CHAPTER 1 FORM AND INTERPRETATION

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

- letter requesting one person to make

advances to 3rd person on the credit of writer
2. TREASURY WARRANT
- govt warrant for payment of money covering
payment/replenishment of cash advances for
official expenditures
3. POSTAL MONEY ORDER

3 FUNCTIONS & IMPORTANCE OF NI

1. Used as a substitute for money
*NI differs from money; NI is valuable/worthless
depending on financial ability of parties to
them
2. Media of exchange
3. Media of credit transaction
PURPOSE OF NEGOTIABILITY
- Allow men of UNDOUBTED credit to carry on
business enterprise with the use of instruments
knowing that other businessmen will treat this
promises as CASH.
Check for immediate payment
BofE & PN for circulation of credits
2 CHARACTERISTICS/FEATURES OF NI
1. Negotiability quality/attribute where NI
give the HDC the right to hold NI & collect sum
payable for himself FREE from defences
*A bona fide holder, FREE from PERSONAL
DEFENSES, but may be subject to REAL
DEFENSES.
2. Accumulation of Secondary Contracts (as
they are transferred from one person to
another)
10 COMMON FORMS OF NI (bbbb dd cpt)
1. BofE
2. Bank check
3. Bank notes
4. Bankers acceptance
5. Bonds
6. Drafts
7. Due bills
8. Check
9. Promissory Notes
10. Trade acceptance

6 INSTRUMENTS W/ LIMITED NEGOTIABILITY

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

4. BILL OF LADING
- NO unconditional promise/order to pay a sum
certain in money
5. CERTIFICATE OF STOCK
- written instrument signed by proper officer of
corporation stating name of person (owner of
designated # of shares of its stock)
- NO unconditional promise/order to pay a sum
certain in money
6. WAREHOUSE RECEIPT
- NO unconditional promise/order to pay a sum
certain in money
Section 1 Memorize
NI contractual obligation to pay money
To determine the negotiability of an instrument,
consider the ff:
1. whole of the instrument
2. only what appears on FACE of the instrument
3. provisions of NIL esp. Section1
MAKER person issuing PN
DRAWER person issuing BofE
UNCONDITIONAL PROMISE PN
UNCONDITIONAL ORDER BofE
*Where the meaning is doubtful, the courts
adopted the policy of resolving IN FAVOR OF
NEGOTIABILITY of the instrument.
*There is NO ORAL NI.
*The signature (of maker/drawer) is a prima
facie evidence of his intention to be bound.
*If the signature placed in instrument,
UNCLEAR what capacity person intended to
sigh,
he
is
deemed
INDORSER
not
maker/drawer.
*NI CEASES to be negotiable if the
INDORSEMENT prohibits FURTHER negotiation
of instrument.
Eg. Pay to Pedro Cruz.

*PLACE & DATE NOT ESSENTIAL to negotiability

of instrument EXCEPT in cases, date IS
necessary to know the due/interest.

DRAWEE is to be charged against the funds of

DRAWER. But this may be omitted.

*Instead of promise to pay, other acceptable

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

2 IDEA & PURPOSE OF BofE

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

*MERE acknowledgment of debt w/o the word

ORDER or BEARER (words of negotiability)
DOES NOT satisfy negotiability.
*The word TO THE ORDER OF and OR ORDER is
a promise to pay as ordered/commanded by
PAYEE but may be payable to BEARER.
*When NO TIME of payment is expressed, an
instrument is payable ON DEMAND.
*A note may be signed by SEVERAL persons
either JOINTLY or JOINTLY AND SEVERALLY.
PN maker, payee
BofE drawer, drawee, payee (parties need
NOT ALL be distinct persons. Thus, drawer may
draw on himself payable to his own order.)

