NEGOTIABLE INSTRUMENT

NIL (Act No. 2031)

CHAPTER 1 FORM AND INTERPRETATION

6. Drafts
7. Due bills
8. Check

APPLICABILITY OF NIL

9. Promissory Notes

- Act applies only to negotiable instruments

and those meet requirements in Section1.

10. Trade acceptance

- Any case not provided in this Act, govern by

existing legislation or in default rules of law
merchant.
3 FUNCTIONS & IMPORTANCE OF NEGOTIABLE
INSTRUMENT
1. Used as a substitute for money
*NI differs from money; NI is valuable/worthless
depending on financial ability of parties to
them

6 INSTRUMENTS W/ LIMITED NEGOTIABILITY

1. LETTER OF CREDIT
- letter from merchant/bank/banker in one
place, addressed to another (place/country)
requesting the addressee to pay money/deliver
goods to 3rd party
- letter requesting one person to make
advances to 3rd person on the credit of writer
2. TREASURY WARRANT

3. Media of credit transaction

- govt warrant for payment of money covering

payment/replenishment of cash advances for
official expenditures

PURPOSE OF NEGOTIABILITY

3. POSTAL MONEY ORDER

- Allow men of UNDOUBTED credit to carry on

business enterprise with the use of instruments
knowing that other businessmen will treat this
promises as CASH.

4. BILL OF LADING

Check for immediate payment

5. CERTIFICATE OF STOCK

BofE & PN for circulation of credits

- written instrument signed by proper officer of

corporation stating name of person (owner of
designated # of shares of its stock)

2. Media of exchange

2 CHARACTERISTICS/FEATURES OF NI
1. Negotiability quality/attribute where NI
give the HDC the right to hold NI & collect sum
payable for himself FREE from defences
*A bona fide holder, FREE from PERSONAL
DEFENSES, but may be subject to REAL
DEFENSES.
2. Accumulation of Secondary Contracts (as
they are transferred from one person to
another)
10 COMMON FORMS OF NI
1. BofE
2. Bank check
3. Bank notes
4. Bankers acceptance
5. Bonds

- NO unconditional promise/order to pay a sum

certain in money

- NO unconditional promise/order to pay a sum

certain in money
6. WAREHOUSE RECEIPT
- NO unconditional promise/order to pay a sum
certain in money

Section 1 Memorize
NI contractual obligation to pay money
To determine the negotiability of an instrument,
consider the ff:
1. whole of the instrument
2. only what appears on FACE of the instrument
3. provisions of NIL esp. Section1

MAKER person issuing PN

DRAWER person issuing BofE

UNCONDITIONAL PROMISE PN
UNCONDITIONAL ORDER BofE

*The word TO THE ORDER OF and OR ORDER is

a promise to pay as ordered/commanded by
PAYEE but may be payable to BEARER.
*When NO TIME of payment is expressed, an
instrument is payable ON DEMAND.
*A note may be signed by SEVERAL persons
either JOINTLY or JOINTLY AND SEVERALLY.
PN maker, payee

*Where the meaning is doubtful, the courts

adopted the policy of resolving IN FAVOR OF
NEGOTIABILITY of the instrument.

BofE drawer, drawee, payee (parties need

NOT ALL be distinct persons. Thus, drawer may
draw on himself payable to his own order.)
December 29,

*There is NO ORAL NI.

*The signature (of maker/drawer) is a prima

facie evidence of his intention to be bound.

*If the signature placed in instrument,

UNCLEAR what capacity person intended to
sigh, he is deemed INDORSER not
maker/drawer.
*NI CEASES to be negotiable if the
INDORSEMENT prohibits FURTHER negotiation
of instrument.

2013
ManilaP1000
Thirty days after date, pay to (unconditional
order to pay) to A or order the sum of One
Thousand (P1000) Pesos. Value received and
charge the same account of
(Sgd.)
B
To C
College, Sampaloc
Manila

Eg. Pay to Pedro Cruz.

LEGEND:
*PLACE & DATE NOT ESSENTIAL to negotiability
of instrument EXCEPT in cases, date IS
necessary to know the due/interest.
*Instead of promise to pay, other acceptable
terms can be used:
- I agree to pay
- I will pay
- I bind myself to pay
- good to A or order
- due to A or order
- I acknowledge to be indebted
*MERE acknowledgment of debt w/o the word
ORDER or BEARER (words of negotiability)
DOES NOT satisfy negotiability.

B drawer
C- drawee; not really a party to the bill,
assumes liability ONLY when he accepts the bill
usually by writing the word ACCEPTED and
signs his name on the face where he
becomes ACCEPTOR and NOT A DRAWEE. By
being this (acceptor), he becomes primarily
liable like the MAKER of a note; DRAWER is
ONLY A SURETY then.
*The words (in BofE) CHARGE THE SAME TO
THE ACCOUNT OF means amount to be paid by
DRAWEE is to be charged against the funds of
DRAWER. But this may be omitted.
2 IDEA & PURPOSE OF BofE
1. DRAWERs funds in hands of DRAWEE
2. Liability of DRAWEE for non-payment

- If DRAWEE refuses to accept when he has

funds for purpose, he is LIABLE TO DRAWER
(not to PAYEE) for resulting damages & harm
done to his (DRAWER) credit.
-If DRAWER no funds in DRAWEE, presumed
that DRAWER made arrangements with
DRAWEE so he will honor the bill. In such case,
DRAWEE must look to the DRAWER for
reimbursement and NOT TO BONA FIDE
HOLDER.

