REPUBLIC ACT NO.

2031

NEGOTIABLE
INSTRUMENT
Paloma, Zenon B.
 CHAPTER II
CONSIDERATION
 SECTION 24
Presumption of consideration

Every negotiable instrument is deemed prima

facie to have been issued for a valuable
consideration; and every person whose
signature appears thereon to have become a
party thereto for value.
Sec. 24. Presumption of
consideration
CONSIDERATION (OR CAUSE)
The immediate, direct, or essential reason which induces a party to enter
into a contract
 SECTION 25
Value, what constitutes

Value is any consideration sufficient to support a

simple contract. An antecedent or pre-existing
debt constitutes value; and is deemed such
whether the instrument is payable on demand or
at a future time
 SECTION 26
What constitutes holder for value

Where value has at any time been given for the

instrument, the holder is deemed a holder for
value in respect to all parties who become such
prior to that time.
Holder for value
One who has given a valuable consideration for the
instrument issued or negotiated to him
 SECTION 27
When lien on instrument constitutes holder for
value

Where the holder has a lien on the instrument

arising either from contract or by implication of
law, he is deemed a holder for value to the
extent of his lien.
Note:
One who has taken a negotiable instrument
as collateral security for a debt has a lien
on the instrument
 SECTION 28
Effect of want of consideration

Absence or failure of consideration is a matter

of defense as against any person not a holder in
due course; and partial failure of consideration
is a defense pro tanto, whether the failure is an
ascertained and liquidated amount or otherwise.
Absence of consideration
Total lack of any valid consideration for the contract, in
consequence of which the alleged contract must fail
Note:
Absence of consideration is only personal
defense between the maker and payee and not
available against a holder in due course
Thus the maker is still liable to a holder in due
course
Failure of
consideration
Failure or refusal of one of the parties to do,
perform or comply with the consideration
agreed upon
Something was agreed upon as consideration
but for some cause, such agreed consideration
failed to materialize.
 SECTION 29
Liability of accommodation party

An accommodation party is one who has signed the

instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of
lending his name to some other person. Such a person is
liable on the instrument to a holder for value,
notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation party.
Accommodation note/bill
One to which the accommodation party has put his name, without consideration, for the purpose of
accommodating some other party who is to use it, and is expected to pay it.

Accommodation party Accommodated party

One who has signed the instrument as maker, One in whose favor a person w/o receiving
drawer, acceptor, or indorser, w/o receiving value therefor, signs an instrument for the
value therefor and for the purpose of lending purpose of lending his credit and enabling
his name to another party said party to raise money upon it.
Liability of accommodation
party to a holder
Absence of consideration not a defense, this means that absence
of consideration between the accommodation party and the
accommodated party does not of itself constitute a valid defense
against a holder for value even though he knew of it when he
became a holder
Kinds of accommodation party
An accommodation party is one who has signed the instrument as
maker, drawer, acceptor, or indorser

1. ACCOMMODATION 2. ACCOMMODATION
MAKER DRAWER

4. ACCOMMODATION 3. ACCOMMODATION
INDORSER ACCEPTOR
Accommodation party
Signs an instrument w/o
receiving value therefor
Signs an instrument for the
purpose of lending his name
to some other person
May always show by parol
evidence that he is only such
Cannot avail of the defense
of absence or failure of
consideration against a
holder not in due course
Cannot avail of the defense
of absence or failure of
consideration against a
holder not in due course
Regular party
Signs the instrument for
value
Does not sign for that
purpose
Cannot disclaim or limit his
personal liability as
appearing on the instrument
by parol evidence
May avail of said defense
against a holder not in due
course
May not sue any subsequent
party for reimbursement
CHAPTER III
NEGOSATION
 SECTION 30
What constitutes negotiation

An instrument is negotiated when it is transferred from

one person to another in such manner as to constitute the
transferee the holder thereof. If payable to bearer, it is
negotiated by delivery; if payable to order, it is negotiated
by the indorsement of the holder and completed by
delivery
Negotiation
The transfer of a negotiable instrument from one person to
another made in such a manner as to constitute the transferee the
holder thereof

