LAW ON NEGOTIABLE

INSTRUMENTS
MR. SAM BARBO, JR.
LAW ON NEGOTIABLE
INSTRUMENTS

NEGOTIATION
 SECTION 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 and
completed by delivery.
 SECTION 30
 NEGOTIATION
 the transfer of a NI from one person to another as
to constitute the transferee the holder thereof. If
the NI is payable to bearer, it can be negotiated
by delivery; if it is payable to order, it is
negotiated by the indorsement of the holder
completed by delivery. (Sec. 30)
 Note: there is no negotiation if the transfer does not
make the transferee the holder in due course.
 SECTION 30

 NEGOTIATION
 METHODS OF NEGOTIATION
1. BEARER – delivery
2. ORDER – indorsement then delivery
 SECTION 30

 NEGOTIATION
*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.
 SECTION 30

 NEGOTIATION
*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.
 SECTION 30

 NEGOTIATION
*PAYMENT of check (or other bill) by drawee-bank is NOT
NEGOTIATION and does NOT make bank the HOLDER;
BANK is not the payee or indorsee; check is EXTINGUISHED
and CANNOT be put in circulation again to bind the drawer or
indorser.
 SECTION 30

 NEGOTIATION
 The writing of HOLDER’s 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.
 SECTION 30

 NEGOTIATION
 BASIC METHODS TO TRANSFER
NEGOTIABLE INSTRUMENT

1. ISSUE – 1st DELIVERY of instrument COMPLETE in form

to a person who takes it as HOLDER
                - 1st TRANSFER of instrument to PAYEE
 SECTION 30
 NEGOTIATION
 BASIC METHODS TO TRANSFER
NEGOTIABLE INSTRUMENT

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
 SECTION 30
 NEGOTIATION
 BASIC METHODS TO TRANSFER
NEGOTIABLE INSTRUMENT

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
 SECTION 30
 NEGOTIATION
 Negotiable Instrument can be NEGOTIATED or
ASSIGNED; NON-Negotiable Instrument 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.
 SECTION 30
NEGOTIATION ASSIGNMENT
Only to Negotiable All contracts
Instruments
Transferee is HOLDER Transferee is ASSIGNEE
HDC - REAL defenses ASSIGNEE – PERSONAL
and REAL defenses

May acquire BETTER title Merely steps in shoes of

than PRIOR party ASSIGNOR
 SECTION 30
NEGOTIATION ASSIGNMENT
GENERAL INDORSER ASSIGNOR does NOT warrant
warrants SOLVENCY of SOLVENCY of prior parties
PRIOR parties (unless stipulated or
INSOLVENCY known to him)

INDORSER NOT LIABLE ASSIGNOR IS LIABLE even

(unless there is PRESENT- w/o NOTICE OF DISHO-NOR
MENT and NOTICE of
DISHONOR)

Governed by NIL Governed by CIVIL CODE on

assignment of credits
 SECTION 30

 NEGOTIATION
 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
 SECTION 30

 NEGOTIATION
 Can there be negotiation to a PAYEE?
 If negotiation refers to instrument already completely
executed/ISSUED, then ONLY HOLDERS
SUBSEQUENT TO PAYEE can acquire title by
NEGOTIATION.
 SECTION 30

 NEGOTIATION
 Can there be negotiation to a PAYEE?
 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.)
 SECTION 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.
 SECTION 31
 Indorsement
 Indorsement be written on INSTRUMENT itself or upon
paper attached (allonge) thereto.

 Signature of INDORSER, w/o additional words, is

SUFFICIENT INDORSEMENT.
 SECTION 31
 Indorsement
 (from Latin in dorsa – writing on the back) – writing of
indorser’s 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.
 SECTION 31
 Indorsement; how made
 legal transaction effected by the writing of one's own
name at the:
a. back of the instrument or
b. upon a paper (allonge) attached thereto with or without
additional words specifying the person to whom or to
whose order the instrument is to be payable whereby
one not only transfers legal title to     the paper
transferred but likewise enters into an implied guaranty
that the instrument will be duly paid (Sec. 31)
 SECTION 31
 Indorsement

 Indorsement w/o delivery conveys NO TITLE and NO

HOLDER.
 SECTION 31
 Indorsement
 NECESSITY (SIGNIFICANCE) OF INDORSEMENTS

1. Essential to the execution and for FURTHER

NEGOTATION of ORDER instrument.

(eg. Note payable: “to the order of P”, P must indorse it

BEFORE it can be further negotiated)
 SECTION 31
 Indorsement
 NECESSITY (SIGNIFICANCE) OF INDORSEMENTS

2. Not necessary to a mere ASSIGNMENT.

(Thus, one can acquire title w/o indorsement of ORDER
instrument but he CANNOT be HDC thereof although entitled
to indorsement made.)
 SECTION 31
 Indorsement
 NECESSITY (SIGNIFICANCE) OF INDORSEMENTS
3. Determines SUBSEQUENT negotiations or transfer of
instrument.
(Indorsement may determine whether another indorsement
can be further negotiated [special indorsement] – w/
indorsee name;
 SECTION 31
 Indorsement
 NECESSITY (SIGNIFICANCE) OF INDORSEMENTS
 or NO further indorsement required for negotiation
because it is converted into a BEARER instrument
negotiated by DELIVERY [blank instrument] – w/
indorsee signature only;
 or RESTRICTED  for further negotiation [restrictive
indorsement] – w/ additional words w/c prohibit/limit
further negotiation)
 SECTION 31
 Indorsement
 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.
 SECTION 31
 Indorsement
 Location of Instrument
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
co-drawer [BofE].
 SECTION 31
 Indorsement
 Location of Instrument
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.
 SECTION 31
 Indorsement

 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 indorsers.
 SECTION 32
 Indorsement must be of entire instrument. - 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. But where the
instrument has been paid in part, it may be indorsed
as to the residue.
 SECTION 32
 Indorsement must be of entire instrument.
 General Rule:
    Indorsement must be of the entire instrument.
 Exception:
Where instrument has been paid in part, it may
be indorsed as to the residue. (Sec. 32)
 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.
 SECTION 32
 Indorsement must be of entire instrument.
 (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)
 SECTION 32
 Indorsement must be of entire instrument.

 NO NEGOTIATION if indorsement transfer instrument to 2

or more indorsees severally.
 
(eg. Pay to A P8 000 and pay to B P2 000 – NOT VALID
NEGOTIATION)
 
 SECTION 32
 Indorsement must be of entire instrument.
 
 However, there is VALID NEGOTIATION if indorsees 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.)
 ACTIVITY

1. Discuss the kinds of Indorsement