December 29, 2013

Section 2 Certainty as to sum, what

constitutes
Sum payable is SUM CERTAIN although
paid:
- w/ interest
- by stated installments
- by stated installments w/ provision that
upon
default
in
payment
of
any
installment/interest,
the
whole shall
become due
- w/ exchange, fixed/current rate
- w/ costs of collection/attorneys fee in
case payment not made at maturity
*If instrument calls for an ACT OTHER THAN
payment of money NOT NEGOTIABLE

Manila
P1000
Thirty
days
after
date, pay
to (unconditional order to pay) to A or order the
sum of One Thousand (P1000) Pesos. Value
received and charge the same account of
(Sgd.) B
To C
College, Sampaloc
Manila
LEGEND:
B drawer
C- drawee; not really a party to the bill,
assumes liability ONLY when he accepts the bill
usually by writing the word ACCEPTED and
signs his name on the face where he
becomes ACCEPTOR and NOT A DRAWEE. By
being this (acceptor), he becomes primarily
liable like the MAKER of a note; DRAWER is
ONLY A SURETY then.
*The words (in BofE) CHARGE THE SAME TO
THE ACCOUNT OF means amount to be paid by

*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 NONNEGOTIABLE
*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
NEGOTIABLE

FOREIGN

CURRENCY

*Payment w/ EXCHANGE RATE NEGOTIABLE

- applicable only to foreign bills

*If payment not made at maturity, then there is
ADDED amount due (eg. Cost of collection,
attorneys fee) NEGOTIABLE
*Attorneys fee may be REDUCED by courts if
found UNREASONABLE; if attorneys fee NOT
specified, it shall be in REASONABLE SUM.
*A provision of to pay ALL costs, charges and
expenses incurred by PAYEE in ANY legal
proceedings for collection of debt NONNEGOTIABLE
*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

*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
CONTINGENCY NON-NEGOTIABLE

to

* If language used is AMBIGUOUS or OBSCURE,

courts
usually
decide
IN
FAVOR
OF
NEGOTIABILITY.
*A MERE recital of consideration for instrument
is STILL UNCONDITIONAL NEGOTIABLE
(statement merely identifies the transaction
w/c gives rise to instrument)
(eg. I promise to pay to order of P1000 being
the price of the car this day sold and delivered
to me; as per our contract; accordance w/ our
contract)
*If promise/order is subject to TERMS AND
CONDITIONS NON-NEGOTIABLE
(As already stated, the negotiability of
instrument is to be determined by what
appears on its FACE AND NOT ELSEWHERE.)
Section 4 Determinable future time, what
constitutes
fixed
period
after
date/sight
NEGOTIABLE
- on/before a fixed or determinable future
time specified - NEGOTIABLE
- ON/AFTER (fixed period) the occurrence
of a specified event w/c is CERTAIN to
happen, not known when NEGOTIABLE
(eg. Death of father); if BEFORE NONNEGOTIABLE
*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.

*In BofE, there must be an ORDER TO PAY one

party to another, OTHERWISE, it is NONNEGOTIABLE.

DEMAND INSTRUMENT payment at anytime

TERM INSTRUMENT payabe only UPON
ARRIVAL of time for payment

ORDER command/imperative direction

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

*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.

Section
5
Additional
provisions
still NEGOTIABLE:
authorizes
SALE
OF
COLLATERAL
securities
authorizes
a CONFESSION
OF
JUDGMENT (written acknowledgment by
defendant of his indebtedness/liability to
plaintiff) if not paid at maturity
- waives the BENEFIT OF ANY LAW
intended for advantage/protection of
obligor.
(eg. Pay bearer P1000. Notice of dishonor
waived.)
- gives HOLDER the election to require
something to be done in lieu of payment
of money
(eg. I promise to pay P1000 to A or order
or an air conditioner at the option of the
holder NEGOTIABLE;
I promise to pay P1000 to A or order or air
conditioner NON-NEGOTIABLE because
HOLDER cannot COMPEL him to make
payment in MONEY)
Section 6 OMISSIONS; SEAL; PARTICULAR
IN MONEY
Still NEGOTIABLE:
- NO DATE
(If there is a date stated but there is no
such date in calendar, the law will deem
the NEAREST DATE of the month the date
intended; eg. Note dated Apr31 will be
construed to be intended for Apr30)
- NO VALUE given
(eg. NO written for value received)
- NO PLACE where it is drawn or is
payable
(An instrument that does not specify the
place of payment is presumed to be
payable at the place/residence/business
of MAKER/DRAWER.)
- WITH SEAL
- Designates a PARTICULAR KIND of
current money as payment
(eg. I promise to pay A or order P1000 in
Central Bank of fifty peso bills.)
Section 7 Payable on DEMAND when:
- EXPRESSED to be payable ON DEMAND,
at sight, or on presentation
- NO TIME for payment is expressed
(eg. Pay to A or order P1000)

