WHAT CONSTITUTES NEGOTIATION

Transfer from one person to another so as to constitute the transferee the holder
thereof

IF PAYABLE TO BEARER(Negotiated by delivery)

IF PAYABLE TO ORDER (Negotiated by indorsement and completed by delivery)

THREE METHODS OF TRANSFER

(1) By assignment; (2) By operation of law; (3) By negotiation

WHAT IF A PERSON TRANSFERRED A NI ONLY THRU ASSIGNMENT

Instrument becomes non-negotiable hence subject to the rules on assignment

TRANSFER BY OPERATION OF LAW

(1) Death of the holder, title vests in his representative; (2) Bankruptcy of the holder,
title vests in his assignee or trustee; (3) Upon the death of joint payee or indorsee, title
vests in the surviving payee or indorsee

INDORSEMENT

HOW INDORSEMENT MADE

- Affixing the signature on the instrument or upon a paper attached thereto
- Not just a mode of transfer but it is also a contract

WHERE INDORSEMENT WRITTEN

- (1) on the instrument or (2) on a paper attached to the instrument called allonge
- usually written on the back of the instrument

INDORSEMENT MUST BE OF ENTIRE INSTRUMENT

- So, A is the maker and P is the payee for the amount of P1,000, P should indorse the
instrument to B for the full amount of P1,000, otherwise, lets say he just indorsed it to
the amount of P500,

Question:
Is there a valid negotiation? (There would be an invalid negotiation)
So, the obligation to pay is extinguished? (No, it may constitute as a valid assignment
between the parties)

EXCEPTION
Where the instrument has been paid in part, it may be indorsed as to the residue

For example, A, indorser, not by virtue of the instrument, has paid P600 already to X,
yet the note negotiated to P is worth P1,000

How much can P indorse to X by virtue of the instrument? (P can indorse it as to the
balance only, that is, P400)

INDORSEMENT TO INDORSEES SEVERALLY, VALID OR NOT

- Not a valid negotiation, it must be joint
- Valid negotiation is Pay to X and Y. (Sgd.) B
- Invalid negotiation is Pay to X or Y. (Sgd.) B
- So, drawee and indorsee can be joint but not severally

KINDS OF INDORSEMENT
(1) Special; (2) In blank; (3) Restrictive; (4) Conditional; (5) Qualified

SPECIAL INDORSEMENT and INDORSEMENT IN BLANK

An indorsement which names the indorsee; an indorsement which does not specify the
indorsee

HOW FURTHER NEGOTIATED

- If payable to bearer, can be negotiated by delivery only even if there was an
indorsement
- If payable to order, there must be an indorsement, special or in blank, if in blank, it
converts the instrument into a bearer instrument, hence, it may now be negotiated by
delivery. So, an order instrument may be converted into a bearer instrument by virtue
of an indorsement in blank

HOW TO CONVERT A BLANK INDORSEMENT INTO A SPECIAL INDORSEMENT

(ORDER INSTRUMENT ONLY)
For example, A indorsed the instrument to B indorsement in blank. (Sgd.) A, to
convert it into a special indorsement, B will just indorse it in the following manner Pay
to C. (Sgd.) B

RESTRICTIVE INDORSEMENT
(a) Prohibits the further negotiation of the instrument;
(b) Constitutes the indorsee the agent of the indorser;
(c) Vests the title in the indorsee in trust for or to the use of some other persons

PROHIBITS THE FURTHER NEGOTIATION

Example: Pay to C only; Pay to C and no other person

Illustration: (Which one is negotiable?)

(a) I promise to pay C only the amount of P10,000
(b) Indorsement is Pay to C only. (Sgd.) B
- (a) is non-negotiable; (b) presupposes that it is negotiable because it was negotiated
by indorsement, but by virtue of such restrictive indorsement, negotiability of the
instrument ceases; it can no longer be negotiated

CONSTITUTES THE INDORSEE THE AGENT OF THE INDORSER

Example: Pay to C for collection. (Sgd.) B; Pay to C for deposit. (Sgd.) B

By indorsing it this way, C does not acquire title over the instrument as against B. C
merely becomes the agent of B and may present the paper, demand and receive
payment, and remit the proceeds to B. And since C is only an agent of B, if an action is
filed against C, C may raise the defenses available to B, his principal

