Negotiable Instruments Law

Note: Section 32 disallows negotiation to two or

more indorsees severally.
BB. NEGOTIATION c. Kinds of indorsement (Sec. 33)

An indorsement may be either special or in blank;

and it may also be either restrictive or qualified or
1. What constitutes negotiation (Sec. 30) conditional.

“An instrument is negotiated when it is 1. Special indorsement (Sec. 34)

transferred from one person to another in such A special indorsement specifies the person to
manner as to constitute the transferee the holder whom, or to whose order, the instrument is to be
thereof. If payable to bearer, it is negotiated by payable, and the indorsement of such indorsee is
delivery; if payable to order, it is negotiated by the necessary to the further negotiation of the
indorsement of the holder and completed by instrument.
delivery.”
Designates the indorsee.
2. Negotiation distinguished from other methods
of transfer Example: “Pay to X”

3. Negotiation by INDORSEMENT coupled 2. Indorsement in blank (Sec. 34)

with DELIVERY
An indorsement in blank specifies no indorsee,
a. How indorsement is made (SEC. 31) and an instrument so indorsed is payable to
bearer, and may be negotiated by delivery.
The indorsement must be written on the
instrument itself or upon a paper attached thereto. Note: no indorsee is specified and it is done by
The signature of the indorser, without additional affixing the indorsee’s signature.
words, is a sufficient indorsement.
a. How blank indorsement is changed to special
b. Indorsement must be of entire instrument indorsement (Sec. 35)
(Sec.32)
The holder may convert a blank indorsement into
The indorsement must be an indorsement of the a special indorsement by writing over the
entire instrument. signature of the indorser in blank any contract
consistent with the character of the indorsement.
Note: An instrument for 5000 cannot be indorsed
for less. 3. Restrictive indorsement (Sec. 36; relate
Sec.36 (a.) to Sec. 47)
Exception: When there is previous partial
payment. An indorsement is restrictive which either:

An indorsement which purports to transfer to the (a) Prohibits the further negotiation of the
indorsee a part only of the amount payable, or instrument;(Pay to X only) or
which purports to transfer the instrument to two
or more indorsees severally, does not operate as (b) Constitutes the indorsee the agent of the
a negotiation of the instrument. But where the indorser; (Pay to X for collection)or
instrument has been paid in part, it may be
indorsed as to the residue. (c) Vests the title in the indorsee in trust for or to
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 Negotiable Instruments Law

the use of some other persons. (Pay to X in trust import. Such an indorsement does not impair the
for Y) negotiable character of the instrument.

But the mere absence of words implying power to Note: An indorsement “without recourse” does
negotiate does not make an indorsement not affect the negotiability of an instrument. It
restrictive. only shows an unwillingness to be answerable for
the insolvency of prior parties.
Note: A restrictive indorsement is one worded that
it either prohibits entirely the further negotiation 5. Conditional indorsement (Sec. 39)
of an instrument or restricts its further negotiation
to a particular person or for a particular purpose; Where an indorsement is conditional, the party
or modifies the rights of the holders or the required to pay the instrument may disregard the
liabilities of the indorser. condition and make payment to the indorsee or his
transferee whether the condition has been fulfilled
The mere absence or words implying power to or not. But any person to whom an instrument so
negotiate does not make an indorsement indorsed is negotiated will hold the same, or the
restrictive. proceeds thereof, subject to the rights of the
person indorsing conditionally.
But if in their place a restrictive word such as
“only” is employed as to prevent further 6. Unconditional or unqualified indorsement
negotiation, the instrument is not only restrictively
endorsed but also ceases to be negotiable. 7. Irregular indorsement (Sec. 64)

a. Effect of restrictive indorsement, rights of ​Where a person, not otherwise a party to an

restrictive indorsee (Sec. 37) instrument, places thereon his signature in blank
before delivery, he is liable as indorser, in
A restrictive indorsement confers upon the accordance with the following rules:
indorsee the right:
(a) If the instrument is payable to the order of a
(a) to receive payment of the instrument; third person, he is liable to the payee and to all
subsequent parties.
(b) to bring any action thereon that the indorser
could bring; (b) If the instrument is payable to the order of the
maker or drawer, or is payable to bearer, he is
(c) to transfer his rights as such indorsee, where liable to all parties subsequent to the maker or
the form of the indorsement authorizes him to do drawer.
so.
(c) If he signs for the accommodation of the
But all subsequent indorsees acquire only the title payee, he is liable to all parties subsequent to the
of the first indorsee under the restrictive payee.
indorsement.
8. Joint indorsement (Sec. 41)
4. Qualified indorsement (Sec. 38)
Where an instrument is payable to the order of
A qualified indorsement constitutes the indorser a two or more payees or indorsees who are not
mere assignor of the title to the instrument. It may partners, all must indorse unless the one indorsing
be made by adding to the indorser's signature the has authority to indorse for the others.
words "without recourse" or any words of similar
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 Negotiable Instruments Law

d. Indorsement of instrument payable to bearer instrument as therein described adding, if he

(Sec. 40 & 67) thinks fit, his proper signature.

