LAW 6: Law on Negotiable Instruments

I. BASIC CONCEPTS AND PRELIMINARY CONSIDERATIONS

A. Commercial Papers and Documents in General
1. Negotiable Instruments
a. Bills of Exchange - an ​unconditional order​ in writing addressed by
one person to another, signed by the person giving it, requiring the
person to whom it is addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to order or to
bearer.
Common Forms:
- Certificate of Deposit
- Bonds
- Bank Note
- Due Bill
Original Parties Involved:
- Maker
- Payee
b. Promissory Notes - an ​unconditional promise​ in writing made by
one person to another, signed by the maker, engaging to pay on
demand, or at a fixed or determinable future time, a sum certain in
money to order or to bearer.
Common Forms:
- Check
- Trade Acceptance
- Bank Draft
Original Parties Involved:
- Drawer
- Drawee
- Payee
2. Non-negotiable Instruments
a. Certificate of Stocks
- also known as a share certificate, represents a legal
interest and ownership in a company’s common stock and
its related stockholder rights.
- It is not a negotiable instrument because it lacks a requisite
given under Section 1. It does not contain a sum certain in
money.
b. Bill of Lading
- a legal document issued by a carrier to a shipper that
details the type, quantity, and destination of the goods
being carried.

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 - Deals with goods rather than money thus violating one of
the requirements for it to be considered a negotiable
instrument.
c. Treasury Warrants - a government warrant for payment of money
issued in favor of a public officer or employees payable out of a
specific fund or appropriation.
d. Postal Money Order - an order for the payment of money to the
payee named therein drawn by one post office upon another
under authority of law. Only one indorsement is allowed which is
inconsistent with negotiability.
e. Warehouse Receipts
- A document that provides proof of ownership of
commodities that are stored in a warehouse, depositary, or
vault for safekeeping.
f. Letter of Credit
- A letter issued by a bank to another bank (typically in a
different country) to serve as a guarantee for payments
made to a specified person under specified conditions.

B. Bills of Exchange and Promissory Notes

1. Fundamental Distinctions between Note and Bill

PROMISSORY NOTE BILL OF EXCHANGE

includes an unconditional promise includes an unconditional order

Two (2) parties: maker and payee Three (3) parties: drawer, drawee, and payee

Issuer/Maker of the note is primarily liable Issuer/Drawer is secondarily liable

Acceptance is not a requirement Acceptance by the drawee is required

2. Parties to a Note and a Bill and Their Liabilities

● Parties to a Note:
i. Maker: the person who executes the written promise to
pay.
ii. Payee: the person in whose favor the promissory note is
made payable

● Parties to a Bill:
i. Drawer: the person who executes the written order to pay.
He corresponds to the maker of a promissory note.

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 ii. Payee: the person whom the bill of exchange is drawn
payable
iii. Drawee: the person who is given the command by the
drawer to pay the payee.

Primarily liable:
1. Maker
2. Acceptor of a bill of exchange
Secondarily liable:
1. Drawer of bill
2. Indorser of note

3. Functions of Notes and Bills

a. Substitute of money
- Although they do NOT constitute legal tender, negotiable
instruments are used as a substitute for money
- It can go hand to hand in commercial markets
- Differs from money in the sense that negotiable
instruments are valuable or worthless depending upon the
financial ability of the parties to them
● LEGAL TENDER - that currency which a debtor
can legally compel a creditor to accept in payment
of a debt in money when tendered by the debtor in
the right amount.
● Effect if Accepted as a Form of Payment
- To take part the part of money in
commercial transactions free from all
personal defenses available against the
original owner.
b. Medium of Credit Transaction
- Means of credit to conduct and carry to completion
business and commercial enterprises
● The check is primarily used for immediate payment,
while the ordinary bill of exchange and the
promissory note are intended for the circulation of
credits.
c. Purchasing Medium
- Increases the purchasing medium in circulation
- They do away the need to physically count coins and bills
whenever payment is made in financial transactions and
obligations.
4. When a Bill is Treated as a Note

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 a. Similarity of the Drawer and Drawee- The drawee if an acceptor is
primarily liable to the bearer. Both are liable but in default of the
drawee the drawer is secondarily liable
b. Incapacity of the Drawee- the Drawer is secondarily liable in the
event the the drawee as the acceptor is incapacitated to such as
being insolvent
c. Drawee is a Fictitious Person - ​Sec. 9. ​When payable to bearer.​ -

(c) When it is payable to the order of a fictitious or non-existing

person, and such fact was known to the person making it so
payable; or
d. In Case of Ambiguity of the Instrument-
(a) Where the sum payable is expressed in words and also in figures and there is a
discrepancy between the two, the sum denoted by the words is the sum payable; but if
the words are ambiguous or uncertain, reference may be had to the figures to fix the
amount;

