Negotiable Instruments Notes: Negotiation (Sec. 30-50)


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. (BDO-ID)
  • If payable to bearer, it is negotiated by delivery; 

    • NOTE: only here negotiation = delivery

  • if payable to order, it is negotiated by the indorsement of the holder and completed by delivery.



  • 3 methods of transfer: - by

  1. assignment - non-nego instruments whereby the assignee is 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; assignee substitute the place of the assignor

  2. operation of law - by (1) death of the holder> representative (2) bankruptcy of the holder>assignee or trustee (3)death of a joint payee or indorsee > GR surviving payee or indorsee

  3. negotiation < Negotiable Instruments Law III

*Sec. 31. Indorsement; how made. - The indorsement must be written:
  • on the instrument itself; or 

  • upon a paper attached thereto. (Allonge) (NOTE: can ONLY be used when there is physical impossibility of writing the indorsement on the instrument itself)

The signature of the indorser, without additional words, is a sufficient indorsement.

  • Indorsement 

    • mode of transfer

    • contract

NOTE: Allonge - can ONLY be used when there is physical impossibility of writing the indorsement on the instrument itself

Sec. 32. Indorsement must be of entire instrument. - 
  • GR: 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. 

  • EX: But where the instrument has been paid in part, it may be indorsed as to the residue.

  • Effect of partial indorsement when unauthorized = valid assignment binding between parties

  • Examples:

    • 2 or more indorsees severally: Pay to A P500 and B P500 - INVALID

    • 2 or more indorsees solidarily : Pay to A and B P500 - VALI

*Sec. 33. Kinds of indorsement. - An indorsement may be either special or in blank; and it may also be either restrictive or qualified or conditional. (SB-RQC)

  • Kinds of indorsement:

    1. special 

    2. in blank

    3. absolute - binds upon no condition than the failure of prior parties

    4. conditional

    5. restrictive 

    6. qualified

    7. joint

    8. successive

    9. irregular

    10. facultative 

*Sec. 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.

NOTE: Where the instrument is originally payable to bearer, it can be further negotiated by mere delivery, even if the original bearer negotiated it by special indorsement

Sec. 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.
Limitation upon conversion of blank indorsement - contract written must not change the contract of the blank indorser
  • Examples of those allowed:

    • Demand and notice waived

    • I guaranty payment 

    • Without recourse

Sec. 36. When indorsement restrictive. - An indorsement is restrictive which either:

(a) Prohibits the further negotiation of the instrument; or (only this form converts into non-negotiable instrument)
  • Examples: 

    • Pay to C ONLY

    • Pay to C and NO other person

(b) Constitutes the indorsee the agent of the indorser; or (agency type) (acquires title of indorsee only for the restrictive purpose)
  • Examples: 

    • Pay to C for collection

    • Pay to C for deposit

(c) Vests the title in the indorsee in trust for or to the use of some other persons.  (trust type) (acquires title of indorsee only for the restrictive purpose)

  • Examples: 

    • Pay to C in trust for D

    • Pay to C for the use of D

But the mere absence of words implying power to negotiate does not make an indorsement restrictive.


NOTE: 
  • holder in due course can still hold drawer with the good defense liable

    • Rationale: did NOT give notice of defenses obtaining between prior parties

  • still presumes consideration 

  • Effect of omission of words of negotiability (i.e. or order) = non-negotiable instrument but does NOT affect negotiability

Sec. 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.


Sec. 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.
  • qualifying words:

    • without recourse

    • sans recours

    • indorser not holden

    • with intent to transfer title only

    • not to incur liability as indorser

    • at the indorsee's own risk

  • Do NOT guarantee the financial responsibility of the parties on the paper just hold title to it as personal property

  • only secondarily liable if the instrument is dishonored by non-acceptance or non-acceptance 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 the prior parties

    4. the fact that, at the time of the indorsement, the instrument was valueless or not valid and he knew of that fact

NOTE: does NOT impair the negotiability character of the instrument

Sec. 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.

NOTE: 

  • Conditional indorsement - does NOT affect negotiability

  • Condition on its face = non-negotiable instrument

Sec. 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.

Sec. 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.

  • EX: 

    1. where the payee or indorsee indorsing has authority to indorse for the others

    2. where the payees or indorsees are partners

Sec. 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.

  • Cities, towns or public corporations - real payee (NOT the officer) but NO authority to indorse since NOT mentioned in Sec. 42


Sec. 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.

Sec. 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. 
  • How agent must indorse:

    1. He must add words describing himself as an agent

    2. At the same time, disclose his principal

    3. He must be duly authorized




Sec. 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: significant in determining if holder in due course


Sec. 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.

NOTE: significant in determining which law governs based on the law of the place



Sec. 47. Continuation of negotiable character. - An instrument negotiable in its origin continues to be negotiable until it has been 

  1. restrictively indorsed or (only the form wherein prohibits further negotiation)

  2. discharged by payment or otherwise.

NOTE: after maturity, still negotiable but holder (of notice)  and no longer a holder in due course (so rights similar as if non-negotiable)

Sec. 48. Striking out indorsement. - The holder may at any time strike out any indorsement which is not necessary to his title. The indorser 

  1. whose indorsement is struck out, and 

  2. all indorsers subsequent to him, 

are thereby relieved from liability on the instrument.

*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 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.
  • Rights of a transferee for value


  1. transferee acquires only the rights of the transferor (same defense available to transferror similar to assignment)


  2. transferee has right to require the transferor to indorse the instrument (according to Atty. Aportadera only theoretically because in doing so it is equivalent to involuntary servitude)


Sec. 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.
  •  Purpose: To avoid circuity of suits