*If payment not made at maturity, then there is

ADDED amount due (eg. Cost of collection,
attorneys fee) NEGOTIABLE
*Attorneys fee may be REDUCED by courts if
found UNREASONABLE; if attorneys fee NOT
specified, it shall be in REASONABLE SUM.
*A provision of to pay ALL costs, charges and
expenses incurred by PAYEE in ANY legal
proceedings for collection of debt NONNEGOTIABLE
*Acquisition of instrument AFTER MATURITY

Section 2
Certainty as to sum, what constitutes Sum
payable is SUM CERTAIN although paid:
- w/ interest

- a transferee acquiring an instrument when it

is OVERDUE would NOT BE HDC & would hold
instrument subject to defenses, as if it were
NON-NEGOTIABLE.

- by stated installments
- by stated installments w/ provision that upon
default in payment of any installment/interest,
the whole shall become due

Section 3
Promise is UNCONDITIONAL when:

- w/ costs of collection/attorneys fee in case

payment not made at maturity

- INDICATION of a particular fund out of w/c

reimbursement is to be made or particular
account to be debited w/ the amount (NOT
direct source of payment, only source of
reimbursement) - NEGOTIABLE

*If instrument calls for an ACT OTHER THAN

payment of money NOT NEGOTIABLE

- statement of transaction w/c gives rise to

instrument - NEGOTIABLE

*A note giving the MAKER the right to ascertain

the AMOUNT payable NON-NEGOTIABLE

Promise is NOT UNCONDITIONAL an

order/promise to pay OUT OF particular fund
(direct source of payment) NON-NEGOTIABLE

- w/ exchange, fixed/current rate

*A promise to pay P1000 in two installments

or in installments NON-NEGOTIABLE
*Acceleration at option of HOLDER NONNEGOTIABLE
*Acceleration at option of MAKER
NEGOTIABLE
(The MAKER can avoid acceleration by paying
the installments on their due date)
*The promise/order to pay w/ exchange
NEGOTIABLE
(EXCHANGE charge for providing funds, may
be fixed/current rate; eg. compensating
balance)
*Payment in FOREIGN CURRENCY
NEGOTIABLE
*Payment w/ EXCHANGE RATE NEGOTIABLE
- applicable only to foreign bills

*The test of NEGOTIABILITY is whether the

instrument carries the GENERAL PERSONAL
CREDIT of MAKER/DRAWER.
*A BARE acknowledgment of indebtedness (eg.
IOU, due A P1000, for value received) ALONE
NON-NEGOTIABLE. But if words like DUE A OR
ORDER, DUE B OR BEARER NEGOTIABLE
although NO express promissory words
*In BofE, there must be an ORDER TO PAY one
party to another, OTHERWISE, it is NONNEGOTIABLE.
ORDER command/imperative direction
*A MERE request IS NOT an ORDER.
(eg. I request you to pay, I wish you would pay,
I authorize you to pay)
*The MERE use of POLITE words like PLEASE
does NOT convert ORDER into REQUEST.

*The NOTE/BILL must be payable ABSOLUTELY.

*It is IMMATERIAL whether the DRAWEE obeys
the order to pay or not. The NEGOTIABILITY of
a bill DEPENDS upon the TERMS OF ORDER.
The DRAWER has his liability under the law.
*If there is CONDITION or subject to
CONTINGENCY NON-NEGOTIABLE
* If language used is AMBIGUOUS or OBSCURE,
courts usually decide IN FAVOR OF
NEGOTIABILITY.
*A MERE recital of consideration for instrument
is STILL UNCONDITIONAL NEGOTIABLE
(statement merely identifies the transaction
w/c gives rise to instrument)
(eg. I promise to pay to order of P1000 being
the price of the car this day sold and delivered
to me; as per our contract; accordance w/ our
contract)
*If promise/order is subject to TERMS AND
CONDITIONS NON-NEGOTIABLE
(As already stated, the negotiability of
instrument is to be determined by what
appears on its FACE AND NOT ELSEWHERE.)

Section 4

DETERMINABLE FUTURE TIME means a time

that can be DETERMINED W/ CERTAINTY AFTER
execution of instrument

Section 5
Additional provisions still NEGOTIABLE:
- authorizes SALE OF COLLATERAL securities
- authorizes a CONFESSION OF
JUDGMENT (written acknowledgment by
defendant of his indebtedness/liability to
plaintiff) if not paid at maturity
- waives the BENEFIT OF ANY LAW intended for
advantage/protection of obligor.
(eg. Pay bearer P1000. Notice of dishonor
waived.)
- gives HOLDER the election to require
something to be done in lieu of payment of
money
(eg. I promise to pay P1000 to A or order or an
air conditioner at the option of the holder
NEGOTIABLE;
I promise to pay P1000 to A or order or air
conditioner NON-NEGOTIABLE because
HOLDER cannot COMPEL him to make payment
in MONEY)

Determinable future time, what constitutes:

- fixed period after date/sight - NEGOTIABLE
- on/before a fixed or determinable future time
specified - NEGOTIABLE

Section 6

- ON/AFTER (fixed period) the occurrence of a

specified event w/c is CERTAIN to happen, not
known when NEGOTIABLE (eg. Death of
father); if BEFORE NON-NEGOTIABLE

OMISSIONS; SEAL; PARTICULAR IN MONEY

*An instrument payable w/ CONTINGENCY (an

uncertain future event, or an event w/c may or
may not happen) is NON-NEGOTIABLE, and the
happening of the event DOES NOT cure the
defect.