Note:
No negotiation if the transfer does not make the transferee the
holder of the instrument
Payable to order
Negotiation by delivery with the necessary indorsement
Payable to bearer
Negotiation by delivery alone
Three methods of transferring a negotiable instrument
1. ISSUE
a. First delivery of the instrument,
complete in form, to a person who
takes it as holder
b. First transfer of an instrument to
a payee
c. Nego legal life does not begin
until it is issued by the make/drawer
to the first holder.
2. NEGOTIATION
a. Involves indorsement
b. Possible for the trabsferee to
acquire a better right to a
negotiable instrument that the
transferor had
3. ASSIGNMENT
a. Less usual method, may or may
not involve indorsement in the
sense of a writing on the back of the
instrument
b. Nego or non-nego may be
transferred by assignment
Instrument payable to order
2 steps required for its negotiation
1. Indorsement by the payee of present holder
2. Its delivery to the next holder
It is payable to the payee named therein or to the indorsee or the person
ordered or authorized by the payee to collect
Authority is made by means of indorsement followed by delivery of the
instrument to the indorsee
Instrument payable to bearer
Negotiated by mere delivery w/o indorsement
Bearer
Person in possession of an instrument payable to bearer is always the
bearer thereof, although he may have no legal right thereto.
If the instrument is negotiated to a holder in due course, the latter may
acquire a better title than that of the transferor.
Delivery
Transfer of possession actual or constructive, from one person to
another.
Assignment
Transfer of the title to the instrument, with the assignee generally
taking only such title as his assignor has, subject to all defenses
available against his assignor.

Note:
Involves transfer of rights under a contract
Negotiation
Transfer of a negotiable
instrument to a holder.
Negotiable inst can be
negotiated or assigned
Negotiable instrument
Transferee is a holder
Holder in due course subject
only to real defenses
Holder in due course may
acquire a better title or greater
rights under the instrument
than those possessed by the
transferor or prior party
General indorser warrants the
solvency of prior parties
Indorser is not liable unless
there be presentment and
notice of dishonor
Governed by negotiable
instruments law
Assignment
Non-negotiable can only be
assigned or transfer (not
negotiated)
Ordinary contract
Transferee is an assignee
Assignee both real and
personal defenses
Assignee merely steps into the
shoes of the assignor
Assignor does not warrant the
solvency of prior parties unless
expressly stipulated or the
insolvency is known to him
Assignor is liable even w/o
notice of dishonor
Art 1624-1635 of CC
 SECTION 31
Indorsement; how made.

The indorsement must be written on the instrument itself

or upon a paper attached thereto. The signature of the
indorser, without additional words, is a sufficient
indorsement.
Indorsement
Writing of the name of the payee on the instrument with the intent
either to transfer the title to the same, or to strengthen the security of
the holder by assuming a contingent liability for its future payment, or
both

Indorser
The payee by singing/indorsing the instrument and delivering it to
another person (in payment of debt)

Indorsee
Person who receives the indorsed instrument
 NOTE

Indorsement alone w/o delivery conveys no title and creates no holder

Indorsement completed by delivery
Involves a new contract and an obligation of the indorser
Necessity of indorsement
1. Essential to the execution of an instrument payable to the order of the
maker/drawer
2. Essential to the negotiation of an order instrument, not of a bearer
instrument
3. Not necessary to a mere assignment of a negotiable or non-negotiable
instrument
a. One can acquire title w/o indorsement
b. w/o indorsement, he cannot be a holder in due course
4. an estoppels may take the place of an indorsement to uphold the
transfer of a bill or note such as where the indorsement is forged or
unauthorized and the party against whom the instrument is sought to be
enforced is precluded from setting up the defense of forgery or want of
authority.
 SECTION 32
Indorsement must be of entire instrument.

The indorsement must be an indorsement of the entire

instrument. An indorsement which purports to transfer to the
indorsee a part only of the amount payable, or which
purports to transfer the instrument to two or more indorsees
severally, does not operate as a negotiation of the
instrument. But where the instrument has been paid in part,
it may be indorsed as to the residue.
 Indorsement to
multiple payees or
Indorsement must be
indorsees
of entire instrument
Joint payees
Instrument must be delivered to the indorsee Transfer of instrument to 2 or more persons
and there cannot be partial delivery of one severally is not negotiable since splitting of
instrument. cause of action o Valid where the indorsees
To avoid multiplicity of suits are joint
Alternative payees
Payable to 2 or more alternative payees,
thus indorsement of either of the payees
 SECTION 33
Kinds of indorsement.

An indorsement may be either special or in blank;

and it may also be either restrictive or qualified or
conditional.
Classification of indorsement

1. AS TO THE METHODS OF 2. AS TO THE KIND OF 3. AS TO SCOPE OF

NEGOTIATION TITLE TRANSFERRED LIABILITY OF INDORSER

a. Special a. Restrictive a. Qualified

b. Blank b. Non-restrictive b. Unqualified or genera

4. AS TO PRESENCE OR 5. THE OTHER KINDS OF NOTE:

ABSENCE OF LIMITATIONS INDORSEMENT ARE
Once an instrument as issued
a. Conditional a. Joint satisfied all the reqt of negotiability,
b. Unconditional b. Successive no indorsement, even restrictive
c. Irregular or anomalous one can negate its negotiable status
d. Facultative
 SECTION 34
Special indorsement; indorsement in blank.