Where the instrument is issued, accepted,

or indorsed when OVERDUE, it is, as
regards the person so issuing, accepting,
or indorsing it, PAYABLE ON DEMAND.
*An OVERDUE instrument is a DEMAND
paper. A HOLDER has immediate right of
payment for money promised/ordered to
be paid.
Instead of ON DEMAND, other acceptable
terms can be used:
- at sight (used in BofE)
- on presentation
- on call
- at anytime called for
*PAYABLE ON DEMAND as regards the MAKER
(late issuance), the ACCEPTOR (late received),
the INDORSER (late indorsed)
Section 8 Instrument may be drawn
PAYABLE TO THE ORDER of:
- PAYEE; not maker/drawer/drawee
- drawer
(eg. Pay to the order of myself P1000)
or maker
(eg. I promise to pay to the order of
myself P1000)
- 2 or more PAYEES jointly
(eg. Pay to the order of A and B P1000)
- 1 or more of several PAYEES
(eg. Pay to the order of A or B P1000)
- 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 NONNEGOTIABLE 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 NONNEGOTIABLE 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
conform the requirements thereof.

to

*A MERE defect in language/grammatical error

still NEGOTIABLE
Section 11 Presumption as to date
If instrument BEARS A DATE, it is
PRESUMED to be the TRUE DATE (prima
facie) made by maker, drawn by drawer,
accepted by drawee, or indorsed by
payee/holder.
*He who claims that some other date is
the true date has the burden to
ESTABLISH the CLAIM.
Section 12 Ante-dated and Post-dated
Instrument is VALID although it is ANTEDATED (earlier than true date) or POSTDATED (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
- 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,
instrument
though
complete
in
particulars, there is NO CONTRACT.

the
all

(2) RULES
1. DEFENSE EVEN AGAINST HDC
- Law is specific that instrument is NOT a VALID
CONTRACT in the hands of any HOLDER even
HDC.
2. DEFENSE AVAILABLE TO PARTIES PRIOR TO
DELIVERY
- The invalidity of the instrument is only w/
reference to the parties whose signatures
appear on the instrument BEFORE and NOT
AFTER DELIVERY.
(eg. A(maker) P(steals) B C D;
Instrument can be enforced against P, B, C
because, as indorsers, they warrant that the
instrument is GENUINE and in all respects what
it purports to be, etc. As their signatures
appear on the instrument after delivery, the
instrument is valid as to them; In case of P, he
is liable not merely because he is an indorser
but also because he is the one responsible for
the theft, and the completion and negotiation
of the instrument.)
Section 16 COMPLETE and UNDELIVERED
(personal defenses)
(4) RULES

1. UNDELIVERED Every contract on NI even if

it is completely written is INCOMPLETE AND
REVOCABLE UNTIL it is delivery for the purpose
of giving it effect.
a.
DELIVERY
transfer
of
possession,
actual/constructive, from one person to
another. It may be made either by the
maker/drawer himself or through a duly
authorized agent.
b. ISSUE FIRST delivery of the instrument,
complete in form, to a person who takes it as
HOLDER.
C. HOLDER PAYEE/INDORSEE of bill/note who
is in possession of it, or the BEARER thereof.
2. IN POSSESSION OF PARTY OTHER THAN HDC
- If a complete instrument is found in the
possession of an IMMEDIATE PARTY (know the
conditions/limitations placed upon delivery of
instrument) or a REMOTE PARTY (indirect
contractual relation to each other) other than
HDC, there is prima facie presumption of
delivery but subject to rebuttal.
- An UNDELIVERED instrument is INOPERATIVE
because DELIVERY is a PREREQUISITE to
LIABILITY. However, if instrument is NO LONGER
in the possession of the person who signed it
and it is COMPLETE in its terms, a VALID AND
INTENTIONAL delivery by him is PRESUMED
until the contrary is proved.
3. DELIVERED UNCONDITIONALLY OR FOR A
SPECIAL PURPOSE
- If delivery was made/authorized, it may be
shown to have been conditional, or for a
special purpose only and not for the purpose of
transferring the property (title) to the
instrument.
- When delivery is made, it is presumed to be
made w/ the intention to transfer ownership of
the instrument to the payee.
- (eg. A delivers the note to B on condition that
it will not be binding on him UNTIL co-maker
has been procured or for safekeeping, or for
collection only.
B cannot enforce the instrument against A
because A can set up the defense that the
delivery was conditional or for a special
purpose only and not for the purpose of
transferring title to the instrument.
4. IN THE HANDS OF HDC
- If a COMPLETE instrument is in the hands of
HDC, a valid delivery thereof by all parties
PRIOR to him is CONCLUSIVELY PRESUMED.
A presumption is said to be CONCLUSIVE when
it admits of no evidence to the contrary