Can it still be negotiated? Yes

It does not render the instrument non-negotiable, but it only prohibits further
negotiation for any purpose except collection or deposit
VESTS TITLE IN TRUST FOR OR TO THE USE OF SOME OTHER PERSONS
Example: Pay to X in trust for C; Pay to X for the use of C

PRESUMPTION OF CONSIDERATION
As a rule, there is presumption; In restrictive indorsement under (a) and (b), the
presumption does not apply; In (c) the presumption applies in favour of the person who
will enjoy the trust or the use (in the example given, it is C)

EFFECT OF OMISSION OF WORDS OF NEGOTIABILITY IN INDORSEMENT

Illustration:
(a) (Body of the instrument) Pay to X or order is negotiable but Pay to X is non-
negotiable
(b) (Indorsement) Pay to X is still negotiable even if no order or bearer

EFFECT OF RESTRICTIVE INDORSEMENT TO INDORSEE

(1) To receive payment of the instrument;
(2) To bring any action thereon that the indorser could bring;
(3) To transfer his right as indorsee, where the form of the indorsement authroizes him
to do so
*But all subsequent indorsees acquire only the title of the first indorsee under the
restrictive indorsement

AMONG THE THREE, WHICH CANNOT BE TRANSFERRED

The first one

ALL SUBSEQUENT INDORSEES ACQUIRE ONLY THE TITLE OF THE FIRST

INDORSEE

Illustration:
(1)A, maker, made a note payable to B or order. B indorsed the instrument to C in this
manner Pay to C for collection only. (Sgd.) B

Question:
Who is the indorser? (B); Who is the indorsee? (C)
Can C further indorse the instrument to, lets say, D? (Yes)
But will D get to keep the money after he eneforced it against A, the party primarily
liable? (No, he only acquired the title of the first indorsee, that is, C)
What is the duty or obligation of D, then? (To collect the amount from A then remit it to
B)

(2)What if B indorsed the instrument to C in this manner Pay to C and no other else.
(Sgd. B)

Question:
Who is the indorser? (B); Who is the indorsee? (C)
Can C further indorse the instrument to, lets say, D? (No)

(3)What if X indorsed the instrument to Y in this manner Pay to Y for deposit only.
(Sgd.) X But Y has a debt of P1,000 to Z.
Question:
Can Y negotiate the instrument to Z as payment for his own debt? (No)

(4) A makes a note payable to B or order. B indorsed it to C for collection only. C

indorsed it to D. Then D to E.

Question:
To whom can E enforce the instrument? (A)
Who is the first indorsee? (C)
What was the undertaking of C? (To collect payment then remit it to B)
As to the indorsers and indorsees, is there consideration between them? (None)
What is now the undertaking of E? (To collect payment from A and remit it to B since E
acquires only the title of the first indorsee, C)
What if A refused payment, can E hold D, C and B secondarily liable? (No, B is the one
who has the right to hold A liable under their contractual relation; and besides, there is
no consideration involved as between E and D, C and B; only between A and B

QUALIFIED INDORSEMENT
Whenever you see the words: without recourse, sans recourse, indorser not
holden, at the indorsees own risk; does not impair the negotiable character of the
instrument

It constitutes the indorser a mere assignor of the title to the instrument, that is, when
party primarily liable defaulted in payment, an indorser making a qualified indorsement
cannot be held liable by the holder, but his warranties under Section 65 of the NIL still
stand, hence, holder may still hold indorser secondarily liable if the instrument has
been dishonoured due to:
(1) forgery;
(2) lack of good title on the part of the indorser;
(3) lack of capacity to indorse on the part of prior parties;
(4) that at the time of the indorsement, the instrument was valueless or not valid and he
knew of that fact

Illustration:
A makes a note payable to B or his order. B indorses the note Sans recourse, Pay to X,
(Sgd.) B

Question:
Who is the person to enforce payment? (X)
To whom should he enforce payment? (A)
What if A cannot pay because he is insolvent, what will happen next? (If B is held liable,
he can refuse payment by virtue of his qualified indorsement)
What if A refused payment because his signature was forged, what will happen next?
(Can enforce liability against B despite of his qualified indorsement, mainly because his
warranties stand)