(If there is a date stated but there is no such

date in calendar, the law will deem the
NEAREST DATE of the month the date intended;
eg. Note dated Apr31 will be construed to be
intended for Apr30)

DEMAND INSTRUMENT payment at anytime

- NO VALUE given

TERM INSTRUMENT payabe only UPON

ARRIVAL of time for payment

(eg. NO written for value received)

AFTER SIGHT means AFTER the instrument is

SEEN by the DRAWEE upon presentment of
acceptance

Still NEGOTIABLE:
- NO DATE

- NO PLACE where it is drawn or is payable

(An instrument that does not specify the place
of payment is presumed to be payable at the
place/residence/business of MAKER/DRAWER.)

- WITH SEAL

(eg. Pay to the order of A and B P1000)

- Designates a PARTICULAR KIND of current

money as payment

- 1 or more of several PAYEES

(eg. I promise to pay A or order P1000 in

Central Bank of fifty peso bills.)

(eg. Pay to the order of A or B P1000)

- HOLDER OF AN OFFICE at the time being
(eg. Pay to the order of the Commissioner of
BIR)

Section 7
Payable on DEMAND when:
- EXPRESSED to be payable ON DEMAND, at
sight, or on presentation
- NO TIME for payment is expressed
(eg. Pay to A or order P1000)
Where the instrument is issued, accepted, or
indorsed when OVERDUE, it is, as regards the
person so issuing, accepting, or indorsing it,
PAYABLE ON DEMAND.
*An OVERDUE instrument is a DEMAND paper.
A HOLDER has immediate right of payment for
money promised/ordered to be paid.
Instead of ON DEMAND, other acceptable terms
can be used:
- at sight (used in BofE)

*An instrument is PAYABLE TO ORDER where it

is drawn payable:
1. to the order of a specified person
2. to him or his order
Consequently, an instrument payable to a
SPECIFIED person (eg. Pay to A) is NONNEGOTIABLE as the promise/order is LIMITED to
paying one person.
*to the order of, or order, to A and his
assigns can be used.
*NO PAYEE, not named, not described NONNEGOTIABLE because there would be nobody
who could indorse the instrument and nobody
who could give the order or authority to collect.

Section 9

- on presentation

PAYABLE TO BEARER WHEN:

- on call

- Expressed to be SO PAYABLE.

- at anytime called for

(But an instrument payable to bearer, A is

NON-NEGOTIABLE, since the word BEARER in
such case describes A, therefore, payable to A
DEFINITE PERSON ONLY)

*PAYABLE ON DEMAND as regards the MAKER

(late issuance), the ACCEPTOR (late received),
the INDORSER (late indorsed)

- Payable to person named therein or BEARER.

Section 8
Instrument may be drawn PAYABLE TO THE
ORDER of:
- PAYEE; not maker/drawer/drawee
- drawer
(eg. Pay to the order of myself P1000)
or maker
(eg. I promise to pay to the order of myself
P1000)
- 2 or more PAYEES jointly

(eg. Pay to A or bearer P1000; Pay to B or

holder P1000)
- Payable to order of FICTITIOUS PERSON and
such fact was KNOWN to person making it so
payable.
(eg. Pay to King Kong or order P1000)
* The bill is PAYABLE TO BEARER and NOT TO
ORDER because King Kong is a fictitious
(feigned/pretended) person.
- Name of PAYEE is not name of any person.
(eg. Pay to the order of Queen of Planet Venus)

(eg. Pay to cash, Pay to money, Pay to

sundries)
*The intention of the DRAWER is to make the
instrument a BEARER PAPER negotiable by
delivery.
- Only/last INDORSEMENT is indorsement in
BLANK.
*The word INDORSEMENT, as used in the law,
refers only to NI.

Date may be inserted when:

1. an instrument is payable at a fixed period
AFTER DATE but is ISSUED UNDATED,
2. an instrument is payable at a fixed period
AFTER SIGHT but the ACCEPTANCE is UNDATED
ANY HOLDER may insert therein the true date
of issue/acceptance and the instrument shall
be payable accordingly.

Terms, sufficient when:

The insertion of a WRONG DATE DOES NOT

avoid the instrument in the hands of the
SUBSEQUENT HDC; but as to him the date so
inserted is to be regarded as the TRUE DATE.

CLEARLY INDICATE THE INTENTION to conform

the requirements thereof.

*The insertion of WRONG DATE constitutes

MATERIAL ATERATION.

Section 10

*A MERE defect in language/grammatical error

still NEGOTIABLE
Section 14
Section 11

INCOMPLETE and DELIVERED (personal

defense)

Presumption as to date

(4) RULES

If instrument BEARS A DATE, it is PRESUMED to

be the TRUE DATE (prima facie) made by
maker, drawn by drawer, accepted by drawee,
or indorsed by payee/holder.

1. AUTHORITY TO FILL UP THE BLANKS

*He who claims that some other date is the

true date has the burden to ESTABLISH the
CLAIM.

Section 12
Ante-dated and Post-dated
Instrument is VALID although it is ANTE-DATED
(earlier than true date) or POST-DATED (later
than true date), provided that it is NOT DONE
for illegal/fraudulent purpose (eg. Bouncing
check, NSF).
The person TO WHOM an instrument is
dated is delivered acquires the TITLE thereto as
of the date of delivery.
The ANTE-DATED/POST-DATED may be
negotiated BEFORE/AFTER the date given as
long as it is NOT NEGOTIATED AFTER ITS
MATURITY.