Section 17 Construction where instrument

is AMBIGUOUS
a. Sum payable expressed both in WORDS
and in FIGURES, and there is discrepancy
between the two, SUM in WORDS is SUM
PAYABLE;
but
if
WORDS
are
AMBIGUOUS/UNCERTAIN, FIGURES may be
the reference.
b. Instrument w/ interest but NO DATE
specifies, interest runs from the date of
instrument; if instrument is UNDATED, from
issue thereof.
c. Instrument UNDATED, considered to be
dated as of time it was ISSUED.
d. Conflict between WRITTEN and PRINTED
provisions of instrument, WRITTEN provisions
prevail.
*The reason for the rule is that the written
words are deemed to express the true intention
of the MAKER/DRAWER because they are
placed there by himself w/o any particular
contract in view.
e. Instrument is AMBIGUOUS whether note or
bill, the HOLDER may treat it as EITHER at HIS
ELECTION.
f. Signature placed in instrument UNCLEAR
what capacity person making the same
intended to sign, he is deemed INDORSER.
*Signature of: (usually)
MAKER lower right-hand corner
DRAWEE lower left-hand corner
HOLDER - back
g. Instrument contain words I promise to pay
signed by TWO OR MORE PERSONS, they are
deemed to be JOINTLY AND SEVERALLY LIABLE
thereon.
*I promise to pay signed by 2 or more
persons SOLIDARY LIABILITY (anyone of the
signers may be held liable for the whole
amount of instrument)
*We promise to pay signed by 2 or more
persons JOINT LIABILITY (there are as many
debts are there are debtors, each debt being
considered distinct and separate from each
other)
Section 18 Liability of person signing in
trade or assumed name
GENERAL
RULE: Only
persons
whose
signatures appear on an instrument ARE
LIABLE thereon.
EXCEPTIONS:

a. Where a person signs in a trade or

assumed name.
b. The PRINCIPAL is liable if a duly
authorized agent signs on his own behalf.
c. In case of forgery, the FORGER is
LIABLE even if his signature does not
appear on the instrument.
d. When the ACCEPTOR makes his
acceptance of a bill on a SEPARATE paper.
e. Where a person makes a WRITTEN
promise to ACCEPT a BILL BEFORE it is
drawn.
Section 19 Signature by agent; authority;
how shown
- The MAKER/DRAWER may sign the
instrument PERSONALLY or by another
DULY AUTHORIZED by him.
- The authority of the AGENT may be
shown, as in other cases of agency, to
have been given ORALLY or in WRITING
subject to the provisions of the STATUTE
OF FRAUDS. It has been held competent
for the AGENT to sign simply the
PRINCIPALS NAME and to show his
authority to do so by other evidence.
Section 20 Liability of person signing as
agent, etc.
(3) When agent MAY ESCAPE personal
liability:
1. He is duly authorized;
2. He add words to his signature
indicating that he signs AS AN AGENT,
that is, for or on behalf of a principal, or I
a representative capacity;
3. He discloses his PRINCIPAL.
*The MERE addition of DESCRIPTIVE WORDS
w/o DISCLOSING the PRINCIPAL will not relieve
signer from personal liability, although he add
to his signature the word AGENT, TRUSTEE,
ADMINISTRATOR, GUARDIAN, or DIRECTOR
(words added are but description personae
describing the person who signed the
instrument)
Section 21 Effect of signature by
PROCURATION
PROCURATION act by w/c a PRINCIPAL
gives power to another to act in HIS
PLACE as he could himself.
- has special and technical meaning; gives
a WARNING that the AGENT has but a
LIMITED AUTHORITY so that IT IS the duty
of the person dealing w/ him to INQUIRE
into the extent of his (AGENT) authority.