CONDITIONAL INDORSEMENT
Does not render an instrument non-negotiable

Illustration:
A makes a note payable to B or bearer. B indorsed it to C in that: Pay to C if he wins in
the election. (Sgd.) B

Question:
Is the instrument negotiable? (Yes)
Who will enforce payment on the instrument? (C)
Should A wait first for the fulfilment of the condition before he pays? (No, he can
disregard the condition)
What if A validly refused, could C enforce payment against B even without complying
with the condition? (No)

INDORSEMENT OF INSTRUMENT PAYABLE TO BEARER

An instrument which was originally a bearer instrument may be negotiated by delivery
even if it was previously specially indorsed; once a bearer always a bearer; but an order
instrument may be converted into a bearer instrument by indorsing it in blank

A person indorsing specially in a bearer instrument is liable as indorser to only such

holders as make title through his indorsement

Illustration
A-maker, B-payee; bearer instrument, B delivered it to D; D specially indorsed it to E; E
specially indorsed it to F; F delivered it to G.

Question
Can F deliver the instrument to G? (Yes, once a bearer always a bearer)
Who is the party primarily liable? (A)
What if A validly refused, who can be held liable by G? (Only F. D and E cannot be held
liable because G did not make title through their indorsement but through delivery of F)
What if F specially indorsed the instrument to G, who are the parties secondarily liable?
(D, E and F)

HOW TO INDORSE IF INSTRUMENT IS PAYABLE TO TWO OR MORE PERSONS

Example: Pay to the order of A and B

Who should indorse? (Both)

Why can A alone or B alone not indorse the instrument? (Because they would indorse
only the part or amount pertaining to them, example, P500 each, hence, they are not
indorsing the entire instrument)

Exceptions:
(1) They are partners
(2) When the party indorsing it has been authorized by the other partner to indorse it
by himself

INDORSEMENT TO CASHIER OR OFFICER OF A BANK OR CORPORATION

Who may indorse? The officer himself or the bank or corporation

INDORSEMENT OF AN AGENT
He must indorse in such a manner as to let others know that he is only indorsing it as
an agent, hence, he negates personal liability, otherwise, he may be held personally
liable.

How to do it? By disclosing the name of his principal

WHAT IS THE PRESUMPTION IF THERE IS NO TIME SPECIFIED WHEN THE

INSTRUMENT WAS INDORSED?

The presumption is that it was indorsed before the instrument became overdue, unless
proven otherwise; this is important in order to determine if the holder is in due course
or not

WHEN NEGOTIABILITY OF AN INSTRUMENT ENDS

(1) When it is discharged by payment or otherwise
(2) When it is restrictively indorsed (even item 2 and 3? No, item 1 only)

TRANSFER WITHOUT INDORSEMENT IN INSTRUMENT PAYABLE TO ORDER

The following are the rights of the transferee:

(1) He acquires only the rights of the transferor;
(2) He may require the transferor to indorse the instrument

Illustration:
A, maker made a note payable to B or order but the truth is there was no consideration
involved. B negotiated it without indorsing to C who did not know about the absence of
consideration.

Question:
Can C recover from A? (No because there was no indorsement and C, although he
appears to be a HIDC, acquired only Bs rights, and B cannot collect from A because the
latter can raise the defense of absence of consideration)

STRIKING OUT INDORSEMENT

What can be stricken out? (Any indorsement which is not necessary to his title)

Who strikes out indorsement? (The holder)

What is the effect of striking out? (The indorser whose indorsement is struck out and all
indorsers subsequent to him are relieved from liability on the instrument)

Illustration:
A, maker, makes a note payable to B or bearer. B indorsed the instrument to C, C
indorsed it to D, D indorsed to E, but E delivered it to H.