Section 13

- The HOLDER/person in possession has prima

facie authority TO COMPLETE an INCOMPLETE
INSTRUMENT by filling up the blanks therein
The law speaks of MATERIAL PARTICULAR
(blanks for date, due date, name of PAYEE,
amount, rate of interest) may be filled in. It has
been held that even the blank for the name of
the DRAWER may be filled up.
*The authority to complete is not an authority
to alter. So, the HOLDER has NO AUTHORITY to
change the amount after it has been filled in,
or to insert the words OR ORDER or OR BEARER
after the name of the PAYEE.
2. AUTHORITY TO PUT ANY AMOUNT
- A signature on a BLANK paper delivered in
order to be converted into a NI is a prima facie
authority to fill it up as such for any amount.
3. RIGHT AGAINST PARTY PRIOR TO
COMPLETION
- If an instrument is incomplete when
delivered, the HOLDER has prima facie
authority to fill up the blanks thereon.
- If a blank paper is delivered by the person
making the signature, the HOLDER has prima

facie authority to fill it up for any amount if the

person making the signature INTENDED TO
CONVERT it into NI.
- In either case of the above (2) situations, the
presumption is that the BLANK was filled in
ACCORDANCE W/ THE AUTHORITY GIVEN and
W/IN REASONABLE TIME.
4. RIGHT OF HDC

the theft, and the completion and negotiation

of the instrument.)

Section 16
COMPLETE and UNDELIVERED (personal
defenses)
(4) RULES

- not enforceable; personal defenses

- The rule is founded upon the principle that
where one of 2 persons must suffer by the bad
faith of another, the loss must fall upon the one
who FIRST REPOSED confidence and made it
possible for the loss to occur.

Section 15
INCOMPLETE and UNDELIVERED (real defense)
When an INCOMPLETE instrument is
UNDELIVERED, if completed & negotiated w/o
authority, be a VALID CONTRACT in the hands
of ANY HOLDER, as against any person whose
signature was placed thereon before delivery.

In the absence of any delivery, the instrument

though complete in all particulars, there is NO
CONTRACT.
(2) RULES
1. DEFENSE EVEN AGAINST HDC
- Law is specific that instrument is NOT a VALID
CONTRACT in the hands of any HOLDER even
HDC.
2. DEFENSE AVAILABLE TO PARTIES PRIOR TO
DELIVERY
- The invalidity of the instrument is only w/
reference to the parties whose signatures
appear on the instrument BEFORE and NOT
AFTER DELIVERY.
(eg. A(maker) P(steals) B C D;
Instrument can be enforced against P, B, C
because, as indorsers, they warrant that the
instrument is GENUINE and in all respects what
it purports to be, etc. As their signatures
appear on the instrument after delivery, the
instrument is valid as to them; In case of P, he
is liable not merely because he is an indorser
but also because he is the one responsible for

1. UNDELIVERED Every contract on NI even if

it is completely written is INCOMPLETE AND
REVOCABLE UNTIL it is delivery for the purpose
of giving it effect.
a. DELIVERY transfer of possession,
actual/constructive, from one person to
another. It may be made either by the
maker/drawer himself or through a duly
authorized agent.
b. ISSUE FIRST delivery of the instrument,
complete in form, to a person who takes it as
HOLDER.
C. HOLDER PAYEE/INDORSEE of bill/note who
is in possession of it, or the BEARER thereof.
2. IN POSSESSION OF PARTY OTHER THAN HDC
- If a complete instrument is found in the
possession of an IMMEDIATE PARTY (know the
conditions/limitations placed upon delivery of
instrument) or a REMOTE PARTY (indirect
contractual relation to each other) other than
HDC, there is prima facie presumption of
delivery but subject to rebuttal.
- An UNDELIVERED instrument is INOPERATIVE
because DELIVERY is a PREREQUISITE to
LIABILITY. However, if instrument is NO LONGER
in the possession of the person who signed it
and it is COMPLETE in its terms, a VALID AND
INTENTIONAL delivery by him is PRESUMED
until the contrary is proved.
3. DELIVERED UNCONDITIONALLY OR FOR A
SPECIAL PURPOSE
- If delivery was made/authorized, it may be
shown to have been conditional, or for a
special purpose only and not for the purpose of
transferring the property (title) to the
instrument.
- When delivery is made, it is presumed to be
made w/ the intention to transfer ownership of
the instrument to the payee.

- (eg. A delivers the note to B on condition that

it will not be binding on him UNTIL co-maker
has been procured or for safekeeping, or for
collection only.
B cannot enforce the instrument against A
because A can set up the defense that the
delivery was conditional or for a special
purpose only and not for the purpose of
transferring title to the instrument.
4. IN THE HANDS OF HDC
- If a COMPLETE instrument is in the hands of
HDC, a valid delivery thereof by all parties
PRIOR to him is CONCLUSIVELY PRESUMED.
A presumption is said to be CONCLUSIVE when
it admits of no evidence to the contrary

HOLDER - back
g. Instrument contain words I promise to pay
signed by TWO OR MORE PERSONS, they are
deemed to be JOINTLY AND SEVERALLY LIABLE
thereon.
*I promise to pay signed by 2 or more
persons SOLIDARY LIABILITY (anyone of the
signers may be held liable for the whole
amount of instrument)
*We promise to pay signed by 2 or more
persons JOINT LIABILITY (there are as many
debts are there are debtors, each debt being
considered distinct and separate from each
other)