Where an instrument, payable to bearer, is g. Indorsement in representative capacity

indorsed specially, it may nevertheless be further (Sec.44)
negotiated by delivery; but the person indorsing
specially is liable as indorser to only such holders Where any person is under obligation to indorse in
as make title through his indorsement.(Section 40) a representative capacity, he may indorse in such
terms as to negative personal liability.
Example:
h. Time of indorsement; presumption (Sec. 45)
Richard Clinton makes a promissory note payable to bearer and
delivers the same to Aurora. Aurora indorses it to X in this Except where an indorsement bears date after the
manner:
maturity of the instrument, every negotiation is
“Payable to X. Signed: Aurora”
deemed prima facie to have been effected before
Later, without indorsing the promissory note, X transfers and the instrument was overdue.
delivers the same to Napoleon. Richard Clinton subsequently
dishonors the note. May Napoleon proceed against Richard i. Place of indorsement; presumption (Sec. 46)
Clinton for the note?
Except where the contrary appears, every
A: Yes, Napoleon may proceed against Richard Clinton. The
instrument was negotiated by delivery to Napoleon. Despite the
indorsement is presumed prima facie to have been
special indorsement of Ms. Page it can still be negotiated by made at the place where the instrument is dated
delivery because it is originally a bearer instrument (Sec. 40,
NIL). Hence, Napoleon became a holder who has the right to j. Effect of indorsement by infant or
enforce the instrument against the maker, Richard Clinton (1998
corporation (Sec. 22)
Bar).

The indorsement or assignment of the instrument

Where a person places his indorsement on an by a corporation or by an infant passes the
instrument negotiable by delivery, he incurs all the property therein, notwithstanding that from want
liability of an indorser.(Section 67) of capacity, the corporation or infant may incur no
liability thereon.
e. Effect of instrument drawn or indorsed to a
person as cashier (Sec. 42) k. Continuation of negotiable character (Sec.
47)
Where an instrument is drawn or indorsed to a
person as "cashier" or other fiscal officer of a ​An instrument negotiable in its origin continues to
bank or corporation, it is deemed prima facie to be be negotiable until it has been restrictively
payable to the bank or corporation of which he is indorsed or discharged by payment or otherwise.
such officer, and may be negotiated by either the l. Striking out indorsement (Sec. 48)
indorsement of the bank or corporation or the
indorsement of the officer. The holder may at any time strike out any
indorsement which is not necessary to his title.
f. Indorsement where name is misspelled, and The indorser whose indorsement is struck out, and
so forth (Sec. 43) all indorsers subsequent to him, are thereby
Where the name of a payee or indorsee is wrongly relieved from liability on the instrument.
designated or misspelled, he may indorse the m. Effect of transfer without indorsement (Sec.
49)
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 Negotiable Instruments Law

Where the holder of an instrument payable to his The person in possession of the instrument has
order transfers it for value without indorsing it, the prima facie authority to complete it by filling the
transfer vests in the transferee such title as the blanks therein. (Section 14)
transferor had therein, and the transferee acquires
Regular
in addition, the right to have the indorsement of
the transferor. But for the purpose of determining ● In order for an instrument to be irregular under Sec.
whether the transferee is a holder in due course, 52 (a), the alteration, tampering, or erasure must be
the negotiation takes effect as of the time when visible or apparent on the face of the instrument.
● Otherwise, if not visible or apparent, the holder can
the indorsement is actually made.
still be considered a HIDC.
n. When prior party may negotiate instrument Material alteration (S. 124)
(Sec. 50)
● A change in any of the matters mentioned or any other
Where an instrument is negotiated back to a prior change which alters the effect of the instrument in any
party, such party may, subject to the provisions of respect.
● Effect: instrument is avoided; presence of material
this Act, reissue and further negotiable the same. alteration discharges the instrument *subject to certain
But he is not entitled to enforce payment thereof exceptions
against any intervening party to whom he was ● Does not matter whether it is favorable or not to the
person who is responsible for the alteration.
personally liable.
What constitutes material alteration (S. 125)

SEC 125. What constitutes a material alteration. - Any alteration

RIGHTS OF THE HOLDER which changes-

a) The date;
b) The sum payable, either for principal or interest;
1. Meaning of “holder” (Sec. 191) c) The time or place of payment;
d) The number or the relations of the parties;
e) The medium or currency in which payment is to be
: ​means the payee or indorsee of a bill or note who made; Or which adds a place of payment where no place
is in possession of it, or the bearer thereof; of payment is specified, or any other change or addition
which alters the effect of the instrument in any respect, is
2. Kinds of holder: Holder in due course and a material alteration.
holder not in due course
Effect of Material Alteration (S. 124)

a. Holder in due course SEC. 124. Alteration of instrument; effect of.- Where a instrument
is materially altered without the assent of all parties liable thereon,
1. What constitutes a holder in due course (Sec. it is avoided, except as against a party who has himself made,
52) authorized, or assented to the alteration, and subsequent indorsers.