(b) Where the instrument provides for the payment of interest, without specifying the
date from which interest is to run, the interest runs from the date of the instrument, and if
the instrument is undated, from the issue thereof;

(c) Where the instrument is not dated, it will be considered to be dated as of the time it
was issued;

(d) Where there is a conflict between the written and printed provisions of the instrument,
the written provisions prevail;

(e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note,
the holder may treat it as either at his election;

(f) Where a signature is so placed upon the instrument that it is not clear in what capacity
the person making the same intended to sign, he is to be deemed an indorser;

(g) Where an instrument containing the word​ "I promise to pay"​ is signed by two or more
persons, they are deemed to be jointly and severally liable thereon.

5. Attributes of Negotiable Instruments

● Negotiability - is the transfer of the instrument from one person to
another in such a way as to constitute the transferee the holder of
the instrument.
● Accumulation of Secondary Contract - after the issuance of the
note or bill, it might undergo the process of negotiation. In which
case, additional contracts are added. For example, if the payee of

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 a note or a bill indorses the instrument to another, he becomes an
indorser and he makes a contractual commitment to pay if the
maker or drawee fails to pay. And further contracts will be added if
it is continuously negotiated afterwards
● Presumption of Consideration - Ordinarily, no person will issue a
bill or make a note without getting anything in return. This is called
consideration which is referred to in the law on negotiable
instruments as “value” defined in section 52 of the negotiable
instruments law as any consideration sufficient to support a simple
contract
6. Life Cycle of a Promissory Note and Bill of Exchange

a. Promissory Note

The Phases are governed by the following articles:

Issuance- Sec. 91 and 1
Negotiation- Sec. 30
Presentment for Payment - Sec. 70
Payment of the Maker- Sec. 60
Discharge of the Instrument- Sec. 119

If not paid, notice of dishonor to persons secondarily liable- Sec. 83 and 89

Payment of persons secondarily liable- Sec. 84

b. Bill of Exchange

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 The Phases are governed by the following articles:
1. Sec. 191
2. Sec. 30
2.1 Sec. 143
3. Sec. 70
4. Sec. 132
4.1 Sec. 83-89
4.1.1 Sec. 84
5. Sec. 62
5.1 Sec. 61
6. Sec. 119(a)

C. Checks as a Form of Bill of Exchange

1. Meaning of Checks
- A check is a bill of exchange drawn on a bank payable on
demand. (Sec. 185)
- It has also been defined as a written order addressed to a bank or
persons carrying on the business of banking by a party having
money in their hands requesting them to pay on presentment to a
person named therein or to his order, or to bearer, a named sum
of money.

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 2. General Characteristics
- It is a bill of exchange drawn against a deposit.
- It is payable upon demand.
- Its drawee is always the bank.
- Presentment of acceptance is unnecessary.
- It becomes stale or worthless within six (6) months from its date of
issue.
- It is made payable to bearer by putting the words “PAY TO
CASH”.
- Its drawer becomes criminally liable if dishonored by its
drawee-bank either for lack of sufficient funds or for being issued
against a closed account.
3. Kinds of Checks and Their Effects
a. Personal Checks
- Certified Checks - it is one which bears upon its face an
agreement by the drawee bank that the check will be paid
on presentation.
- Crossed Checks - it is one which bears across its face two
parallel lines drawn diagonally, usually on the upper left
side. It can only be deposited and may not be converted
into cash. It is generally deposited with a bank by the
holder where he keeps an account.
- Crossed specially: the name of a particular bank or
company is written between the parallel lines. The
drawee bank must pay the check only upon
presentment by such bank or company.
- Crossed generally: the words “and Co.” are written
between the parallel lines or said parallel lines are
empty. The drawee bank must pay the check
through the intervention of some bank or banker.
- Memorandum Check - it is one which bears the words
“memorandum,” “mem” or “memo” on its face, signifying
that the ​drawer​ engages to pay the bona fide holder
absolutely. In other words, the drawer may be sued the
same as a maker upon a promissory note.
b. Bank Checks
- Cashier’s Check - It is one drawn by the cashier of a bank
upon the bank itself, payable on demand to a payee. It is
deemed accepted by the act of issuance. It is really
the bank's own check and maybe treated as a promissory
note with the bank as the maker. (Sec. 130.) It operates as
an assignment of funds represented by the check to the