*The PRINCIPAL is NOT BOUND if the agent has

exceeded the ACTUAL LIMITS of his authority,
although he may acted w/in the general scope
of the agency.
(eg. A signature by procuration may be made
as follows:
A Mercado
Per Procuration: B San Miguel
Instead of per procuration, per proc., P.P.,
or pp may be used.
Section 22 Effect of indorsement by
INFANT or CORPORATION
The
indorsement/assignment
of
the
instrument by a corporation or by an
infant PASSES the property therein,
notwithstanding that from want of
capacity, the corporation or infant may
incur NO LIABILITY thereon.
EFFECT OF INDORSEMENT BY INCAPACITATED
PERSONS
1. MINORS
- As a general rule, contracts entered into by a
minor ARE VOIDABLE at his instance or at the
instance of his guardian.
a. While MINOR NOT BOUND by his
indorsement for lack of capacity, he CAN
TRANSFER certain RIGHTS. Minority is a real
defense available to MINOR.
b. A MINOR may be BOUND where he
is guilty of ACTUAL FRAUD committed by
specifically stating that he is of age, when, in
fact he is not.
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.

DEFRAUD (eg. Signing of anothers name;

alteration of an instrument in the name,a
mount, description of person and the like)
- a REAL DEFENSE even against HDC
(2) Cases where SIGNATURE is wholly
INOPERATIVE and NO RIGHT can be acquired
through the FORGED SIGNATURE:
1. Where signature on instrument is affixed by
one who DOES NOT claim to act as an agent
and who has NO AUTHORITY to bind the person
whose signature he has forged; and
2. Where signature is affixed by one who
purports to be an AGENT BUT NO AUTHORITY
to bind the ALLEGED principal.
(2) CASES OF FORGERY IN GENERAL
1. Forgery of PROMISSORY NOTES
- indorsement of the note
- MAKERs signature
2. Forgery of BILLS OF EXCHANGE
- indorsement of the bill
- DRAWERs signature (either w/ acceptance by
DRAWEE; or w/o such acceptance but the bill is
paid by DRAWEE)
*Section 23 DOES NOT purport to declare the
instrument TOTALLY VOID nor the GENUINE
signatures thereon INOPERATIVE. IT IS ONLY
THE FORGED/UNAUTHORIZED SIGANTURE that
is declared to be INOPERATIVE.
In other words, RIGHTS MAY STILL EXIST and be
enforced by virtue of such instrument as to
those whose signature thereto are found to be
genuine.
M P A, X (obtains possession of note and
forged As signature) B C
C cannot enforce the instrument against M and
P because Cs rights against them are CUT OFF
by the FORGED SIGNATURE of A w/c is WHOLLY
INOPERATIVE.
Neither can C enforce the note against A
because As signature is wholly inoperative. C
has NO RIGHT to retain, discharge, or ENFORCE
PAYMENT OF, the note UNDER the forged
signature of A.
But C may go against B whose signature is
GENUINE and therefore, OPERATIVE. B is a
GENERAL INDORSER who warranted to C that
the instrument is GENUINE and was VALID and
SUBSISTING (existing) at the time of Bs
indorsement.

Section 23 Effect of FORGED signature

FORGERY counterfeit-making or fraudulent
alteration of any writing w/ INTENT TO

Of course, B or C has a right of recourse

against X, the forger.

A can recover from M and P because his rights

against them WERE NOT affected by forgery.
The signature of M and P are genuine and they
are liable to A on their contract.
2 EXCEPTIONS TO THE GENERAL RULE THAT NO
RIGHT/TITLE CAN BE ACQUIRED TO AN NI
THROUGH
OR
UNDER
A
FORGED/UNAUTHORIZED SIGNATURE
1. If the party against whom it is sought to
enforce such right is PRECLUDED (stopped)
from setting up forgery or want of authority;
and
2. Where forged signature is NOT necessary to
the HOLDERS TITLE in w/c case the forgery
may be DISREGARDED.
(2) PERSONS PRECLUDED FROM SETTING UP
THE DEFENSE OF FORGERY
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

3. Where bill payable to order

- Where the bill is payable to ORDER, the party
whose indorsement (inoperative) is forged IS
NOT LIABLE to any holder even HDC.
a. If DRAWEE pays under a forged
indorsement, DRAWER NOT LIABLE on the bill
and DRAWEE may not debit the DRAWERs
account.
b. Where, however, checks received
MERELY FOR COLLECTION and deposit, the
bank, as agent, CANNOT BE EXPECTED to
know/ascertain the GENUINENESS of all PRIOR
indorsements.
4. Where bill payable to bearer
- In case the bill is originally payable to
BEARER, the DRAWEE may debit the DRAWERs
account in spite of the forged indorsement. The
reason is that the forged instrument is NOT
NECESSARY to the title of the holder. The
DRAWEE cannot recover from the HOLDER.