A special indorsement specifies the person to whom, or to

whose order, the instrument is to be payable, and the
indorsement of such indorsee is necessary to the further
negotiation of the instrument. An indorsement in blank
specifies no indorsee, and an instrument so indorsed is
payable to bearer, and may be negotiated by delivery.
Special indorsement
One where the name of the payee is specified
Specific indorsement or indorsement in full
Unqualified indorsement (same in blank

Note:
Either case, the indorsement must be followed by the
signature of the indorser
In indorsing, it is not necessary to use “or order” / “to the
order of”
These words are only used in the instrument itself
 SECTION 35
Blank indorsement; how changed to special indorsement.

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
Blank indorsement
One which specifies no particular indorsee. Consist only of the
signature of te payee or indorsee.
So indorse is payable to bearer or whoever possesses it and may be
negotiated by the indorser by delivery alone
A thief/finder could negotiate by mere delivery and if payment were
made in good faith, the real owner would not have the right to recover
from the maker or drawer
Most commonly used form of indorsement
Conversion of blank
indorsement to special
indorsement
Payable to order on its face becomes payable to bearer if the only or last
indorsement is in blank
Holder may protect himself from liability by changing the blank indorsement to
a special indorsement
May be converted into an order instrument by writing over the signature of the
indorser in blank any contract not inconsistent with the character of the
indorsement
Bearer instrument always remain a bearer instrument negotiable by mere
delivery
Whether the last indorsement is a blank or a special one.
 SECTION
When indorsement restrictive.
36
An indorsement is restrictive which either:
a) Prohibits the further negotiation of the instrument; or
b) Constitutes the indorsee the agent of the indorser; or
c) Vests the title in the indorsee in trust for or o the use of
some other persons.

But the mere absence of words implying power to negotiate

does not make an indorsement restrictive.
GENERAL RULE
Signature of the indorser w/o add words is a
sufficient indorser

EXCEPTION
Words may be added w/c prohibit or limit the
negotiation
 SECTION 37
Effect of restrictive indorsement; rights of indorsee.

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.

But all subsequent indorsees acquire only the title of the first
indorsee under the restrictive indorsement.
Rights of indorsee in
restrictive indorsement
Indorsee may
receive payment on the instrument
Sue on in his own name
Negotiate the instrument except when it is
prohibited in the indorsement
The right of the indorsees subsequent to the first
indorsee are subject to the terms of the
restrictive indorsement
 SECTION 38
Qualified indorsement

A qualified indorsement constitutes the indorser a mere

assignor of the title to the instrument. It may be made by
adding to the indorser's signature the words "without
recourse" or any words of similar import. Such an
indorsement does not impair the negotiable character of the
instrument.
Qualified indorsement
One which constitutes the indorser a mere assignor of the title
to the instrument

Recourse
Resort to a person who is secondarily liable after the default of
the person who is primarily liable
Effect of qualified indorsement
1. INDORSER, AS
ASSIGNOR
Transferring title and Guaranteeing
its payment if the holder is unable
to obtain payment from the maker,
drawer at maturity (probably
clerical error)
2. INDORSER’S LIABILITY LIMITED
Secondarily liable for breach of his warranties as an indorser 3. NEGOTIABILITY OF
under Sec. 65 INSTRUMENT NOT
Liable if the instrument is dishonored by non-acceptance or EFFECTED
non-payment due to
Forgery
Lack of good title to the instrument indorsed
Lack of capacity to contract on the part of prior parties
The fact that the instrument was valueless or not valid at
the time of the indorsement which fact was known to
him
NOT liable to the indorsee if the instrument is dishonored
for some other reason like the insolvency of the person
primarily liable
 SECTION 39
Conditional indorsement.

