CHAPTER 1 FORM AND INTERPRETATION

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

3 FUNCTIONS & IMPORTANCE OF NI

1. Used as a substitute for money

*NI differs from money; NI is valuable/worthless depending on financial ability

of parties to them

2. Media of exchange
3. Media of credit transaction

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

Check – for immediate payment

BofE & PN – for circulation of credits

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

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

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

10 COMMON FORMS OF NI (bbbb dd cpt)

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

6 INSTRUMENTS W/ LIMITED NEGOTIABILITY

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

2. TREASURY WARRANT
- gov’t warrant for payment of money covering payment/replenishment of cash
advances for official expenditures

3. POSTAL MONEY ORDER

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

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

6. WAREHOUSE RECEIPT
- NO unconditional promise/order to pay a sum certain in money

Section 1 Memorize

NI – contractual obligation to pay money

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

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

MAKER – person issuing PN

DRAWER – person issuing BofE

UNCONDITIONAL PROMISE – PN
UNCONDITIONAL ORDER – BofE

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

*There is NO ORAL NI.

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

be bound.

*If the signature placed in instrument, UNCLEAR what capacity person

intended to sigh, he is deemed INDORSER not maker/drawer.

*NI CEASES to be negotiable if the INDORSEMENT prohibits FURTHER

negotiation of instrument.
Eg. Pay to Pedro Cruz.

*PLACE & DATE NOT ESSENTIAL to negotiability of instrument EXCEPT in cases,

date IS necessary to know the due/interest.

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

- I agree to pay
- I will pay
- I bind myself to pay
- good to A or order
- due to A or order
- I acknowledge to be indebted
*MERE acknowledgment of debt w/o the word ORDER or BEARER (words of
negotiability) DOES NOT satisfy negotiability.

*The word TO THE ORDER OF and OR ORDER is a promise to pay as

ordered/commanded by PAYEE but may be payable to BEARER.

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

DEMAND.

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

SEVERALLY.

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

December 29, 2013

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

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

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

2 IDEA & PURPOSE OF BofE

1. 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.

*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

(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)

- 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
NON-NEGOTIABLE as the promise/order is LIMITED to paying one person.

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

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

Section 9 PAYABLE TO BEARER WHEN:

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

- Payable to person named therein or BEARER.

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

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

- Name of PAYEE is not name of any person.

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

- Only/last INDORSEMENT is indorsement in BLANK.

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

Section 10 Terms, sufficient when:

CLEARLY INDICATE THE INTENTION to conform the requirements thereof.
*A MERE defect in language/grammatical error – still NEGOTIABLE

Section 11 Presumption as to date

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

Section 13 Date may be inserted when:

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

ANY HOLDER may insert therein the true date of issue/acceptance and the
instrument shall be payable accordingly.

The insertion of a WRONG DATE DOES NOT avoid the instrument in the hands of
the SUBSEQUENT HDC; but as to him the date so inserted is to be regarded as
the TRUE DATE.

*The insertion of WRONG DATE constitutes MATERIAL ATERATION.

Section 14 INCOMPLETE and DELIVERED (personal defense)

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

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

2. AUTHORITY TO PUT ANY AMOUNT

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

3. RIGHT AGAINST PARTY PRIOR TO COMPLETION

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

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

Section 15 INCOMPLETE and UNDELIVERED (real defense)

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

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

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

2. DEFENSE AVAILABLE TO PARTIES PRIOR TO DELIVERY

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

Section 16 COMPLETE and UNDELIVERED (personal defenses)

(4) RULES
1. UNDELIVERED – Every contract on NI even if it is completely written is
INCOMPLETE AND REVOCABLE UNTIL it is delivery for the purpose of giving it
effect.

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
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.
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.
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.

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.

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

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

3 BASIC METHODS TO TRANSFER NI

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

*NI can be NEGOTIATED or ASSIGNED; NON-NI can only be

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

NEGOTIATION
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)
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 NIL Governed by CIVIL CODE on

assignment of credits

Can there be negotiation to a PAYEE?

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

*If negotiation refers to instrument already completely executed/ISSUED, then

ONLY HOLDERS SUBSEQUENT TO PAYEE can acquire title by NEGOTIATION.

*There is NEGOTIATION also to PAYEE when instrument delivered BACK to him

by LAST HOLDER. (In such case, indorsement of LAST HOLDER not necessary
because PAYEE is remitted to his FORMER RIGHTS, and all intervening parties
are DISCHARGED from LIABILITY.)

Section 31 Indorsement; how made

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

INDORSEMENT (from Latin in dorsa – writing on the back) – writing of 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.
Just like signature of maker/drawer, INDORSEMENT may be written in INK,
PRINTED, (RUBBER) STAMPED, TYPEWRITTEN, or any means that will create a
mark.

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

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

Section 32 Indorsement must be of entire instrument

(object of provision: to avoid multiplicity of suits/actions in court)
NO NEGOTIATION if indorsement transfer ONLY PART of AMOUNT payable (not
HOLDER but merely is an ASSIGNEE; renders instrument NON-NEGOTIABLE, NOT
PAYEE/BEARER of note, NOT INDORSEE.
(eg. The total payable is P10 000, “Pay to A P8 000” – NOT VALID NEGOTIATION)
Exception to entirety: Where instrument has been paid in part, it may be
indorsed as to the RESIDUE.
(eg. The total payable is P10 000, P2 000 is already paid. “Pay to A P8 000” –
VALID NEGOTIATION)
NO NEGOTIATION if indorsement transfer instrument to 2 or more indorsees
severally.
(eg. Pay to A P8 000 and pay to B P2 000 – NOT VALID NEGOTIATION)

However, there is VALID NEGOTIATION if indorsees are JOINT.

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

Section 33 Kinds of Indorsement

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

Section 34 Special, and blank indorsement

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

*If instrument originally payable to ORDER, INDORSEMENT NECESSARY for

FURTHER negotiation of instrument.

*If instrument originally payable to BEARER, it may be further negotiated by

indorsement or even by mere delivery but REMAINS a BEARER instrument even
if specially indorsed. (BEARER ALWAYS A BEARER.)

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

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

*If instrument is payable to ORDER on its face and the ONLY or LAST indorsement
is in BLANK, it is CONVERTED into BEARER instrument.
*If instrument is payable to BEARER on its face, ANY indorsement, whether
SPECIAL or BLANK, does NOT change as BEARER instrument. (BEARER ALWAYS A
BEARER.)

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

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

Section 35 Blank → SPECIAL

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

*The INSERTION of UNATHORIZED contracts constitutes MATERIAL ALTERATION

and AVOIDS INDORSEMENT.

[eg. BLANK → SPECIAL

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

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

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

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

a. Prohibits further negotiation of instrument.

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

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

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

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

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

Mere absence of words of negotiability does NOT make the indorsement

restrictive.

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

Note: This is only a handful of reviewer. I hope this helps. :)