Section 30 What constitutes negotiation

Negotiation to constitute the transferee the
HOLDER thereof

READ pp.76-77
(4) RIGHTS OF PARTIES IN CASES OF FORGED
INSTRUMENTS
1. Where note payable to order
- Where the note is payable to ORDER, the
party whose indorsement (inoperative) is
forged IS NOT LIABLE to any holder even HDC.
- The other parties (including the MAKER) prior
to the party whose signature is forged ARE NOT
ALSO LIABLE to ANY HOLDER. The instrument
being payable to order, can be negotiated
ONLY BY INDORSEMENT COMPLETED BY
DELIVERY. But since the indorsement is forged,
it is INOPERATIVE, and therefore, cannot
operate to transfer ANY RIGHT/TITLE over the
instrument.
2. Where note payable to bearer
- Where the note, mechanically complete, is
originally payable to bearer, the party whose
indorsement is forged is LIABLE to HDC but
NOT to one who IS NOT HDC.
- The other parties (including the MAKER) prior
to the party whose signature is forged, MAY
ALSO BE HELD LIABLE by one who is NOT HDC.
The reason is that the instrument being
originally payable to bearer, it can be
negotiated by MERE DELIVERY even w/o
indorsement. Hence, even if the indorsement is
forged, the FORGERY MAY BE DISREGARDED.

2 METHODS OF NEGOTIATION
1. BEARER delivery
2. ORDER indorsement then delivery
*ANY person in possession of BEARER
instrument is ALWAYS the bearer thereof,
although he may have NO legal RIGHT thereto.
Meaning, if instrument is negotiated to HDC,
the latter may acquire BETTER RIGHT than
transferor.
*NO NEGOTIATION if the transfer does NOT
make
the
transferee
the
HOLDER
of
instrument.
(eg. If M makes a note payable to P or order,
then
P
delivers w/o indorsement
to
A,
negotiation is NOT affected because A, by such
transfer, DOES NOT become the HOLDER.)
just an ordinary ASSIGNMENT because it is
ORDER instrument but NOT indorsed.
*PAYMENT of check (or other bill) by draweebank is NOT NEGOTIATION and does NOT make
bank the HOLDER; BANK is not the payee or
indorsee; check is EXTINGUISHED and CANNOT
be put in circulation again to bind the drawer
or indorser.
* The writing of HOLDERs name on the back of
the check before surrendering for PAYMENT to
drawee-bank is NOT INDORSEMENT. Signature
merely serves as RECEIPT OF MONEY. Upon

payment, the CHECK becomes merely

VOUCHER, NOT a transfer of TITLE thereto.

3 BASIC METHODS TO TRANSFER NI

1.
ISSUE
1st DELIVERY
of
instrument
COMPLETE in form to a person who takes it as
HOLDER
- 1st TRANSFER of instrument to
PAYEE
2. NEGOTIATION - to constitute the transferee
the HOLDER thereof
3. ASSIGNMENT assignee is placed in the
position of assignor; assignee acquires
instrument subject to personal and real
defenses available against assignor
*NI can be NEGOTIATED or ASSIGNED; NON-NI
can only be ASSIGNED/TRANSFERRED, NOT
negotiated.
------------------------------------------------------------------------*Indorsement NOT ONLY mode of transfer but
also involves NEW CONTRACT and OBLIGATION
on part of INDORSER an IMPLIED guaranty
that instrument be paid according to terms
thereof.
NEGOTIATION
Only to NI
Transferee is HOLDER
HDC - REAL defenses
May acquire BETTER title
than PRIOR party
GENERAL
INDORSER
warrants SOLVENCY of
PRIOR parties

INDORSER NOT LIABLE

(unless
there
is
PRESENT-MENT
and
NOTICE of DISHONOR)
Governed by NIL

ASSIGNMENT
All contracts
Transferee is ASSIGNEE
ASSIGNEE PERSONAL
and REAL defenses
Merely steps in shoes of
ASSIGNOR
ASSIGNOR does NOT
warrant SOLVENCY of
prior
parties
(unless
stipulated
or
INSOLVENCY known to
him)
ASSIGNOR
IS
LIABLE
even w/o NOTICE OF
DISHO-NOR