Where an indorsement is conditional, the 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.
Absolute indorsement
Indorser binds himself to pay, upon no other condition than the failure
of prior parties to do so, and of due notice to him of such failure

Conditional indorsement
Indorser imposes some other conditions to his liability or on the
indorsee’s right to collect the proceeds of the instrument
 NOTE

No effect on negotiation, regardless condition is fulfilled not not

EXCEPTION, condition appearing on the face of the instrument
renders non negotiable.
Party required to pay, make payment, disregard condition w/o
incurring any liability because he is expressly authorized to do under
sec. 39
Person who received payment will hold the proceeds subject to the
right of the conditional indorser
 SECTION 40
Indorsement of instrument payable to bearer

Where an instrument, payable to bearer, is indorsed

specially, it may nevertheless be further negotiated by
delivery; but the person indorsing specially is liable as
indorser to only such holders as make title through his
indorsement.
Effect of special indorsement where
instrument originally payable to bearer
payable to bearer is not converted into payable to order by being indorsed specially and notwithstanding
sec.34, the indorsee may further negotiate the instrument by mere delivery.
Person indorsing specially is liable only to those holders who can trace their title to the instrument by a
series of unbroken indorsement from such special indorser
Liability of general indorser under sec.66
Liability of person who nego by delivery alone is under sec.65

Application – only to instrument originally payable to bearer

Not payable to order and even indorsed in blank under sec9
Payable to order becomes payable to bearer only when last indorsement is blank (sec.9)
Not sec.9 if blank indorsement is followed by special indorsement
Reason - Payable to bearer cannot be made payable to order w/o modifying these terms
 SECTION 41
Indorsement where payable to two or more persons.

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 authority to
indorse for the others.
Indorsement where instrument payable
to 2 or more joint payees or indorsees
(joint indorsement)
2 or more payees or indorsees jointly
Sec41 does not apply to instrument payable to 2 or
more payees severally (not jointly)
Pay to the order of P or A
Anyone of such parties in possession is the holder
Indorsement by all payees or indorsee
All must indorse in order for the transaction to operate
as a nego
Indorsement to a co-payee
Payable o order of 2 persons, but indorsed by 1 payee
w/o authority, is no longer transferavle as a nego but
only as a non-nego chose in action
But indorsement and delivery by one of 2 joint payees
to his co payee may transfer full title
 SECTION 42
Effect of instrument drawn or indorsed to a person as
cashier

Where an instrument is drawn or indorsed to a person

as "cashier" or other fiscal officer of a bank or
corporation, it is deemed prima facie to be payable to
the bank or corporation of which he is such officer, and
may be negotiated by either the indorsement of the
bank or corporation or the indorsement of the officer.
Indorsement where
instrument drawn or indorse
to a person as cashier
Cashier, president, secretary or treasurer, may issue negotiation
paper
 SECTION 43
Indorsement where name is misspelled, and so forth

Where the name of a payee or indorsee is wrongly

designated or misspelled, he may indorse the
instrument as therein described adding, if he thinks fit,
his proper signature.
Indorsement where name
misspelled
The instrument may be indorsed as therein described; thus
Any variance between the name of the payee on the face of
an instrument and the signature on the back thereof should
be ignored if the payee and the indorser are the same
person.
 SECTION 44
Indorsement in representative capacity

Where any person is under obligation to indorse

in a representative capacity, he may indorse in
such terms as to negative personal liability.
Indorsement in
representative capacity
Indorsed by either personally or thru an
agent
Authority of the agent need not be in writing
 SECTION 45
Time of indorsement; presumption.

Except where an indorsement bears date after

the maturity of the instrument, every negotiation
is deemed prima facie to have been effected
before the instrument was overdue
 NOTE
if indorsement is fresher ink than the demand note is not sufficient to
overcome the presumption that it was indorsed before it was overdue.
 SECTION 46
Place of indorsement; presumption

Except where the contrary appears, every

indorsement is presumed prima facie to have
been made at the place where the instrument is
dated.
Presumption as to place of
indorsement
At the place where the instrument is dated
Important where the law is different countries varies
Indorsement is governed by the law of the state where it is made
although instrument is executed in a different state.
 SECTION 47
Continuation of negotiable character

An instrument negotiable in its origin continues

to be negotiable until it has been restrictively
indorsed or discharged by payment or otherwise.
 SECTION 48
Striking out indorsement.

The holder may at any time strike out any

indorsement which is not necessary to his title.
The indorser whose indorsement is struck out,
and all indorsers subsequent to him, are thereby
relieved from liability on the instrument.
 SECTION 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 for 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.
Effect of transfer
w/o indorsement
Only to payable to order
If the holder of payable to order transfers it for value
w/o indorsing it, the transferee cannot negotiate the bill
by indorsing it.
W/o indorsing becomes assignment subject to defenses
and equities available among prior parties
If the transferor has legal title, the transferee acquires
such title.
Effect of
indorsement after
transfer
A may require P to indorse, A has the right to an
unqualified indorsement
After P indorsement, A becomes holder
To determine if holder of due course, count at the time
of actual indorsement
Nego is completed at the time of indorsement not
delivery
 SECTION 50
When prior party may negotiate instrument

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.