Section 17
Construction where instrument is AMBIGUOUS
a. Sum payable expressed both in WORDS and
in FIGURES, and there is discrepancy between
the two, SUM in WORDS is SUM PAYABLE; but if
WORDS are AMBIGUOUS/UNCERTAIN, FIGURES
may be the reference.
b. Instrument w/ interest but NO DATE
specifies, interest runs from the date of
instrument; if instrument is UNDATED, from
issue thereof.
c. Instrument UNDATED, considered to be
dated as of time it was ISSUED.
d. Conflict between WRITTEN and PRINTED
provisions of instrument, WRITTEN provisions
prevail.
*The reason for the rule is that the written
words are deemed to express the true intention
of the MAKER/DRAWER because they are
placed there by himself w/o any particular
contract in view.
e. Instrument is AMBIGUOUS whether note or
bill, the HOLDER may treat it as EITHER at HIS
ELECTION.
f. Signature placed in instrument UNCLEAR
what capacity person making the same
intended to sign, he is deemed INDORSER.
*Signature of: (usually)
MAKER lower right-hand corner
DRAWEE lower left-hand corner

Section 18
Liability of person signing in trade or assumed
name
GENERAL RULE: Only persons whose signatures
appear on an instrument ARE LIABLE thereon.
EXCEPTIONS:
a. Where a person signs in a trade or assumed
name.
b. The PRINCIPAL is liable if a duly authorized
agent signs on his own behalf.
c. In case of forgery, the FORGER is LIABLE
even if his signature does not appear on the
instrument.
d. When the ACCEPTOR makes his acceptance
of a bill on a SEPARATE paper.
e. Where a person makes a WRITTEN promise
to ACCEPT a BILL BEFORE it is drawn.

Section 19
Signature by agent; authority; how shown
- The MAKER/DRAWER may sign the instrument
PERSONALLY or by another DULY AUTHORIZED
by him.

- The authority of the AGENT may be shown, as

in other cases of agency, to have been given
ORALLY or in WRITING subject to the provisions
of the STATUTE OF FRAUDS. It has been held

competent for the AGENT to sign simply the

PRINCIPALS NAME and to show his authority to
do so by other evidence.

Section 20
Liability of person signing as agent, etc.
(3) When agent MAY ESCAPE personal liability:
1. He is duly authorized;
2. He add words to his signature indicating that
he signs AS AN AGENT, that is, for or on behalf
of a principal, or I a representative capacity;
3. He discloses his PRINCIPAL.
*The MERE addition of DESCRIPTIVE WORDS
w/o DISCLOSING the PRINCIPAL will not relieve
signer from personal liability, although he add
to his signature the word AGENT, TRUSTEE,
ADMINISTRATOR, GUARDIAN, or DIRECTOR
(words added are but description personae
describing the person who signed the
instrument)

Section 21

Section 22
Effect of indorsement by INFANT or
CORPORATION
The indorsement/assignment of the instrument
by a corporation or by an infant PASSES the
property therein, notwithstanding that from
want of capacity, the corporation or infant may
incur NO LIABILITY thereon.
EFFECT OF INDORSEMENT BY INCAPACITATED
PERSONS
1. MINORS
- As a general rule, contracts entered into by a
minor ARE VOIDABLE at his instance or at the
instance of his guardian.
a. While MINOR NOT BOUND by his
indorsement for lack of capacity, he CAN
TRANSFER certain RIGHTS. Minority is a real
defense available to MINOR.
b. A MINOR may be BOUND where he
is guilty of ACTUAL FRAUD committed by
specifically stating that he is of age, when, in
fact he is not.
2. OTHER INCAPACITATED PERSONS

Effect of signature by PROCURATION

- As far as such persons (incapacitated, insane,

demented, deaf-mutes, etc) are concerned,

PROCURATION act by w/c a PRINCIPAL gives

power to another to act in HIS PLACE as he
could himself.

THEIR CAPACITY IS A REAL DEFENSE, that is,

available even against HDC.

- has special and technical meaning; gives a

WARNING that the AGENT has but a LIMITED
AUTHORITY so that IT IS the duty of the person
dealing w/ him to INQUIRE into the extent of his
(AGENT) authority.
*The PRINCIPAL is NOT BOUND if the agent has
exceeded the ACTUAL LIMITS of his authority,
although he may acted w/in the general scope
of the agency.

EFFECT OF INDORSEMENT BY A CORPORATION

As regards corporations, Section 22 applies to
cases where corporation has committed ultra
vires acts (acts beyond its powers).
It has been held that a corporation IS NOT
LIABLE on notes in a suit thereon by an
indorsee, where the corporation is WITHOUT
CAPACITY to make the contract in fulfilment of
w/c they are executed.

(eg. A signature by procuration may be made

as follows:
A Mercado
Per Procuration: B San Miguel

Instead of per procuration, per proc., P.P.,

or pp may be used.

Section 23
Effect of FORGED signature
FORGERY counterfeit-making or fraudulent
alteration of any writing w/ INTENT TO
DEFRAUD (eg. Signing of anothers name;
alteration of an instrument in the name,a
mount, description of person and the like)