Governed by CIVIL CODE

on assignment of credits
Can there be negotiation to a PAYEE?
MAKER/DRAWER PAYEE payee acquires title
by ISSUANCE, NOT negotiation
MAKER/DRAWER AGENT of MAKER/DRAWER
PAYEE payee acquires title by NEGOTIATION
*If negotiation refers to instrument already
completely
executed/ISSUED,
then
ONLY
HOLDERS SUBSEQUENT TO PAYEE can acquire
title by NEGOTIATION.
*There is NEGOTIATION also to PAYEE when
instrument delivered BACK to him by LAST
HOLDER. (In such case, indorsement of LAST

HOLDER not necessary because PAYEE is

remitted to his FORMER RIGHTS, and all
intervening parties are DISCHARGED from
LIABILITY.)
Section 31 Indorsement; how made
Indorsement be written on INSTRUMENT itself
or upon paper attached (allonge) thereto.
Signature of INDORSER, w/o additional words,
is SUFFICIENT INDORSEMENT.
INDORSEMENT (from Latin in dorsa writing on
the back) writing of indorsers name on the
instrument w/ the intent EITHER 1.) to transfer
TITLE to the same, or 2.) to STRENGTHEN
security of HOLDER by assuming contingent
liability for its future payment, OR BOTH.
*Indorsement w/o delivery conveys NO TITLE
and NO HOLDER.
NECESSITY (SIGNIFICANCE) OF INDORSEMENTS
1. Essential to the execution and for FURTHER
NEGOTATION of ORDER instrument.
(eg. Note payable: to the order of P, P must
indorse it BEFORE it can be further negotiated)
2. Not necessary to a mere ASSIGNMENT.
(Thus, one can acquire title w/o indorsement of
ORDER instrument but he CANNOT be HDC
thereof although entitled to indorsement
made.)
3. Determines SUBSEQUENT negotiations or
transfer of instrument.
(Indorsement may determine whether another
indorsement can be further negotiated [special
indorsement] w/ indorsee name;
or NO further indorsement required for
negotiation because it is converted into a
BEARER
instrument
negotiated
by
DELIVERY [blank instrument] w/ indorsee
signature only;
or
RESTRICTED
for
further
negotiation [restrictive indorsement] w/
additional words w/c prohibit/limit further
negotiation)
FORM OF INDORSEMENT
Law does NOT require EXCLUSIVE FORM by w/c
indorsement be accomplished but it must be IN
WRITING.
Just
like
signature
of
maker/drawer,
INDORSEMENT may be written in INK, PRINTED,
(RUBBER) STAMPED, TYPEWRITTEN, or any
means that will create a mark.
LOCATION OF INSTRUMENT
1. On instrument itself
*As a matter of practice, indorsement is
WRITTEN AT THE BACK of instrument (referred
to as dorsal portion of instrument) but it may
be written on the face (although it would entail

risk of being held liable as co-maker [PN] or codrawer [BofE].

2. Upon paper attached thereto (allonge)
*A paper that is merely clipped/pinned to an
instrument is NOT an ALLONGE, and anything
written on it CANNOT be considered as
INDORSEMENT.
Accordingly,
person
in
possession of instrument is NOT the HOLDER.
*If there is still space for indorsements, the use
of ALLONGE should be avoided so as not to
cause CONFUSION on ORDER OF LIABILITY of
indorsers.
Section 32 Indorsement must be of entire
instrument
(object of provision: to avoid multiplicity of
suits/actions in court)
NO NEGOTIATION if indorsement transfer ONLY
PART of AMOUNT payable (not HOLDER but
merely is an ASSIGNEE; renders instrument
NON-NEGOTIABLE, NOT PAYEE/BEARER of note,
NOT INDORSEE.
(eg. The total payable is P10 000, Pay to A P8
000 NOT VALID NEGOTIATION)
Exception to entirety: Where instrument has
been paid in part, it may be indorsed as to the
RESIDUE.
(eg. The total payable is P10 000, P2 000 is
already paid. Pay to A P8 000 VALID
NEGOTIATION)
NO NEGOTIATION if indorsement transfer
instrument to 2 or more indorsees severally.
(eg. Pay to A P8 000 and pay to B P2 000
NOT VALID NEGOTIATION)
However, there is VALID NEGOTIATION if
indorsees are JOINT.
(eg. Pay to A and B P10 00 VALID
NEGOTIATION) A and B must BOTH indorse
UNLESS they are PARTNERS, or one is
authorized to indorse for both of them, in w/c
case, only one may indorse.
Section 33 Kinds of Indorsement
5 CLASSIFICATIONS OF INDORSEMENT
1. As to the METHODS OF NEGOTIATION
Special
Blank
2. As to the KIND OF TITLE TRANSFERRED
Restrictive
Non-restrictive
3. As to the SCOPE OF LIABILITY OF INDORSER
Qualified
Unqualified (general)
4.
As
to
the PRESENCE/ABSENCE
OF
LIMITATIONS
Conditional
Unconditional

