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
(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
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.

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*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. DRAWER’s 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/attorney’s 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, attorney’s fee) – NEGOTIABLE
*Attorney’s fee may be REDUCED by courts if found
UNREASONABLE; if attorney’s fee NOT specified, it shall be in
REASONABLE SUM.
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*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.
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
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(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
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)
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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
(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
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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.
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
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- 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
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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.
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.
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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)
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.
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- 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 PRINCIPAL’S 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.
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 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.
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 another’s 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
- MAKER’s signature
2. Forgery of BILLS OF EXCHANGE
- indorsement of the bill
- DRAWER’s 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.
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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 A’s signature) –
B–C
C cannot enforce the instrument against M and P because C’s 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 A’s 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 B’s 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 HOLDER’S TITLE
in w/c case the forgery may be DISREGARDED.
(2) PERSONS PRECLUDED FROM SETTING UP THE DEFENSE OF
FORGERY
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.
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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 DRAWER’s
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 DRAWER’s 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.
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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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Page 17 of 22
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 indorser’s 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.
(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.
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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
*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].
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)

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

Page 19 of 22
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).

Page 20 of 22
*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.
[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:

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.

Page 21 of 22
 “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”
“Pay to A and to no other person”
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.)
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.

“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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