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 credit of the payee or holder. If the check is drawn by a
bank upon another bank, it is called a bank draft.
- Manager’s Check - lt is one drawn by the bank's
manager upon the bank itself. It is similar to the cashier's
check both as to effect and use.
- Traveler’s Check - It is one upon which the holder's
signature must appear twice, one to be affixed by him a
the time it is issued and the second or counter-signature,
to be affixed by him in the presence of the payee before it
is paid, otherwise, it is incomplete.
Its purpose is to provide the traveler safe and convenient
method by which to supply himself with funds in a
most all parts of the civilized world without the hazard of
carrying the money.
4. Instances when the Drawee-Bank Will Not Honor the Payment of a Check
- The bank is insolvent
- The drawer’s deposit is insufficient or he has no account with the
bank or said account had been closed or garnished
- The drawer is insolvent and proper notice is receiver by the bank
- Drawer dies and notice is received by the bank
- Holder refuses to identify himself
- The bank has reason to believe that the check has been forged
- Check is stale or post dated

II. REQUISITES OF NEGOTIABILITY

A. Meaning of Negotiable Instrument - ​a written contract for the payment of money which
complies with the requirements of Sec. 1 of the NIL, which by its form and on its face, is intended
as a substitute for money and passes from hand to hand as money, so as to give the holder in due
course (HDC) the right to hold the instrument free from defenses available to prior parties.

B. Legal Significance of the Instrument being Negotiable

In legal aspect an instruments must be negotiable for it is intended to substitute for
money, but an instrument , even if negotiable is not a legal tender.

C. Requisites of Negotiability in General

Section 1 of Negotiable instrument law of the Philippines states that an instuments in order to be
negotiable must
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.

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 D. Specific Requirements for each of the Requisites of Negotiability
1. Being in Writing
- the instrument must be in writing to enable it to be passed from
one hand to another, just like money
- either written or printed in a durable paper, or any paper as long
as it is MOVABLE.
- electronically-structured instrument is allowed under e-commerce
law
- if promise is done orally, it would be difficult to determine liability
and creates the danger of fraud

2. Signature of the Maker (promissory note) or Drawer (bill of exchange)

- serves as proof of the maker’s or of the drawer’s intention to be
contractually bound on the instrument
- Effect of forged signature
When a signature is forged or made without the authority of
the person whose signature it purports to be, it is wholly inoperative,
and no right to retain the instrument, or to give a discharge therefor,
or to enforce payment thereof against any party thereto, can be
acquired through or under such signature, unless the party against
whom it is sought to enforce such right is precluded from setting up
the forgery or want of authority. (Sec 23)

3. Commitment to Pay in the Form of Promise or Order

The instruments must be payable to order or Bearer (sec 1) or Payable

to Order (sec 8.) - The instrument is payable to order where it is drawn
payable to the order of a specified person or to him or his order. It may be
drawn payable to the order of –
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c)The drawee; or
(d) Two or more payees jointly; or One or some of several payees; or
The holder of an office for the time being.

Where the instrument is payable to order, the payee must be named

or otherwise indicated therein with reasonable certainty.

Payable to Bearer (sec 9.) - The instrument is payable to bearer –

1.When it is expressed to be so payable; or
2. When it is payable to a person named therein or bearer; or
3. When it is payable to the order of a fictitious or non-existing person,
and such fact was known to the person making it so payable; or
4. When the name of the payee does not purport to be the name of
any person; or
5. When the ​only or last indorsement is an indorsement in blank​.

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 4. Unconditionality of Such Commitment to Pay
- Must contain an unconditional promise or order to pay a sum certain in
money; (sec 1)
- The sum payable is a sum certain within the meaning of this act,
although it is to be paid -

a.With interest; or
b.By stated installments; or
C. By stated installments, with a provision that, upon default in
payment of any installment or of interest, the whole shall
become due; or
d.With exchange, whether at a fixed rate or at the current
rate; or
e.With costs of collection or an attorney's fee, in case payment
shall not be made at maturity. (sec 2)

- Unqualified order or promise to pay is unconditional within the

meaning of this Act though coupled with:

(a)An indication of a particular fund out of which

reimbursement is to be made or a particular account to be debited
with the amount; or
(b)A statement of the transaction which gives rise to the
instrument.

NOTE: But an order or promise to pay out of a particular fund is not

unconditional. (sec 3)

-
5. Effect of Additional Act to be Done Other Than Payment of a Sum of
Money
General rule: ​The instrument is non-negotiable if it contains a promise or
order to do any act in addition to the payment of money.
Exceptions:
(a) Sale of collateral securities.
- this happens after the instrument is not paid at maturity so
it doesn’t make the instrument non-negotiable.