Sec. 52. What constitutes a holder in due course. - But when an instrument has been materially altered and is in the
hands of a holder in due course, not a party to the alteration, he
A holder in due course is a holder who has taken may enforce payment thereof according to its original tenor.
the instrument under the following conditions:

(a) That it is complete and regular upon its face;

Note: An instrument is complete if not wanting in

any material particular.

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Negotiable Instruments Law

(b) That he became the holder of it before it was

overdue, and without notice that it has been
previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

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 Negotiable Instruments Law

ii. When title defective (Sec. 55)

The title of a person who negotiates an instrument

is defective when:

1) he obtained the instrument, or any

signature thereto, by fraud, duress, or force
and fear, or other unlawful means, or for
an illegal consideration, or

2) when he negotiates it in breach of faith, or

under such circumstances as amount to a
fraud.
(d) That at the time it was negotiated to him, he
iii. What constitutes notice of defect (Sec. 56)
had no notice of any infirmity in the instrument
or defect in the title of the person negotiating it. To constitute notice of an infirmity in the
instrument or defect in the title of the person
negotiating the same, the person to whom it is
negotiated must have had actual knowledge of the
infirmity or defect, or knowledge of such facts
that his action in taking the instrument amounted
to bad faith.

i. Notice before full amount paid (Sec.54) Note:

Where the transferee receives notice of any Mere negligence to make inquiries is not
infirmity in the instrument or defect in the title of sufficient to constitute notice since it is not
the person negotiating the same before he has paid equivalent to actual knowledge or bad faith.
the full amount agreed to be paid therefor, he will
be deemed a holder in due course only to the If the holder had actual knowledge of suspicious
extent of the amount therefore paid by him. circumstances, and he wilfully abstained from
making inquiries, his intentional ignorance may
amount to bad faith.

2. Who is deemed holder in due course (Sec. 59)

Every holder is deemed prima facie to be a

holder in due course; but when it is shown that
the title of any person who has negotiated the
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 Negotiable Instruments Law

instrument was defective, the burden is on the

holder to prove that he or some person under
whom he claims acquired the title as holder in due
course. But the last-mentioned rule does not apply
in favor of a party who became bound on the
instrument prior to the acquisition of such
defective title.

Note: One a person through whose hands an

instrument has passed shows that he is a holder,
the presumption accrues in his favor. He does not
have to prove that he acquired the instrument
under all circumstances required in Section 52.

But, when it is shown that the title of any person

who has negotiated the instrument was defective,
as when the instrument is not payable to him or to
bearer, the burden of proof shifts to the holder
who must show he is a holder in due course
although he is not himself a holder in due course b. Holder not in due course
3. Rights of a holder in due course (Sec. 51 & 1. When person not deemed holder in due course
Sec. 57) (Sec. 53)
1) To sue on the instrument in his own name; Where an instrument payable on demand is
negotiated on an unreasonable length of time after
2) To receive payment of the instrument, and
its issue, the holder is not deemed a holder in due
if the payment is in due course, the
course.
instrument is discharged. (Section 51)
2. Rights of a holder not in due course (Sec. 51 &
3) To hold the instrument free from any
Sec. 58)
defect of title of prior parties and free from
available defenses to the parties among 1) To sue on the instrument on his own name;
themselves; and 2) To receive payment of the instrument, and
if the payment is in due course, the
4) To enforce payment of the instrument for
instrument is discharged. (Section 51)
the full amount against all parties liable
3) To hold the instrument but is subject to the
thereon. (Section 57)
same defenses as if were non-negotiable.
4. Derivative holder in due course (Sec. 58, 2nd 4) To have all the rights of a HIDC if he
sentence) derives title from such holder and he
himself is not a party to any fraud
a holder who derives his title through a holder in
due course, and who is not himself a party to any 3. Situational rights of a holder
fraud or illegality affecting the instrument, has all
a. Right to insert true date of issue (Sec. 13)
the rights of such former holder in respect of all
parties prior to the latter. Section 13 authorizes the holder to insert a date on
an instrument where an instrument is payable at a
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 Negotiable Instruments Law

fixed period after date but is issued undated, and all indorsers subsequent to him, are thereby
the instrument shall be payable accordingly. relieved from liability on the instrument.

b. Right to insert true date of acceptance (Sec. 13) h. Right to give notice of dishonor (Sec. 89)

