CHAPTER III

NEGOTIATION

Sec. 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 completed by

delivery.

Modes of transfer of bill or note, in

general.

Transfer is the process by which property is delivered by one person to

another.

A bill of exchange or promissory note may be transferred from one

person to another in several different ways, and for different purposes, and

with different types of indorsement which result or may result in the

acquisition of different rights or interests and the incurrence of different

liabilities. The law does not prescribe an exclusive method of transferring

negotiable instruments but only the manner in which their independence of

equities or defenses that might obtain between the original parties may be

preserved, (see 11 Am. Jur. 2d 334.)

Three methods of transferring a

negotiable instrument.

They are the following:

(1) Issue.—It is the first delivery of the instrument, complete in form, to

a person who takes it as holder (Sec. 191.); it is the first transfer of an

instrument to a payee. A negotiable instrument's legal life does not begin

until it is issued by the maker or drawer to the first holder;

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(2) Negotiation. — It ordinarily involves indorsement (in regard to

other than bearer paper) so that "negotiation" and "indorsement" are often

used interchangeably. Negotiation makes it possible for the transferee to

acquire a better right to a negotiable instrument that the transferor had.

Whether the holder is a holder in due course depends upon factors other

than the fact of negotiation (see Sec. 52.); and

(3) Assignment. — It is the less usual method/ which may or may not

involve an indorsement in the sense of a writing on the back of the

instrument. A bill or note, whether negotiable or non-negotiable, may be

transferred by assignment. By its nature, there can be no "negotiation" of a

non-negotiable instrument. Although it may be transferred by indorsement

and delivery, the assignee acquired the instrument subject to the rules

applicable to non-negotiable paper, (see 11 Am. Jur. 2d 335-336.)

Absent an express prohibition against assignment or transfer written on

the face of a non-negotiable instrument, the same may be assigned or

transferred. Thus, a promissory note marked "non- negotiable" but not at

the same time stamped "non-transferrable" or "non-assignable" may be

assigned or transferred. (Sesbreno vs. Court of Appeals, 222 SCRA 466

[1993].)

Both negotiation and assignment require delivery to effect a transfer of

the instrument.

Meaning of negotiation.

Negotiation is the transfer of a negotiable instrument from one person

to another made in such a manner as to constitute the transferee the holder

thereof. The term expresses, at least primarily, the mode and effect of the

transfer of a negotiable instrument.

There is no negotiation if the transfer does not make the transferee the

holder of the instrument. If the instrument is payable to order, it is

negotiable by delivery with the necesary indorsement; if payable to bearer,

it is negotiable by delivery alone. Thus, if M makes a note payable to P or

order and P delivers it without indorsement to A, negotiation is not effected

because A, by such transfer, does not become the holder of the

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note. If the instrument is a bearer instrument (see Sec. 9.), P can negotiate it

without indorsement of any kind simply by handing or mailing the

instrument to a subsequent purchaser. Under Section 191 (par. 7.), a holder

is "the payee or indorsee of a bill or note, who is in possession of it, or the

bearer thereof/'

Methods of negotiation.

The method by which an instrument is negotiated depends upon

whether the instrument is payable to order or to bearer.

(1) Instrument payable to order. — Where the instrument is payable

to order, there are two steps required for its negotiation: first, an

indorsement by the payee of present holder, and secondly, its delivery to

the next holder. An instrument payable to order (Sec. 8.) is payable to the

payee named therein or to the indorsee or the person ordered or

authorized by the payee to collect. This order or authority is made by means

of indorsement (Sec. 31.) followed by delivery of the instrument to the

indorsee.

Under Section 74, the instrument must be exhibited when presented

for payment to the person from whom payment is demanded. The party

paying may thus judge the genuineness of the indorsements and of the right

of the holder to receive payment.

(2) Instrument payable to bearer.—If the instrument is payable to

bearer (Sec. 9.), it is negotiated by mere delivery without indorsement.

Section 191, paragraph 4 defines "bearer" as the person in possession of a

bill or note which is payable to bearer. Hence, any person in possession of

an instrument payable to bearer is always the bearer thereof, although he

may have no legal right thereto. This means that if the instrument is

negotiated to a holder in due course, the latter may acquire a better title

than that of the transferor.

Delivery means "transfer of possession actual or constructive, from one

person to another. (Sec. 191, par. 6.)

EXAMPLE:

M issues a note "payable to bearer." The note was stolen

from M's home by T who delivered the note to P.

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Ts acquisition of the note does not constitute delivery. . There

is no negotiation to X because delivery must be voluntary.