(e.g.) I promise to pay to the order of Carol Danvers P200,000 on

or before March 20, 2019 and if I failed to do so, she may auction
the car I mortgaged to her in payment of my said debt.

(Sgd.) Maria Rambo

(b) Confession of judgment.

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 - It is a written acknowledgement by the defendant of his
indebtedness or liability to the plaintiff.
- The following confessions of judgment are valid:
1. Cognovit actionem (“he has confessed action”) -
acknowleding his debt after the action has been
filed.
2. Relicta verificatione (“his pleading being
abandoned”) - accompanied by a withdrawal of the
defense.
(e.g.) I promise to pay to the order of Peggy Carter P100,000 on
or before March 18, 2019 and if I don’t, I will readily confess that I
really owe her the said amount and will no longer contest any
lawsuit filed against me for the collection of said debt.

(Sgd.) Steve
(c) Waiver of benefit granted by law.
- The instrument waives the benefit of any law intended for
the protection or advantage of the obligor.
- Waiver of protest, presentment for payment, or demand
does not destroy the negotiability of an instrument.

(e.g.)“Pay bearer P20,000. Notice of dishonor waived.”

(e.g.) “Pay to the order of P the sum of P50,000 on December 1,
2018. Presentment of payment waived.”

(d) Election of holder to require some other act.

- An alternative performance can be stipulated in the
instrument so long as the choice belongs to the holder
himself and not to any other party.
Note​: If the choice belongs to a party other than a holder,
the holder can’t compel him to make payment in money
and thus, the instrument becomes ​non-negotiable​.

“I promise to pay R or order P10,000 or a refrigerator at the

option of the holder.”

6. Certainty of the Sum Payable

- Instrument must represent a fixed amount to be paid wholly in
money.
*SUM CERTAIN- the amount is determinable from the instrument
itself

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 *MONEY- medium of exchange authorized or adopted by
domestic or foreign government as a part of its currency. (In literal
sense: CASH)

Certainty of Sum Payable is NOT affected by the following:

1. Sum to be paid with Interest
- It is stated that there is interest
- Where the rate of interest is not specified:
6%
- If the date from which the interest is to run is
not stated, the interest will accrue from the
date of the instrument and if not dated, from
the issue thereof.
- If rate is increased after maturity, or if it is
decreased due to payment before maturity
2. Sum payable by stated installments
- Installments must be stated.
- Due date for each installment is fixed in the
instrument.
3. Sum to be paid by installments with acceleration
clause
- As long as dependent on the MAKER.
*ACCELERATION CLAUSE- a promise that
if any installment or interest is not paid as
agreed, the whole shall be demandable
4. Sum to be paid with exchange
- Refer to instruments payable in foreign
currency
- Does not impair negotiability because
current exchange rate can be determined
- Applicable only to foreign bills.
5. Sum to be paid with costs of collection or an
attorney’s fee
- In case payment shall not be made at
maturity, there shall be added to the amount
due on the note costs of collection or an
attorney’s fee.

7. Must be Payable Upon Demand or at a Fixed or Determinable Future

Time

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 When Payable on Demand
(Sec.7)
An instrument is payable on
demand:
(a) When it is so expressed to be
payable on demand, or at sight, or
on presentation; or
(b) In which no time for payment is
expressed.
Where an instrument is issued,
accepted, or indorsed when
overdue, it is, as regards the
person so issuing, accepting, or
indorsing it, payable on demand.
8. Either Payable to Order or Payable to Bearer
When payable to ORDER(Sec. 8)
The instrument is payable to order
where it is drawn payable to the
order of a specified person or to
him or his order. It may be drawn
payable to the order of:
(a) A payee who is not maker,
drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several
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When Payable at a fixed or
determinable future time (Sec. 4)
An instrument is payable at a
determinable future time, within
the meaning of this Act, which is
expressed to be payable:
(a) At a fixed period after date or
sight; or
(b) On or before a fixed or
determinable future time specified
therein; or
(c) On or at a fixed period after the
occurrence of a specified event
which is certain to happen, though
the time of happening be
uncertain.
An instrument payable upon a
contingency is not negotiable, and
the happening of the event does
not cure the defect.
When Payable to Bearer (Sec. 9)
The instrument is payable to
bearer:
(a) When it is expressed to be so
payable; or
(b) When it is payable to a person
named therein or bearer; or
(c) When it is payable to the order
of a fictitious or non-existing
person, and such fact was known
to the person making it so
payable; or
(d) When the name of the payee
does not purport to be the name of
 payees; or any
person; or
(f) The holder of an office for the
time being. (e) When the only or last
indorsement is an indorsement in
Where the instrument is payable blank.
to order, the payee must be
named or otherwise indicated
therein with reasonable certainty.