- a REAL DEFENSE even against HDC

(2) Cases where SIGNATURE is wholly
INOPERATIVE and NO RIGHT can be acquired
through the FORGED SIGNATURE:
1. Where signature on instrument is affixed by
one who DOES NOT claim to act as an agent
and who has NO AUTHORITY to bind the person
whose signature he has forged; and
2. Where signature is affixed by one who
purports to be an AGENT BUT NO AUTHORITY
to bind the ALLEGED principal.
(2) CASES OF FORGERY IN GENERAL
1. Forgery of PROMISSORY NOTES
- indorsement of the note
- MAKERs signature
2. Forgery of BILLS OF EXCHANGE
- indorsement of the bill
- DRAWERs signature (either w/ acceptance by
DRAWEE; or w/o such acceptance but the bill is
paid by DRAWEE)
*Section 23 DOES NOT purport to declare the
instrument TOTALLY VOID nor the GENUINE
signatures thereon INOPERATIVE. IT IS ONLY
THE FORGED/UNAUTHORIZED SIGANTURE that
is declared to be INOPERATIVE.
In other words, RIGHTS MAY STILL EXIST and be
enforced by virtue of such instrument as to
those whose signature thereto are found to be
genuine.
M P A, X (obtains possession of note and
forged As signature) B C
C cannot enforce the instrument against M and
P because Cs rights against them are CUT OFF
by the FORGED SIGNATURE of A w/c is WHOLLY
INOPERATIVE.
Neither can C enforce the note against A
because As signature is wholly inoperative. C
has NO RIGHT to retain, discharge, or ENFORCE
PAYMENT OF, the note UNDER the forged
signature of A.
But C may go against B whose signature is
GENUINE and therefore, OPERATIVE. B is a
GENERAL INDORSER who warranted to C that
the instrument is GENUINE and was VALID and
SUBSISTING (existing) at the time of Bs
indorsement.

Of course, B or C has a right of recourse

against X, the forger.
A can recover from M and P because his rights
against them WERE NOT affected by forgery.
The signature of M and P are genuine and they
are liable to A on their contract.
2 EXCEPTIONS TO THE GENERAL RULE THAT NO
RIGHT/TITLE CAN BE ACQUIRED TO AN NI
THROUGH OR UNDER A
FORGED/UNAUTHORIZED SIGNATURE
1. If the party against whom it is sought to
enforce such right is PRECLUDED (stopped)
from setting up forgery or want of authority;
and
2. Where forged signature is NOT necessary to
the HOLDERS TITLE in w/c case the forgery
may be DISREGARDED.
(2) PERSONS PRECLUDED FROM SETTING UP
THE DEFENSE OF FORGERY
1. Those who by their acts, silence, or
negligence are estopped from setting up the
defense of forgery; and
2. Those who warrant/admit the genuineness of
the signatures in question, namely:
a. indorsers
b. acceptors
c. persons negotiating by delivery
(4) RIGHTS OF PARTIES IN CASES OF FORGED
INSTRUMENTS
1. Where note payable to order
- Where the note is payable to ORDER, the
party whose indorsement (inoperative) is
forged IS NOT LIABLE to any holder even HDC.
- The other parties (including the MAKER) prior
to the party whose signature is forged ARE NOT
ALSO LIABLE to ANY HOLDER. The instrument
being payable to order, can be negotiated
ONLY BY INDORSEMENT COMPLETED BY
DELIVERY. But since the indorsement is forged,
it is INOPERATIVE, and therefore, cannot
operate to transfer ANY RIGHT/TITLE over the
instrument.
2. Where note payable to bearer
- Where the note, mechanically complete, is
originally payable to bearer, the party whose

indorsement is forged is LIABLE to HDC but

NOT to one who IS NOT HDC.
- The other parties (including the MAKER) prior
to the party whose signature is forged, MAY
ALSO BE HELD LIABLE by one who is NOT HDC.
The reason is that the instrument being
originally payable to bearer, it can be
negotiated by MERE DELIVERY even w/o
indorsement. Hence, even if the indorsement is
forged, the FORGERY MAY BE DISREGARDED.
3. Where bill payable to order
- Where the bill is payable to ORDER, the party
whose indorsement (inoperative) is forged IS
NOT LIABLE to any holder even HDC.
a. If DRAWEE pays under a forged
indorsement, DRAWER NOT LIABLE on the bill
and DRAWEE may not debit the DRAWERs
account.
b. Where, however, checks received
MERELY FOR COLLECTION and deposit, the
bank, as agent, CANNOT BE EXPECTED to
know/ascertain the GENUINENESS of all PRIOR
indorsements.
4. Where bill payable to bearer
- In case the bill is originally payable to
BEARER, the DRAWEE may debit the DRAWERs
account in spite of the forged indorsement. The
reason is that the forged instrument is NOT
NECESSARY to the title of the holder. The
DRAWEE cannot recover from the HOLDER.

Section 30
What constitutes negotiation
Negotiation to constitute the transferee the
HOLDER thereof
2 METHODS OF NEGOTIATION
1. BEARER delivery
2. ORDER indorsement then delivery
*ANY person in possession of BEARER
instrument is ALWAYS the bearer thereof,
although he may have NO legal RIGHT thereto.
Meaning, if instrument is negotiated to HDC,
the latter may acquire BETTER RIGHT than
transferor.

*NO NEGOTIATION if the transfer does NOT

make the transferee the HOLDER of
instrument.
(eg. If M makes a note payable to P or order,
then P delivers w/o indorsement to A,
negotiation is NOT affected because A, by such
transfer, DOES NOT become the HOLDER.)
just an ordinary ASSIGNMENT because it is
ORDER instrument but NOT indorsed.
*PAYMENT of check (or other bill) by draweebank is NOT NEGOTIATION and does NOT make
bank the HOLDER; BANK is not the payee or
endorsee; check is EXTINGUISHED and
CANNOT be put in circulation again to bind the
drawer or endorser.
* The writing of HOLDERs name on the back of
the check before surrendering for PAYMENT to
drawee-bank is NOT INDORSEMENT. Signature
merely serves as RECEIPT OF MONEY. Upon
payment, the CHECK becomes merely a
VOUCHER, NOT a transfer of TITLE thereto.
3 BASIC METHODS TO TRANSFER NI
1. ISSUE 1st DELIVERY of instrument
COMPLETE in form to a person who takes it as
HOLDER
- 1st TRANSFER of instrument to
PAYEE
2. NEGOTIATION - to constitute the transferee
the HOLDER thereof
3. ASSIGNMENT assignee is placed in the
position of assignor; assignee acquires
instrument subject to personal and real
defenses available against assignor
*NI can be NEGOTIATED or ASSIGNED; NON-NI
can only be ASSIGNED/TRANSFERRED, NOT
negotiated.
*Indorsement NOT ONLY mode of transfer but
also involves NEW CONTRACT and OBLIGATION
on part of INDORSER an IMPLIED guaranty
that instrument be paid according to terms
thereof.
NEGOTIATION