However, the delivery to P (who acted in good faith) constitutes

negotiation. While a thief (or finder) cannot acquire title to the

instrument, by virtue of the theft, he can transfer title to a

subsequent innocent purchaser.

Payment of instrument by drawee not

negotiation.

The payment of a check (or other bill) by the drawee bank is not a

negotiation and does not make the bank a holder within Section 30.

The bank is neither the payee nor indorsee, (see Sec. 191, par. 7.) The

check is extinguished and cannot be put in circulation again so as to bind the

drawer or indorser. (Beutel's Brannan, op. tit., p. 592.)

The writing of the name of the holder on the back of the check before
surrendering it for payment to the drawee-bank is not an indorsement. Such

signature merely serves as a receipt for the money. Upon payment, the

check becomes merely a voucher. Payment effects a discharge of the

instrument, not a transfer of title thereto, (see Sec. 119[a].)

Meaning of assignment.

An assignment of a bill or note merely means a 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, (see 11

Am. Jun 2d 338.)

Assignment involves a transfer of rights under a contract. Note the

transfer of a non-negotiable Instrument always constitutes an assignment.

The word "transfer" is also used when referring to "assignment." When

negotiation takes place, the transferee becomes a holder.

Effect of delivery of order instrument without

indorsement.

A transfer of a negotiable instrument is effected otherwise than by

negotiation when an order instrument is delivered

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without indorsement. In this case, 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.

Without the indorsement, the transferee would not be the holder of

the instrument, he not being the payee, indorsee, or the bearer thereof.

However, the assignee 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. (Sec. 49.)

Negotiation and assignment distinguished.

The former is strictly the transfer of a negotiable instrument to a

holder, (see Sec. 58.) While a negotiable instrument may be either

negotiated or assigned, a non-negotiable instrument can only be assigned

or transferred, not negotiated. The other distinctions are:

(1) Negotiation refers only to negotiable instruments, while

assignment refers generally to an ordinary contract;

(2) In negotiation, the transferee is a holder, while in assignment, the

transferee is an assignee;

(3) A holder in due course is subject only to real defenses, while an

assignee is subject to both real and personal defenses (see Sec. 57-59.);

(4) A holder in due course may acquire a better title or greater rights

under the instrument than those possessed by the transferor or a prior

party, while generally an assignee merely steps into the shoes of the

assignor;

(5) A general indorser warrants the solvency of prior parties, while an

assignor does not warrant the solvency of prior parties unless expressly

stipulated or the insolvency is known to him;

(6) An indorser is not liable unless there be presentment and notice of

dishonor, while an assignor is liable even without notice of dishonor; and

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(7) Negotiation is governed by the Negotiable Instruments Law, while

assignment is governed by Articles 1624 to 1635 (on assignment of credits)

of the Civil Code.

When distinction not material.

The difference between negotiation and assignment may be of no

material significance, if there is no defense to the obligation and only the

maker is sought to be held. But whether the transfer of a bill or note is by

negotiation or assignment, the transfer may constitute a sale, exchange,

pledge, or gift, (see 11 Am.Jur. 2d 337.)

Payment by means of instrument

merely conditional.

Whether the act involved is negotiation or assignment, payment by

means of promissory notes, bills of exchange, and other negotiable

instruments is merely conditional, i.e., subject to the condition that they be

converted into cash at maturity, (see Art. 1249, Civil Code.)

The rule is different in insurance. Acceptance of a promissory note or

check in payment of the premium by the insurer renders the policy

immediately operative where the policy is silent as to the mode of payment,

although one of its conditions is that "it shall not be valid or binding until the

first premium is paid." The acceptance, in effect, waives this provision.

(Capital Ins. & Surety Co., Inc. vs. Plastic Era Co., Inc., 65 SCRA 134 [1975].)

Can there be a negotiation to a payee?

One school of thought claims that the delivery to the payee by the

maker or drawer does not constitute negotiation because delivery is part of

the creation of a negotiable instrument, (see Sec. 14.) Before the writing is

delivered there is no negotiable instrument, no contract as yet. Negotiation,

on the other hand, refers to an existing negotiable instrument.

The second school maintains that there can be such negotiation. Under

Section 30 and Section 191, paragraph 7, an instrument is negotiated when

it is delivered to the payee or

154 THE NEGOTIABLE INSTRUMENTS LAW Sec. 23

to an indorsee or to the bearer thereof. Hence, "negotiated" is not confined

to transfer after delivery to the payee (see Beutel's Brannan, op. cit., p. 591.)

because a holder may be a payee in possession of the instrument.