9. Designating the Drawee of a Bill

“Where the instrument is addressed to a drawee, he must be named or

otherwise indicated therein with reasonable certainty.” -Section 1(e)

(e.g.) Pay to Kris Avens or order the sum of Fifteen Thousand Pesos
(P15,000) on or before March 19, 2019.
(Sgd.) Miles Morales
To: Gwen Stacy

- “A bill may be addressed to two or more drawees jointly, whether

they are partners or not; but not two or more drawees in the
alternative or in succession.” -Section 128
(e.g) “To Jose Martin and Denise Marasigan.” - Negotiable because
drawees are addressed jointly.
“To Jose Martin or Denise Marasigan.” - Not negotiable because
drawees are addressed alternatively.
“To Jose Martin or in his absence, to Denise Marasigan” - Not
negotiable because drawees are addressed in succession.

E. Application of the Requisites of Negotiability

1. Being in Writing
"Written" includes printed, and "writing" includes print. (Sec 191)
2. Signature of the Maker or Drawee

No person is liable on the instrument whose signature does not appear

thereon (Sec. 18)
Exception:
1. One who signs in a trade or assumed name will be liable to the
same extent as if he had signed in his own name. (Sec 18, (2))
2. The principal is bound by the signature of his duly authorized
agent (Sec 19)
3. Forgery (Sec 23)
4. Acceptance by the acceptor in a separate paper (Sec 134)

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 5. Written promise by a person to accept the bill before it is
drawn. (Sec 135)

· Effect of forged signature

When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative, and no
right to retain the instrument, or to give a discharge therefor, or to
enforce payment thereof against any party thereto, can be acquired
through or under such signature, unless the party against whom it is
sought to enforce such right is precluded from setting up the forgery or
want of authority. (Sec 23)

3. Commitment to Pay in the Form of Promise or Order

The instruments must be payable to order or Bearer (sec 1)

Payable to Order (sec 8.) - The instrument is payable to order where it is drawn payable to
the order of a specified person or to him or his order. It may be drawn payable to the order
of –
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c)The drawee; or
(d) Two or more payees jointly; or One or some of several payees; or The holder of an
office for the time being.

Where the instrument is payable to order, the payee must be named or otherwise
indicated therein with reasonable certainty.

Payable to Bearer (sec 9.) - The instrument is payable to bearer –

1.When it is expressed to be so payable; or
2. When it is payable to a person named therein or bearer; or
3. When it is payable to the order of a fictitious or non-existing person, and such fact was
known to the person making it so payable; or
4. When the name of the payee does not purport to be the name of any person; or
5. When the ​only or last indorsement is an indorsement in blank​.

4. Unconditionality of Such Commitment to Pay.

Must contain an unconditional promise or order to pay a sum certain in money; (sec 1)

To be certain in sum it must be

The sum payable is a sum certain within the meaning of this act, although it is to be paid -
a. With interest; or
b. By stated installments; or
c. By stated installments, with a provision that, upon default in payment of any
installment or of interest, the whole shall become due; or
d. With exchange, whether at a fixed rate or at the current rate; or
e. With costs of collection or an attorney's fee, in case payment shall not be made at
maturity. (sec 2)
To be unconditional it must be

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 Unqualified order or promise to pay is unconditional within the meaning of this Act though coupled
with:
(a)An indication of a particular fund out of which reimbursement is to be made or a particular
account to be debited with the amount; or
(b)A statement of the transaction which gives rise to the instrument.
But an order or promise to pay out of a particular fund is not unconditional. (sec 3)

III. CONCEPT OF NEGOTIATION

A. Meaning and Significance of Negotiation - transfer of negotiable instrument from
one person to another made in such a manner as to constitute the transferee the
holder thereof.

It should he noted that if the transfer does not make transferee the holder of
instrument, there is no negotiation.

The significance of negotiation is to constitute the transferee the holder thereof.

B. Distinction from Mere Assignment as a form of Transfer
● Assignment​ is a method of transferring a ​non-negotiable instrument
whereby the assignee is merely placed in the position of the assignor and
acquires the instrument subject to all defenses that might have been set
up against the original payee.

NEGOTIATION ASSIGNMENT

Only negotiable instruments can All commercial papers, negotiable

be transferred by negotiation. or non-negotiable, can be
transferred by assignment, and
likewise by operation of law.

The transferee if he qualifies as a The transferee cannot qualify as a

holder in due course will be
subject to or affected only by real
defenses but not by personal
defenses of the parties (Section
56 & 57)
holder in due course (Section 49).
He is a mere assignee and as
such, he is subject to all kinds of
defenses (both real and personal)
of the parties (Section 58).