Where the acceptance of an instrument payable at “When a negotiable instrument has been
fixed period after sight is undated, any holder may dishonored by non-acceptance or non-payment,
insert therein the true date of acceptance, and the notice of dishonor must be given to the drawer
instrument shall be payable accordingly. and each indorser, and any drawer or indorser to
whom such notice is not given is discharged.”
Note: The date inserted, even if wrong, is to be
regarded as the true date. One who signs such an Notice of dishonor: is bringing, verbally or in
instrument furnishes the means of fraud and is writing, to the knowledge of the drawer or
estopped to deny his liability thereon. indorser of an instrument, the fact that a specified
negotiable instrument, upon proper proceedings
c. Right to complete an incomplete instrument taken, has not been accepted or has not been paid
(Sec. 14) and that the party notified is expressed to pay it.
Where the instrument is wanting in any material (Martin v. Brown)
particulate, the person in possession thereof has a A negotiable instrument is considered to be
prima facie authority to complete it by filling up dishonored:
the blanks therein.
1) If it is not accepted when presented for
d. Right to treat an ambiguous instrument as either acceptance; or
a bill or a note [Sec.17 (e)]; See also Sec. 130 2) If it is not paid when presented for
Where the instrument is so ambiguous that tere is payment at maturity;
doubt whether it is a bill or note, the holder may 3) If presentment is excused or waived and
treat it as either at his election. the instrument is past due and unpaid.

e. Right to sign in trade name or assumed name Note:

(Sec. 18) General Rule: Notice is essential; mere knowledge
f. Right to convert a blank indorsement into by the indorser of non-payment is not sufficient.
special one (Sec. 35) Exception: The maker and acceptor need not be
An instrument made payable to bearer by an notified because they are the very ones who
endorsement in blank may be converted into an dishonored the instrument. I.e. a joint maker
instrument by writing over the signature of the through a surety is not an indorser and is primarily
indorser in blank any contract not inconsistent liable, therefore, is not entitled to notice of
with the character of the indorsement. dishonor.

g. Right to strike out any indorsement not i. i. Right to discharge instrument by intentional
necessary to his title (Sec. 48) cancellation thereof (Sec. 119)

The holder may at any time strike out any A negotiable instrument is discharged –
indorsement which is not necessary to his title. a) By payment in due course by or on behalf
The indorser whose indorsement is struck out, and of the principal debtor;

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 Negotiable Instruments Law

b) By payment in due course by the party p. Right of the holder of a bill presenting the same
accommodated, where the instrument is for acceptance to require that the acceptance be
made or accepted for accommodation; written on the face of the bill (Sec. 133)
c) By the intentional cancellation thereof
by the holder; q. Right of holder of a bill to allow a period for
d) By any other act which will discharge the drawee to accept other than 24 hours (Sec. 137
simple contract for the payment of money; in relation to Sec. 136)
e) When the principal debtor becomes the r. Right of holder of a bill dishonored but
holder of the instrument at or after subsequently accepted to have the bill accepted as
maturity in his own right. of the date of the first presentment (Sec. 138)
Discharge of an instrument: means release of all s. Right of holder of a bill to refuse to take a
parties from the obligation arising thereunder. qualified acceptance and to treat the bill as
Renders the instrument without force and effect dishonored by non-acceptance if he does not
and consequently can no longer be negotiated. obtain an unqualified acceptance if he does not
j. Right to discharge a person secondarily liable by obtain an unqualified acceptance (Sec. 142)
intentional cancellation of his signature [Sec. 120 t. Right of a holder of a bill required to be
(b)] presented for acceptance either
A person secondarily liable on the instrument is to present it for acceptance or negotiate it within a
discharged by the intentional cancellation of his reasonable time (Sec. 144)
signature by the holder.
u. Right of holder of a bill dishonored by
Note: If the holder intentionally strikes out the non-acceptance to have immediate recourse
signature of a person secondarily liable, the effect against drawer and indorsers (Sec. 151)
is to discharge him from liability on the
instrument as if he has never been a party to the v. Rights of holders to whom different parts of a
same. No consideration is necessary to support the bill in set are negotiated (Sec. 179)
discharge.
w. Right of holder of a bill to allow acceptance of
k. Right to release the principal debtor and the same for honor (Sec. 161)
consequently discharge persons secondarily liable
CASES:
[Sec. 120 (e)]
• De Ocampo v. Gatchalian (3 SCRA 596)
l. Right to extend the time for payment
[Sec.120(f)] • Mesina v. IAC (145 SCRA 97)
m. Right to renounce his rights against any party
to the instrument (Sec. 122)

n. Right to enforce payment of a materially altered

instrument according to its original tenor (Sec.
124)

o. Right to resort to the referee in case of need

(Sec. 131)