Self-Made Reviewer on Law on Negotiable Instruments

NIL (Act No. 2031)

CHAPTER 1 FORM AND INTERPRETATION
APPLICABILITY OF NIL
- Act applies only to negotiable instruments and those meet
requirements in Section1.
- Any case not provided in this Act, govern by existing legislation or in
default rules of law merchant.
3 FUNCTIONS & IMPORTANCE OF NI
1. Used as a substitute for money
*NI differs from money; NI is valuable/worthless depending on financial
ability of parties to them
2. Media of exchange
3. Media of credit transaction
PURPOSE OF NEGOTIABILITY
- 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.
Check for immediate payment
BofE & PN for circulation of credits
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 (bbbb dd cpt)
1. BofE
2. Bank check
3. Bank notes
4. Bankers acceptance
5. Bonds
6. Drafts
7. Due bills

8. Check
9. Promissory Notes
10. Trade acceptance

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
- govt warrant for payment of money covering payment/replenishment
of cash advances for official expenditures
3. POSTAL MONEY ORDER
4. BILL OF LADING
- NO unconditional promise/order to pay a sum certain in money
5. CERTIFICATE OF STOCK
- written instrument signed by proper officer of corporation stating
name of person (owner of designated # of shares of its stock)
- 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

*Where the meaning is doubtful, the courts adopted the policy of
resolving IN FAVOR OF NEGOTIABILITY of the instrument.
*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.
Eg. Pay to Pedro Cruz.
*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.
*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
BofE drawer, drawee, payee (parties need NOT ALL be distinct
persons. Thus, drawer may draw on himself payable to his own order.)
December 29, 2013

Manila
P1000
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
LEGEND:
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.
Section 2 Certainty as to sum, what constitutes
Sum payable is SUM CERTAIN although paid:
- w/ interest
- by stated installments
- by stated installments w/ provision that upon default in payment of
any installment/interest, the whole shall become due
- w/ exchange, fixed/current rate
- w/ costs of collection/attorneys fee in case payment not made at
maturity

*If instrument calls for an ACT OTHER THAN payment of money NOT
NEGOTIABLE
*A note giving the MAKER the right to ascertain the AMOUNT payable
NON-NEGOTIABLE
*A promise to pay P1000 in two installments or in installments
NON-NEGOTIABLE
*Acceleration at option of HOLDER NON-NEGOTIABLE
*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
*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
- 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.
Section 3 Promise is UNCONDITIONAL when:
- 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
- statement of transaction w/c gives rise to instrument - NEGOTIABLE

Promise is NOT UNCONDITIONAL an order/promise to pay OUT OF

particular fund (direct source of payment) NON-NEGOTIABLE
*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 NON-NEGOTIABLE.
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 NONNEGOTIABLE
(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, what constitutes

- fixed period after date/sight - NEGOTIABLE
- on/before a fixed or determinable future time specified - NEGOTIABLE
- 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
*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.
DEMAND INSTRUMENT payment at anytime
TERM INSTRUMENT payabe only UPON ARRIVAL of time for payment
AFTER SIGHT means AFTER the instrument is SEEN by the DRAWEE
upon presentment of acceptance
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 NONNEGOTIABLE because HOLDER cannot COMPEL him to make payment
in MONEY)
Section 6 OMISSIONS; SEAL; PARTICULAR IN MONEY
Still NEGOTIABLE:
- NO DATE
(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)

- NO VALUE given
(eg. NO written for value received)
- 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
- Designates a PARTICULAR KIND of current money as payment
(eg. I promise to pay A or order P1000 in Central Bank of fifty peso
bills.)
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)
- on presentation
- on call
- at anytime called for
*PAYABLE ON DEMAND as regards the MAKER (late issuance), the
ACCEPTOR (late received), the INDORSER (late indorsed)
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 the order of A and B P1000)

- 1 or more of several PAYEES

(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)
*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 NON-NEGOTIABLE 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 NON-NEGOTIABLE because
there would be nobody who could indorse the instrument and nobody
who could give the order or authority to collect.
Section 9 PAYABLE TO BEARER WHEN:
- Expressed to be SO PAYABLE.
(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 to person named therein or BEARER.
(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.

Section 10 Terms, sufficient when:

CLEARLY INDICATE THE INTENTION to conform the requirements
thereof.
*A MERE defect in language/grammatical error still NEGOTIABLE
Section 11 Presumption as to date
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.
*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 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.
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.
*The insertion of WRONG DATE constitutes MATERIAL ATERATION.
Section 14 INCOMPLETE and DELIVERED (personal defense)
(4) RULES
1. AUTHORITY TO FILL UP THE BLANKS
- 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
- 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 the theft, and
the completion and negotiation of the instrument.)
Section 16 COMPLETE and UNDELIVERED (personal defenses)
(4) RULES
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
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
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 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 Effect of signature by PROCURATION

PROCURATION act by w/c a PRINCIPAL gives power to another to act
in HIS PLACE as he could himself.
- 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.
(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 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
- As far as such persons (incapacitated, insane, demented, deaf-mutes,
etc) are concerned, THEIR CAPACITY IS A REAL DEFENSE, that is,
available even against HDC.
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.
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
READ pp.76-77
(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 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.
* 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
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)

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

DISHONOR)
ASSIGNOR IS LIABLE even w/o NOTICE OF DISHO-NOR
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.)
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
indorsers 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.
*Indorsement w/o delivery conveys NO TITLE and NO HOLDER.

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)
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.)
3. Determines SUBSEQUENT negotiations or transfer of instrument.

(Indorsement may determine whether another indorsement can be

further negotiated [special indorsement] w/ indorsee name;
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)
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
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].
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
indorsers.
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
indorsees severally.

(eg. Pay to A P8 000 and pay to B P2 000 NOT VALID NEGOTIATION)

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.
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
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 indorsers 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 indorser ENLARGES his liability by writing over his
signature a WAIVER of usual demand (formal protest) and NOTICE OF
NON-PAYMENT (dishonor).
Section 34 Special, and blank indorsement
SPECIAL indorsement w/ indorsee 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 indorsee; can be negotiated by
DELIVERY because it becomes a BEARER instrument.

[eg. I promise to pay A or order P10 000 (Sgd.) B

A (payee) may indorse the instrument in blank by SIMPLY writing his
signature at BACK of instrument:
(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.)
*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 indorser
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.
[eg. BLANK SPECIAL
M P (special) A (blank) B (beomes BEARER) (if indorse specially,
negotiation will be effected only indorsement) C (special indorsee)
In example, the indorsement by P A and A B may appear:
Pay to A
(Sgd.) P
(sgd.) A
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
(Sgd.) P
Pay to B
(sgd.) A
Section 36 Restrictive indorsement:
RESTRICTIVE INDORSEMENT RESTRAINS the negotia-bility 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 indorser subject to restrictive indorsement.)
Pay to B for collection
Pay to B for collection and remittance
Pay to B for collection only
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.