If negotiation is done by In assignment of an instrument,

indorsement plus delivery, the
indorser warrants the solvency of
prior parties. (NOTE this is so if
the indorser is a general indorser
but not if he is a qualified inforser.
(Section 60 & 65)
the assignor/transferor does not
warrant the solvency of prior
parties except if such warranty is
expressly stipulated or the
insolvency is known to him.

In negotiation, the indorser is In assignment, the assignor is

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 liable only, as a general, if a prior liable even if no prior notice of
notice of dishonor is given to him. dishonor is given to him.
(Section 89)

Transfer by negotiation is Transfer by assignment is mostly

governed only by Negoatiable
Instruments Law.
governed by laws other than the
Negotiable Instruments Law.
Although to a limited extent such
form of transfer may be governed
by the Negotiable instrument Law
if such transfer is a negotiable
instrument (see Section 49 & 38).
Primarily, transfer by assignment
is governed by the New Civil Code
(Articles 1624 to 1635 thereof).

NEGOTIATION ASSIGNMENT

Commercial Papers ✔ ✔

Negotiable ✔ ✔
Instruments

Non-Negotiable X ✔
Instruments

C. Manner of Negotiation in General

Negotiation may take place (i) by delivery (ii) by endorsement and delivery.

(i) Negotiation by Delivery -

According to Section 47 Subject to the provisions of Section 58 of the

Negotiable Instrument Act, 1881 a promissory note, bill of exchange or
cheque payable to bearer is negotiable by delivery thereof.

Exception:​ A promissory note, bill of exchange or cheque delivered on

condition that it is not to take effect except in a certain event is not
negotiable (except in the hands of a holder for value without notice of the
condition) unless such event happens.

Illustration -

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 (a) A, the holder of a negotiable instrument payable to bearer,
delivers it to B’s agent to keep for B. The instrument has been negotiated.

(b) A, the holder of a negotiable instrument payable to bearer, which

is in the hands of A’s banker, who is at the time the banker of B, directs
the banker to transfer the instrument to B’s credit in the banker’s account
with B. The banker does so, and accordingly now possesses the
instrument as B’s agent. The instrument has been negotiated, and B has
become the holder of it.

(ii) Negotiation by ​Endorsement​ and Delivery -

According to Section 48 of the said Act Negotiation by endorsement,
Subject to the provisions of Section 58, a Promissory Note, bill of
exchange or cheque payable to order, is negotiable by the holder by
endorsement and delivery thereof.

D. Indorsement
1. Meaning of Indorsement - a legal transaction, effected by writing one’s
own name on the back of the instrument, whereby one not only transfers
one’s full legal title to the paper transferred, but also enters into an implied
guaranty that the note or instrument will be duly paid.
2. Forms of Indorsement
a. Special - ​A “special” endorsement allows a payee to make a check
payable to another person or entity.
○ For example, if John Doe, the payee, wants to make the
check payable to his wife, Susan Doe, he would write “Pay to
the order of Susan Doe,” on the back of the check and then
endorse it.
b. Blank - ​In order for a check to be cashed or further negotiated, it
must be properly endorsed. A “blank” endorsement is the most
common type of check endorsement.
With a blank endorsement, the payee (person to whom the check is
made payable) signs his/her name as it appears on the face of the
check. If the person’s name is misspelled on the face of the check,
the person endorses exactly as the name is misspelled and then
signs again with the correct spelling.
c. Qualified - ​A qualified endorsement limits the responsibility of the
endorser.
With a qualified endorsement, the endorser will not assume any
responsibility for paying the check if it is returned for any reason. The
payee adds words such as “without recourse” to the back of the
check.

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 d. Restrictive - ​A restrictive endorsement restricts or limits negotiability.
○ “For deposit only” is the most common form of restrictive
endorsement and is used to prevent further negotiation of the
check. For example, a check payable to John Doe signed by
John Doe, i.e. a “blank” endorsement, can be cashed or
deposited by anyone holding the item in the event that it is
lost or stolen. A “blank” endorsement makes the item like
cash.
e. Conditional - ​A “conditional” endorsement is one of the ways in which
a check may be endorsed.
○ This type of endorsement places a limit or restriction upon the
time when a check can be paid. For example, Larry Smith has
written a check payable to John Doe. John Doe conditionally
endorses the check as “Payable to Billy Cooper upon
satisfactory completion of drywall job, (signed) John Doe.”
f. Anomalous - ​ a person other than the maker, payee, or holder
of a negotiable bill or note who indorses it for some purpose
other than to transfer it.
g. Successive - ​Successive indorsement is made by several
"persons, the legal effect being to subject each of them to
each other in the order in which they indorse ; the
indorsement imparts several and successive, but not joint
obligation.
h. Joint - All payees must each indorse in order to negotiate the
instrument. When one indorses → passes only his part of
the instrument
i. Irregular - person, not otherwise a party to an instrument,
places thereon his signature in blank before delivery
j. Facultative - indorser expressly gives up some of his rights
or increase his liability under the negotiable instrument
○ Example: by using after signature, words such as
‘notice of dishonour dispensed with’ or ‘waiver of
notice of dishonour’ or ‘notice of dishonour not
required’