ASSIGNMENT

Only to NI

All contracts

Transferee is HOLDER

Transferee is
ASSIGNEE

HDC - REAL defenses

ASSIGNEE
PERSONAL and REAL

defenses

*Indorsement w/o delivery conveys NO TITLE

and NO HOLDER.

May acquire BETTER

title than PRIOR party

Merely steps in shoes

of ASSIGNOR

GENERAL INDORSER
warrants SOLVENCY
of PRIOR parties

ASSIGNOR does NOT

warrant SOLVENCY of
prior parties (unless
stipulated or
INSOLVENCY known
to him)

1. Essential to the execution and for FURTHER

NEGOTATION of ORDER instrument.

INDORSER NOT
LIABLE (unless there
is PRESENT-MENT
and NOTICE of
DISHONOR)

ASSIGNOR IS LIABLE
even w/o NOTICE OF
DISHO-NOR

(Thus, one can acquire title w/o indorsement of

ORDER instrument but he CANNOT be HDC
thereof although entitled to indorsement
made.)

Governed by NIL

Governed by CIVIL
CODE on assignment
of credits

Can there be negotiation to a PAYEE?

MAKER/DRAWER PAYEE payee acquires title
by ISSUANCE, NOT negotiation
MAKER/DRAWER AGENT of MAKER/DRAWER
PAYEE payee acquires title by NEGOTIATION
*If negotiation refers to instrument already
completely executed/ISSUED, then ONLY
HOLDERS SUBSEQUENT TO PAYEE can acquire
title by NEGOTIATION.
*There is NEGOTIATION also to PAYEE when
instrument delivered BACK to him by LAST
HOLDER. (In such case, indorsement of LAST
HOLDER not necessary because PAYEE is
remitted to his FORMER RIGHTS, and all
intervening parties are DISCHARGED from
LIABILITY.)

NECESSITY (SIGNIFICANCE) OF INDORSEMENTS

(eg. Note payable: to the order of P, P must

indorse it BEFORE it can be further negotiated)
2. Not necessary to a mere ASSIGNMENT.

3. Determines SUBSEQUENT negotiations or

transfer of instrument.
(Indorsement may determine whether another
indorsement can be further negotiated [special
indorsement] w/ endorsee name; or NO
further indorsement required for negotiation
because it is converted into a BEARER
instrument negotiated by DELIVERY [blank
instrument] w/ endorsee signature only; or
RESTRICTED for further negotiation [restrictive
indorsement] w/ additional words w/c
prohibit/limit further negotiation)
FORM OF INDORSEMENT
Law does NOT require EXCLUSIVE FORM by w/c
indorsement be accomplished but it must be IN
WRITING.
Just like signature of maker/drawer,
INDORSEMENT may be written in INK, PRINTED,
(RUBBER) STAMPED, TYPEWRITTEN, or any
means that will create a mark.
LOCATION OF INSTRUMENT

Section 31
Indorsement; how made
Indorsement be written on INSTRUMENT itself
or upon paper attached (allonge) thereto.
Signature of INDORSER, w/o additional words,
is SUFFICIENT INDORSEMENT.
INDORSEMENT (from Latin in dorsa writing on
the back) writing of endorsers name on the
instrument w/ the intent EITHER 1.) to transfer
TITLE to the same, or 2.) to STRENGTHEN
security of HOLDER by assuming contingent
liability for its future payment, OR BOTH.

1. On instrument itself
*As a matter of practice, indorsement is
WRITTEN AT THE BACK of instrument (referred
to as dorsal portion of instrument) but it may
be written on the face (although it would entail
risk of being held liable as co-maker [PN] or codrawer [BofE].
2. Upon paper attached thereto (allonge)
*A paper that is merely clipped/pinned to an
instrument is NOT an ALLONGE, and anything
written on it CANNOT be considered as
INDORSEMENT. Accordingly, person in
possession of instrument is NOT the HOLDER.

*If there is still space for indorsements, the use

of ALLONGE should be avoided so as not to
cause CONFUSION on ORDER OF LIABILITY of
endorsers.
Section 32 Indorsement must be of entire
instrument
(object of provision: to avoid multiplicity of
suits/actions in court)
NO NEGOTIATION if indorsement transfer ONLY
PART of AMOUNT payable (not HOLDER but
merely is an ASSIGNEE; renders instrument
NON-NEGOTIABLE, NOT PAYEE/BEARER of note,
NOT INDORSEE.
(eg. The total payable is P10 000, Pay to A P8
000 NOT VALID NEGOTIATION)
Exception to entirety: Where instrument has
been paid in part, it may be indorsed as to the
RESIDUE.
(eg. The total payable is P10 000, P2 000 is
already paid. Pay to A P8 000 VALID
NEGOTIATION)