Moreover, there are American cases where courts have supported this
second view.

Both arguments are logical and convincing. They may, however, be

reconciled.

(1) First delivery of instrument to payee. — It is believed that the

payee, as the first holder, acquires title to the instrument not by negotiation

but by issue or issuance, (see Sec. 191, par. 10.) If negotiation refers to an

instrument already completely executed or issued, then only the holders

subsequent to the payee can acquire title by negotiation. This should be the

rule in case the first delivery of the instrument is made by the maker or

drawer directly to the payee.

(2) First delivery of instrument to other than payee. — If the delivery is

not so made, such delivery, as a qualification of Section 191, paragraph 10

("issue"), may constitute negotiation under Section 30 in relation to Section

191, paragraph 7 ("holder"). Thus, where the delivery by the maker or

drawer is made to a person other than the payee such as an agent of the

maker or drawer, the payee acquired title by negotiation, (see Vicente B. de

Ocampo & Co. vs. Gatchalian, 3 SCRA 596 [1961]; Sec. 52[c].)

(3) Delivery of instrument to payee by last holder. — There may also

be negotiation to the payee when the instrument is delivered back to him

by the last holder. In such case, the indorsement of the last holder is not

necessary because the payee is remitted to his former rights (Sec. 121.) and

all intervening parties are discharged from liability. (Sees. 48,50.)

Delivery of negotiable instrument.

(1) Kinds. — Delivery is the transfer of possession, actual or

constructive, from one person to another. (Sec. 191, par. 6.) An example of

constructive delivery is where A, without B's knowledge, indorses an

instrument to B and ! puts it into an envelop containing other papers of B.

(Babb & Martin, op. cit., p. 188.)

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(2) Necessity. — Delivery is an essential part of every negotiation.

Indorsement, as defined by the Act, means an indorsement completed by

delivery. (Sec. 191, par. 8.) An intent to be bound is necessary to the creation

of an obligation, and delivery of the negotiable instrument is the operative

fact that evidences the intention of the maker or drawer to become bound

by it.

(3) Presumption. — Delivery is presumed from possession. Except as

against a holder in due course, the maker or drawer may overcome this

prima facie presumption by proof that the instrument was lost or stolen.

(Babb & Martin, op. cit., p. 188.)

Where delivery conditional.

The delivery may be conditional.

(1) Condition precedent. — Parol evidence is admissible to show that

(notwithstanding delivery) the instrument was to become operative as a

contract only upon the happening of a future, contingent event, since this is

a condition precedent to the attaching of any obligation under the written

instrument.

EXAMPLE:

M delivers his promissory note to P stating orally that the note

is not to take effect until P delivers to M a deed to certain property.

P fails to deliver the deed.

Evidence of the oral agreement is admissible to show that the

note which purports to be a contract is in fact no contract at all.

(2) Condition subsequent. — Where an instrument is unconditionally

delivered as an operative contract, parol evidence is not admissible to show

a parol condition (not expressed in the writing) attached to the obligation of

the contract.

EXAMPLE:

M is sued by P on a promissory note given by M in part

payment of his tuition fee. M testifies that P promised orally that M

would be released on the note if M should decide to discontinue

with his course and should so notify P before he

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had received more than five lessons, and that M did so decided

and notify P in accordance with the oral agreement.

The testimony of M is not admissible as it is in direct

contradiction of the written contract (as to the existence and

validity of which there is no controversy) and its admission ' i would

violate the parol evidence rule. (Babb & Martin, op. tit., pp.

188-189.)

Sec. 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

Meaning and nature of indorsement.

(1) Indorsement is the 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, (see Norton, op. cit., 4th ed., p. 148.) The payee

by signing (indorsing) the instrument and delivering it to another person (in

payment of debt payee owes him or for any other reason) becomes an

indorser. The person who receives the indorsed instrument is the indorsee.

He can indorse the Instrument to some else and thus become an indorser as

well.

Indorsement alone without delivery conveys no title and creates no

holder. Indorsement in accordance with Section 191, paragraph 8 means an

indorsement completed by delivery. It applies to both bills and notes.

(2) An indorsement is not only a mode of transfer. It involves also a

new contract and an obligation on the part of the indorser — an implied

guaranty that the instrument will be duly paid according to the terms

thereof. By his indorsement, the indorser becomes a party to the

instrument, and may be held liable for its payment even without receiving

any consideration therefor, (see Sec. 29.) Each indorsement generates an

additional contract between the indorser and aU subsequent Holders.