3. Effects of the Different Kinds of Indorsement

A. Special
(1) “If the instrument is originally payable to order, and it is negotiated by the
payee by special indorsement, the indorsement of the indorsee is
necessary to the further negotiation of the instrument. (Section 34)

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 (2) “Where an instrument, payable to bearer, is indorsed specially, it may
nevertheless be further negotiated by delivery; but the person endorsing
specially is liable as indorser to only such holders as make title through
his indorsement.” (Section 40)

B. Blank
(1) “The instrument is payable to bearer -...(e) When the only or last
indorsement is an indorsement in blank.” (Section 9e)

(2) “An indorsement in blank specifies no indorsee and an instrument so

indorsed is payable to bearer, and may be negotiated by delivery.”

(3) “The holder may convert a blank indorsement into a special indorsement
by writing over the signature of the indorser in blank any contract
consistent with the character of the indorsement.”

C. Qualified
(1) “A qualified indorsement constitutes the indorser a mere assignor of the
title to the instrument. It may be made by adding the words “without
recourse” or any words of similar import. Such an indorsement does not
impair the negotiable character of the instrument.”
(2) A qualified indorser does not guarantee the solvency of the party primarily
liable in the instrument and hence, he will no longer be liable if the
non-payment of the party primarily liable is due to insolvency.
(3) The qualified indorser, however, remains liable to the indorsee in a
qualified indorsement in any of the following cases:
1. If he has prior knowledge of the insolvency of the party primarily
liable before he qualifiedly indorsed the instrument.
2. If the non-payment by the party primarily liable is for reasons other
than insolvency such as forgery and incapacity.

D. Restrictive
(1) Only the possession of the paper is transferred. Consequently, this type
of indorsement restricts further negotiation of the instrument, and either
makes the indorsee an agent of the indorser or invests title in the
indorsee in trust for or to the use of some other person. The indorsee has
right, however, to receive payment of the instrument, or to sue on the
same, and may transfer such rights he has to another indorsee if a right of
transfer has been given.
(2) “A restrictive indorsement confers upon the indorsee the right: a. To
receive payment of the instrument b. To bring any action thereon that the
indorser could bring c. to transfer his rights as such indorsee, where the
form of the indorsement authorizes him to do so.

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 But all subsequent indorsees acquire only the title of the first indorsee
under the restrictive indorsement.
(3) A restrictive indorsement may convert a negotiable instrument to one
which is non-negotiable.

E. Conditional
(1) It does not make the instrument non-negotiable.
(2) “Where an indorsement is conditional, a party required to pay the
instrument may disregard the condition, and make payment to the
indorsee or his transferee, whether the condition has been fulfilled or not.
But any person to whom an instrument so indorsed is negotiated, will hold
the same, or the proceeds thereof, subject to the rights of the person
indorsing conditionally.” (Section 39)
(3) The Condition is binding between the indorser and subsequent
purchasers, but the primary party on the instrument may disregard such
condition ad pay the holder, whoever he may be, whether or not the
condition has been met. Until the condition is met, any holder who
receives the proceeds of the paper holds the same as trustee for the
conditional indorser. Consequently, any person who takes the paper after
such conditional indorsement is charged with knowledge of the condition.

F. Anomalous
(1) “Where a person, not otherwise, a party to the instrument, places thereon,
his signature in blank before delivery, he is liable as indorser, in
accordance to the following rules:
a. If the instrument is payable to the order of a third person, he is
liable to the payee and all subsequent parties.
b. If the instrument is payable to the order of the maker or drawer, or
payable to bearer, he is liable to all parties subsequent to the
maker or drawer.
c. If he signs for the accommodation of the payee, he is liable to all
parties subsequent to the payee.”

G. Successive
(1) “Where an instrument is negotiated back to a prior party, such party may,
subject to the provisions of this Act, reissue and further negotiable the
same. But he is not entitled to enforce payment thereof against any
intervening party to whom he was personally liable.
(2) If several persons indorse in succession they are liable to each other in
the order they indorse.