Question:
Who can strike out indorsement? (H)
Which indorsement can H strike out? (Indorsement of B, C and/or D because they are
not necessary to his title)
If H strikes out the indorsement of B, who are the parties relieved? (B, C and D)
WHEN PRIOR PARTY MAY NEGOTIATE INSTRUMENT

Illustration:
A makes a bill payable to B or order.
Indorsement was B --- C --- D --- E --- F --- G --- back to D

Can D renegotiate the instrument? (Yes)

Can he renegotiate it to H, a non-party to the instrument? (Yes)
Can he enforce the instrument against E, F or G? (No, because he can be held liable by
them, that is, to avoid circuity of suits)

WHAT CONSTITUTES A HOLDER IN DUE COURSE (SEC. 52)

A holder who has taken the instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it had
been previously dishonoured;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it

Every holder is presumed to be a HIDC

WHAT ARE THE RIGHTS OF A HIDC

(1) He may sue on the instrument in his own name;
(2) He may receive payment
(3) He may discharge the instrument
(4) He may enforce payment
(5) He may hold the instrument free from any defect of title or prior parties
(5) He holds the instrument free from any defenses available to prior parties

SHELTER RULE (Sec. 58 of the NIL)

A issued a note to B and authorized the latter to fill out the amount in blank with
P10,000. However, B inserted P20,000 in violation of the instruction. She negotiated the
note C who had knowledge of the infirmity. C thereafter negotiated the instrument to D
who had no knowledge of the infirmity and took it for value. D negotiated it to E who
had knowledge of the infirmity.

Question:
Can E hold A liable? (Yes)
But he is non-HIDC and A may raise the personal defense of filling out not within
authority? (No. Under Sec.58 of the NIL, a holder who derives his title through a HIDC,
and who is not himself a party to any fraud or illegality affecting the instrument, has all
the rights of such former HIDC. This is the Shelter Rule.

A issued a bill payable to B or order. But it was found out that B and his friend X
induced A by fraud in making such issuance. B indorsed the note to C, C indorsed it D,
D indorsed to E, a HIDC, then E indorsed it to X.
Question:
Can X hold A secondarily liable? (No)
Shelter rule does not apply? (No because although he derived his title from a HIDC, he
was a party to the fraud affecting the instrument, hence, the general rule applies)

LIABILITIES OF PARTIES

LIABILITY OF MAKER
By making it, engages that (1)he will pay it according to its tenor and (2)admits the
existence of the payee and his capacity to indorse

A, maker, makes a note payable to B who is insane. B indorsed it to C, to D and to E.

Question:
If E enforces payment against A, can A refuse claiming that B, the payee is insane? (No)

LIABILITY OF DRAWER
By drawing the instrument, admits (1)the existence of the payee and his capacity to
indorse; engages (2)that on due presentment the instrument will be accepted or paid or
both according to its tenor and if dishonoured and the necessary proceedings on
dishonour be duly taken, he will pay the amount to the holder or to any subsequent
indorser who may be compelled to pay

But the drawer may insert in the instrument an express stipulation negativing or
limiting his own liability to the holder only

LIABILITY OF ACCEPTOR
By accepting the instrument, engages (1)that he will pay it according to the tenor of his
acceptance; admits (2)the existence of the drawer, the genuineness of his signature,
and his capacity and authority to draw the instrument; and (3)the existence of the
payee and his capacity to indorse

A draws a bill payable to P or order and drawn against X drawee bank. The instrument
is for P50,000. P indorsed it to B, C then H. When H presented it to X for acceptance, X
accepted it for P35,000 only.

Question:
How much should X pay? (P35,000)
What happens to the P15,000 deficiency? (Can ask from the party secondarily liable)

WARRANTY OF GENERAL INDORSER

(1) That the instrument is genuine and in all respects what it purports to be;
(2) That he has a good title to it;
(3) That all prior parties had capacity to contract;
(4) That the instrument is, at the time of the endorsement, valid and subsisting
It also engages that on due presentment, it shall be accepted or paid, or both, as the
case may be, according to its tenor; and if it be dishonoured and the necessary
proceedings on dishonour be duly taken, he will pay the amount thereof to the holder,
or to any subsequent indorser who may be compelled to pay it.

ORDER IN WHICH INDORSERS ARE LIABLE

If the indorsement is BCDEFGH

Question:
If H chose E to pay, to whom can E ask reimbursement? (B,C,D but not F and G)

If the indorsement is like this, Pay to C. (Sgd.) A and B, A and Bs liability is joint and
several, hence, C can ask full payment from any of them. Solidary, Joint and Several,
Several as opposed to Indivisible, Joint.