NO NEGOTIATION if indorsement transfer

instrument to 2 or more endorsees severally.
(eg. Pay to A P8 000 and pay to B P2 000
NOT VALID NEGOTIATION)

Restrictive
Non-restrictive
3. As to the SCOPE OF LIABILITY OF INDORSER
Qualified
Unqualified (general)
4. As to the PRESENCE/ABSENCE OF
LIMITATIONS
Conditional
Unconditional
5. Other kinds of indorsements
JOINT payable to two or more persons jointly
SUCCESSIVE in succession by several
endorsers who are liable prima facie in ORDER
in w/c they indorse
REGULAR Delivery Indorsement
IRREGULAR (ANOMALOUS) (placed signature
in blank before delivery) Indorsement
Delivery
FACULTATIVE endorser ENLARGES his liability
by writing over his signature a WAIVER of usual
demand (formal protest) and NOTICE OF NONPAYMENT (dishonor).

Section 34
However, there is VALID NEGOTIATION if
endorsees are JOINT.
(eg. Pay to A and B P10 00 VALID
NEGOTIATION) A and B must BOTH indorse
UNLESS they are PARTNERS, or one is
authorized to indorse for both of them, in w/c
case, only one may indorse.

Section 33
Kinds of Indorsement
5 CLASSIFICATIONS OF INDORSEMENT
1. As to the METHODS OF NEGOTIATION
Special
Blank
2. As to the KIND OF TITLE TRANSFERRED

Special, and blank indorsement

SPECIAL indorsement w/ endorsee name; can
be further negotiated.
[eg. Pay to A; Pay to the order of A; Pay to A or
order (Sgd.) B]
*If instrument originally payable to ORDER,
INDORSEMENT NECESSARY for FURTHER
negotiation of instrument.
*If instrument originally payable to BEARER, it
may be further negotiated by indorsement or
even by mere delivery but REMAINS a BEARER
instrument even if specially indorsed. (BEARER
ALWAYS A BEARER.)
BLANK indorsement specifies no endorsee;
can be negotiated by DELIVERY because it
becomes a BEARER instrument.

[eg. I promise to pay A or order P10 000

(Sgd.) B

In example, the indorsement by P A and A B

may appear:

A (payee) may indorse the instrument in blank

by SIMPLY writing his signature at BACK of
instrument:

Pay to A

(Sgd.)A

(Sgd.) P
(sgd.) A

*If instrument is payable to ORDER on its face

and the ONLY or LAST indorsement is in BLANK,
it is CONVERTED into BEARER instrument.
*If instrument is payable to BEARER on its face,
ANY indorsement, whether SPECIAL or BLANK,
does NOT change as BEARER
instrument. (BEARER ALWAYS A BEARER.)

B, as HOLDER of instrument w/ BLANK

indorsement, may PROTECT himself by
converting it into SPECIAL indorsement, as for
example, by writing Pay to B, thereby
indorsing it to himself. Thus, the ff will appear:
Pay to A

*A BLANK INDORSEMENT may be negotiated by

delivery, or by indorsement and delivery.
However, ORDER instrument SPECIALLY
INDORSED AFTER BLANK INDORSEMENT
reacquires status as ORDER INSTRUMENT.
(eg. ORDER instrument indorsed: SPECIAL
SPECIAL BLANK (becomes a BEARER
instrument) SPECIAL (becomes ORDER
instrument, again) SPECIAL)

Section 35
Blank SPECIAL
- Done by writing APPROPRIATE words OVER
the signature of endorser in blank.
- The INDORSEE CANNOT add to the
indorsement ANY contract INCONSISTENT w/
character of indorsement. (eg. Adding protest
waived; Demand and notice waived;
Without recourse; if such was NOT THE
INTENTION of parties. Also, adding I hereby
guaranty payment will make INDORSER
LIABLE as GUARANTOR and thus NOT ENTITLED
to NOTICE in case of DISHONOR.)
*The INSERTION of UNATHORIZED contracts
constitutes MATERIAL ALTERATION and AVOIDS
INDORSEMENT.

(Sgd.) P
Pay to B
(sgd.) A
Section 36 Restrictive indorsement:
RESTRICTIVE INDORSEMENT RESTRAINS the
negotiability of instrument for purpose or to
the person stated therein.
a. Prohibits further negotiation of instrument.
(Becomes NON-NEGOTIABLE)
Pay to A only
Pay to A and to no other person
Here, A is the only one authorized to receive
payment.
b. Constitutes INDORSEE the AGENT OF
INDORSER (AGENCY type: AGENT NO TITLE to
instrument; holds instrument as AGENT of
principal, the restrictive endorser subject to
restrictive indorsement.)
Pay to B for collection
Pay to B for collection and remittance

[eg. BLANK SPECIAL

Pay to B for collection only

M P (special) A (blank) B (becomes

BEARER) (if indorse specially, negotiation will
be effected only indorsement) C (special
endorsee)

Pay to B for deposit

c. Vests title in INDORSEE in TRUST for or use
of some other person

(TRUST type: transfers TITLE to INDORSEE NOT

FOR HIMSELF but in trust of for BENEFIT of
another person including INDORSER. The
INDORSEE CANNOT NEGOTIATE instrument for
OWN BENEFIT BUT FOR BENEFICIAL OWNER.)
Pay to C in trust for D
Pay to C as trustee for D
Pay to A for my use

Pay to C for the use of D

Mere absence of words of negotiability does
NOT make the indorsement restrictive.
*BUT if there are restrictive words stated like
only, it prevents further negotiation, become
restrictive indorsement, and NON-NEGOTIABLE.