H. Joint

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 (1) “Where an instrument is payable to the order of two or more payees or
indorsees who are not partners, all must indorse unless the one indorsing
has the authority to indorse for others.”
(2) Under the Civil Law concept, partnership has a personality separate and
distinct from the partners composing it. Hence, an indorsement must be
under the name of the firm or partnership to be considered as joint
payees or indorsees pertaining to partners.

I. Irregular
(1) Payable to order of a third person → liable to the payee and to all
subsequent parties
(2) Payable to the order of the maker or drawer → liable to all parties
subsequent to the maker or drawer
(3) Payable to bearer → liable to all parties subsequent to the maker or
drawer
(4) Signs for the accomodation of the payee → liable to all parties
subsequent to the maker or drawer

J. Facultative
(1) Indorsee is relieved of his duty to give notice of dishonour to the
indorser
(2) Indorser remains liable to the indorsee for the non-payment of the
instrument, even though no notice of dishonour has been given to
him

4. Legal Consequences of Absence of Indorsement in the Transfer of an

Instrument Payable to Order
- On the status of being a holder in due course

Sec. 49. Transfer without indorsement; effect of. - Where the holder of an
instrument payable to his order transfers it for value without indorsing it, the transfer
vests in the transferee such title as the transferor had therein, and the transferee
acquires in addition, the right to have the indorsement of the transferor. But f​or the
purpose of determining whether the transferee is a holder in due course, the negotiation
takes effect as of the time when the indorsement is actually made.

A transfer of a negotiable instrument is effected otherwise than by negotiation when an order

instrument is delivered without indorsement.
1. Transferer operates as an ORDINARY ASSIGNMENT
The transfer operates as an ordinary assignment and the assignee is merely placed
in the position of the assignor, the former acquiring the instrument subject to all
defenses, real and personal, available against the latter.

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 2. Transferee does not become holder of instrument
Without the indorsement, the transferee would not be the holder of the instrument
,not being the payee, indorser, or the bearer thereof.

3. Where indorsement subsequently obtained

The assignee still acquires the right to have the indorsement of the assignor.
When indorsement is subsequently obtained ,the transfer operates as a negotiation only
as of the time the indorsement is actually made.

Rights of transferees for value

1. The transferee acquires only the rights of the transferor. This
means that if a defense is available against the transferor, that
defense is also available against the transferees.
2. The transferee has also the right to require the transferor to
indorse the instrument.

E. Transfer of an Instrument Payable to Bearer by Negotiation

1. In General
1. If the instrument is payable to bearer, it is no longer necessary to
indorse the instrument.
2. In order to effect the negotiation of the instrument, mere delivery is
sufficient. The transfer must constitute the transferee the bearer of
the instrument.
3. A bearer instrument is negotiated by mere delivery. The words “by
mere delivery” therefore, refer to a holder who negotiates the
instrument in the same condition in which he received it, making
no indorsement at all.
2. Effect if the Bearer Instrument is Still Indorsed

An instrument payable to bearer is negotiated by mere delivery.

When it is specially indorsed, it may still be negotiated by delivery.
An instrument which is originally payable to bearer will always be
payable to bearer even when it has been specially indorsed.

Effect on liability
The person specially indorsing an instrument is liable as indorser to
holders who acquired the instrument through his indorsement.

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 Example
A is a bearer and he delivered tge instrument to B
B specially indorsed it to C
C specially indorsed it to D
D delivered to E

To whom is/are B liable?

B, being the first to indorsed the instrument, is liable to C and D
because they acquired the bearer instrument through indorsement
of B. On the other hand, B is not liable to E because E acquired the
instrument through delivery of D, not because of the indorsement of
B.

3. Transfer of an Instrument Made a Bearer Instrument through Blank

Indorsement

(a) Meaning of Blank Indorsement

• An indorsement which does not indicate an indorsee.

(b) Effects of Blank Indorsement

• The instrument is payable to bearer when the only or last indorsement is
in blank.
• A blank indorsement specifies no indorsee and an instrument indorsed
in blank is payable to bearer and may be negotiated by mere delivery.
• When a person places his indorsement on an instrument that is
negotiable by mere delivery, he incurs all the liability of an indorser.
•Every person negotiating an instrument by delivery warrants:
A. That the instrument is genuine and in all respects what it purports to
be.
B. That he has a good title to it. C. That all prior parties had capacity to
contract.
D. That he has no knowledge of any fact which would impair the validity of
the instrument or render it valueless. The warranty however, extends in
favor of no holder other than the immediate transferee.

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