(3) It involves the certainty of two things:

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(a) the identity of the indorser (as being the payee or true

owner); and

(b) the genuineness of his signature.

It is the duty of a person cashing or paying on an instrument to ascertain

both before paying. (American Express Co. v. People's Sav. Bank, 181 NW

701; see Sec. 23.) But the acceptor does not admit the genuineness of the

indorsees signature, (see Sec. 62.)

Indorsement and assignment distinguished.

The two terms are to be distinguished in that the latter is broader, and

sometimes include the former. It is, however, a common practice to speak

of the indorsement of negotiable, and the assignment of non-negotiable,

instrument in blank, (see Hughes v. Kaw, Invest. Co., 31ALR 727.)

Necessity of indorsement.

(1) Indorsement is essential to the execution of an instrument payable

to the order of the maker or drawer, (see Sees. 8[b], 184.)

(2) It is also essential to the negotiation of an order instrument, not of

a bearer instrument. (Sec. 30.)

(3) It is not necessary to a mere assignment of a negotiable or

non-negotiable instrument, (supra.) Thus, one may acquire title to such

instrument without indorsement but without indorsement of an order

instrument, he cannot be a holder in due course thereof even though he is

entitled to have the indorsement made, (see Sec. 49.)

(4) Under proper circumstances, an estoppel 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, (see Sec. 23; see 11 Am. Jur. 2d

371.)

Form of indorsement.

The law does not require an exclusive form by which an indorsement

may be accomplished. But it "must be written"

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or in writing. As "writing" includes "print" (Sec. 191, par. 13.), the

indorsement made by rubber stamp or typewritten on the instrument

complies with the requirement. The use of the word "assign" does not

make a negotiation a mere assignment. For example: "I hereby assign all

my rights and interests in this note. (Sgd.) P."Clearly, it cannot be said that P

intends to limit the rights of the person to whom he transfers the

Instrument.

According to Section 31, the signature of the indorser, without

additional words, is a sufficient indorsement. Such indorsement is called

"blank indorsement." (Sec. 34.) Where the name of the indorsee is specified,

it is called "special indorsement." (ibid.) The indorser, however, may add

words which prohibit or limit the further negotiation of the instrument, (see
Sec. 36.)

ILLUSTRATIVE CASE:

Guaranty by payee at the back of the note is followed by his

signature.

Facts: At the back of a promissory note payable to order issued

by M, the following notation appears: "For value received I hereby

guarantee payment of the within note including interest and costs

at maturity or at any time thereafter demanded." (Sgd.) P (payee)

Before maturity of the note, A became the bona fide

purchaser thereof, for value and without notice of any defense

thereto. A brought suit to recover upon the note. M argued that

the guaranty provision on the back standing alone was not an

indorsement and the note was not thereby negotiated but merely

transferred or assigned subject to defenses existing in favor of the

maker against the original payee.

Issue: Did the guaranty followed by the signature of P amount

to an indorsement?

Held: There are two conflicting lines of authority. The

reasoning of authorities which support the position of M is that the

indorsement is not in blank, but is filled up; that it expresses fully

the contract, and can raise no implication of another. The majority

of decisions hold that the guaranty operates as an indorsement

with enlarged liability. But such a guaranty is wholly inoperative

until the note is transferred by the payee to a third party. (Hutson

v. Rankin, 213 Pac. 345.)

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Place of indorsement.

The indorsement may be written:

(1) On the instrument itself. — Indorsement is derived from the Latin

word indorsa. Literally, it means "writing on the back/' While indorsement is

usually written on the back, it may be written on the face of the instrument.

The place is not essential. The law looks to the intention of the parties rather

than to the form as to indorsement, (see Sees. 17[f], 63.) When it is not clear

in what capacity a person intended to sign, he shall be deemed an indorser;

or

(2) Upon a paper attached thereto. — Where the indorsement is on a

slip of paper physically attached to the instrument so as to become part of it,

die paper is known as allonge.

Use of allonge for indorsement.

The question as to whether an allonge can be used whether or not

there is still room in the instrument has given rise to much conflict.

Although the law makes no distinction, the better view seems to be that

it is immaterial whether there is still room or not. As one author has said:

"why should such a space be material when some indorsements are on an

attached piece of paper?" In neither case does the leaving of a blank space

facilitate fraud, since nobody would gain any advantage by inserting his

name in the space and rendering himself liable to those who indorsed below

him upon the note or the allonge. (Beutel's Brannan, op. cit.f p. 601.)