorsement transfer ONLY PART of AMOUNT 1. As to the METHODS OF NEGOTIATION


payable (not HOLDER but merely is an ASSIGNEE; renders Special

Blank

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2. As to the KIND OF TITLE TRANSFERRED Section 34 Special, and blank indorsement

Restrictive SPECIAL indorsement – w/ indorsee name; can be further


negotiated.
Non-restrictive
[eg. Pay to A; Pay to the order of A; Pay to A or order (Sgd.) B]
3. As to the SCOPE OF LIABILITY OF INDORSER
*If instrument originally payable to ORDER, INDORSEMENT
Qualified NECESSARY for FURTHER negotiation of instrument.
Unqualified (general) *If instrument originally payable to BEARER, it may be further
4. As to the PRESENCE/ABSENCE OF LIMITATIONS negotiated by indorsement or even by mere delivery but REMAINS a
BEARER instrument even if specially indorsed. (BEARER ALWAYS A
Conditional BEARER.)

Unconditional BLANK indorsement – specifies no indorsee; can be negotiated by


DELIVERY because it becomes a BEARER instrument.
5. Other kinds of indorsements
[eg. “I promise to pay A or order P10 000” (Sgd.) B
JOINT – payable to two or more persons jointly
A (payee) may indorse the instrument in blank by SIMPLY writing his
SUCCESSIVE – in succession by several indorsers who are liable
signature at BACK of instrument:
prima facie in ORDER in w/c they indorse
(Sgd.) A ]
REGULAR – Delivery → Indorsement

IRREGULAR (ANOMALOUS) – (placed signature in blank before


delivery) Indorsement → Delivery *If instrument is payable to ORDER on its face and the ONLY or LAST
indorsement is in BLANK, it is CONVERTED into BEARER instrument.
FACULTATIVE – indorser ENLARGES his liability by writing over his
signature a WAIVER of usual demand (formal protest) and NOTICE
OF NON-PAYMENT (dishonor).

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*If instrument is payable to BEARER on its face, ANY indorsement, [eg. BLANK → SPECIAL
whether SPECIAL or BLANK, does NOT change as BEARER
instrument. (BEARER ALWAYS A BEARER.) M – P (special) – A (blank) – B (beomes BEARER) (if indorse specially,
negotiation will be effected only indorsement) – C (special indorsee)
*A BLANK INDORSEMENT may be negotiated by delivery, or by
indorsement and delivery. In example, the indorsement by P – A and A – B may appear:

However, ORDER instrument SPECIALLY INDORSED AFTER BLANK Pay to A


INDORSEMENT reacquires status as ORDER INSTRUMENT. (Sgd.) P
(eg. ORDER instrument indorsed: SPECIAL → SPECIAL → BLANK (sgd.) A
(becomes a BEARER instrument) → SPECIAL (becomes ORDER
instrument, again) → SPECIAL)

B, as HOLDER of instrument w/ BLANK indorsement, may PROTECT


himself by converting it into SPECIAL indorsement, as for example,
Section 35 Blank → SPECIAL by writing “Pay to B”, thereby indorsing it to himself. Thus, the ff
- Done by writing APPROPRIATE words OVER the signature of will appear:
indorser in blank.

- The INDORSEE CANNOT add to the indorsement ANY contract Pay to A


INCONSISTENT w/ character of indorsement. (eg. Adding “protest
waived”; “Demand and notice waived”; “Without recourse”; if such (Sgd.) P
was NOT THE INTENTION of parties. Also, adding “I hereby guaranty
Pay to B
payment” will make INDORSER LIABLE as GUARANTOR and thus
NOT ENTITLED to NOTICE in case of DISHONOR.) (sgd.) A
*The INSERTION of UNATHORIZED contracts constitutes MATERIAL Section 36 Restrictive indorsement:
ALTERATION and AVOIDS INDORSEMENT.
RESTRICTIVE INDORSEMENT – RESTRAINS the negotia-bility of
instrument for purpose or to the person stated therein.

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“Pay to C as trustee for D”

a. Prohibits further negotiation of instrument. “Pay to A for my use”

(becomes NON-NEGOTIABLE) “Pay to C for the use of D”

“Pay to A only” Mere absence of words of negotiability does NOT make the
indorsement restrictive.
“Pay to A and to no other person”
*BUT if there are restrictive words stated like “only”, it prevents
Here, A is the only one authorized to receive payment. further negotiation, become restrictive indorsement, and NON-
b. Constitutes INDORSEE the AGENT OF INDORSER (AGENCY type: NEGOTIABLE.
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”

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