5. Other kinds of indorsements

JOINT payable to two or more persons jointly
SUCCESSIVE in succession by several
indorsers who are liable prima facie in ORDER
in w/c they indorse
REGULAR Delivery Indorsement
IRREGULAR (ANOMALOUS) (placed signature
in blank before delivery) Indorsement
Delivery
FACULTATIVE indorser ENLARGES his liability
by writing over his signature a WAIVER of usual
demand (formal protest) and NOTICE OF NONPAYMENT (dishonor).
Section 34 Special, and blank indorsement
SPECIAL indorsement w/ indorsee name; can
be further negotiated.
[eg. Pay to A; Pay to the order of A; Pay to A or
order (Sgd.) B]
*If instrument originally payable to ORDER,
INDORSEMENT
NECESSARY
for
FURTHER
negotiation of instrument.
*If instrument originally payable to BEARER, it
may be further negotiated by indorsement or
even by mere delivery but REMAINS a BEARER
instrument even if specially indorsed. (BEARER
ALWAYS A BEARER.)
BLANK indorsement specifies no indorsee;
can be negotiated by DELIVERY because it
becomes a BEARER instrument.
[eg. I promise to pay A or order P10 000
(Sgd.) B
A (payee) may indorse the instrument in blank
by SIMPLY writing his signature at BACK of
instrument:
(Sgd.) A

*If instrument is payable to ORDER on its face

and the ONLY or LAST indorsement is in BLANK,
it is CONVERTED into BEARER instrument.
*If instrument is payable to BEARER on its face,
ANY indorsement, whether SPECIAL or BLANK,
does
NOT
change
as
BEARER
instrument. (BEARER ALWAYS A BEARER.)
*A BLANK INDORSEMENT may be negotiated by
delivery, or by indorsement and delivery.
However,
ORDER
instrument
SPECIALLY
INDORSED
AFTER
BLANK
INDORSEMENT
reacquires status as ORDER INSTRUMENT.
(eg. ORDER instrument indorsed: SPECIAL
SPECIAL BLANK (becomes a BEARER
instrument) SPECIAL (becomes ORDER
instrument, again) SPECIAL)
Section 35 Blank SPECIAL

- Done by writing APPROPRIATE words OVER

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

Section 36 Restrictive indorsement:

RESTRICTIVE INDORSEMENT RESTRAINS the
negotia-bility of instrument for purpose or to
the person stated therein.

*The INSERTION of UNATHORIZED contracts

constitutes MATERIAL ALTERATION and AVOIDS
INDORSEMENT.

b. Constitutes INDORSEE the AGENT OF

INDORSER (AGENCY type: AGENT NO TITLE to
instrument; holds instrument as AGENT of
principal, the restrictive indorser subject to
restrictive indorsement.)
Pay to B for collection
Pay to B for collection and remittance
Pay to B for collection only
Pay to B for deposit

[eg. BLANK SPECIAL

M P (special) A (blank) B (beomes
BEARER) (if indorse specially, negotiation will
be effected only indorsement) C (special
indorsee)
In example, the indorsement by P A and A B
may appear:
Pay to A
(Sgd.) P
(sgd.) A
B, as HOLDER of instrument w/ BLANK
indorsement, may PROTECT himself by
converting it into SPECIAL indorsement, as for
example, by writing Pay to B, thereby
indorsing it to himself. Thus, the ff will appear:

c. Vests title in INDORSEE in TRUST for or use

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

Pay to A
(Sgd.) P
Pay to B
(sgd.) A

a. Prohibits further negotiation of instrument.

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

*BUT if there are restrictive words stated like

only, it prevents further negotiation, become
restrictive indorsement, and NON-NEGOTIABLE.