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. 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.

Negotiation

- is the transfer of a negotiable instrument from one person to another made in such a
manner as to constitute the transferee the holder thereof

* there is no negotiation if the transfer does not make the transferee the holder of the
instrument

Methods of Transfer of a Negotiable Instrument:

1. ISSUE - is the first delivery of the instrument complete in form, to a person who
takes it as a holder.
2. Negotiation - operates to make the transferee of a negotiable instrument the holder
thereof.
3. Assignment is the transfer of the title to an instrument, with the assignee generally
taking only such title or rights as his assignor has, subject to all defenses available
against his assignor.

Methods of Negotiation:

1. Instruments Payable to order:

a. An indorsement by the payee or present holder; and
b. Its delivery to the next holder

2. Instruments payable to bearer:

- negotiated by mere delivery alone without indorsement.

Bearer the person in possession of a bill or note which is payable to bearer.

Delivery transfer of possession, actual or constructive, from one person to another.

* The payment of a check (or other bill) by the drawee bank is not a negotiation and does
not make the bank a holder within section 30.

1. the bank is neither the payee nor indorsee. The check is extinguished and cannot be put
in circulation again so as to bind the drawer or indorser.

2. the writing of the name of the holder on the back of the check before surrendering it
for payment to the drawee bank is not an indorsement.

Effect of delivery of order instrument without indorsement:

1. Transfer operates as an ordinary assignment

2. Transferee does not become holder of the instrument
3. Where indorsement subsequently obtained

NEGOTIATION
1. Refers only to negotiable instruments
2. Transferee is a holder
3. A holder in due course is subject only
to real defenses.
4. A holder in due course may acquire a
better title or greater rights under the
instrument than those possessed by the
transferor or a prior party.
5. A general indorser warrants the
solvency of prior parties
6. An indorser is not liable unless there be
a presentment and notice of dishonor
7. Governed by the Negotiable
Instruments Law
ASSIGNMENT
1. Refers generally to an ordinary contract
2. Transferee is a assignee
3. An assignee is subject to both real and
personal defenses.
4. Merely steps into the shoes of the
assignor.
5. An assignor does not warrant the
solvency of prior parties unless expressly
stipulated or the insolvency is known to him
6. An assignor is liable even without
notice of dishonor
7. Governed by Articles 1624 to 1635 of
the Civil Code

Can there be negotiation to a payee?

1. First delivery of Instrument to Payee.

2. First delivery of Instrument to other the Payee.

3. Delivery of Instrument by the Payee by last holder.

Sec. 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.

Indorsement

- is the writing of the name of the payee on the instrument with the intent to either to
transfer the title to the same, or to strengthen the security of the holder by assuming a contingent
liability for its future payment, or both.
Parties Involved:

1. Indorser payee by signing the instrument and delivering it to another person.

2. Indorsee person who receives the indorsed instrument.

Note: Indoresment alone without delivery conveys no title and creates no holder.

Nature of Indorsement.

* An indorsement is not only a mode of transfer

* It involves also a new contract and an obligation on the part of the indorser an implied
guaranty that the instrument will be duly paid according to the terms thereof. Each indorsement
generates an additional contract between the indorser and all subsequent holders.

Necessity of Indorsement.

1. essential to the execution of an instrument payable to the order of the maker or drawer.

2. essential to the negotiation of an order, not of a bearer instrument.

3. it is not necessary to a mere assignment of a negotiable or non-negotiable instrument.

Form of Indorsement.

* The law does not require an exclusive form by which an indorsement may be
accomplished. But it must be written or be in writing. As writing includes print, the
indorsement made by rubber stamp or typewritten on the instrument complies with the
requirement.

1. the use of the word assign does not make a negotiation a mere assignment.

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

Such indorsement is called Blank Indorsement

3. where the name of the indorser is specified it is called Special Indorsement

Place of Indorsment.

May be written:

1. On the Instrument itself Indorsement is derived from the Latin word

Indorsa meaning Writing on the Back. While Indorsement is usually written on the
back, it may be written on the face of the instrument. The place is not essential. The law
looks to the intention of the parties rather than the form as to indorsement.
 2. Upon a paper attached thereto - where the Indorsment is on a slip of paper
physically attached to the instrument so as to become part of it, the paper is known as
allonge.

Sec. 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.

Reason: the instrument must be delivered to the indorsee and there cannot be a partial
delivery of one instrument.

Indorsement to multiple payees or indorsees

1. Joint payees similarly, an indorsment purporting to transfer the instrument to two or

more persons severally (independently or apart from each other) does not operate as a
negotiation of the instrument for again the cause of action is split or divided. However, the
negotiation is valid where the indorsees are joint (combined or joined together). The indorsments
of all the indorsees are required for further negotiation of the instrument.

2. Alternative payees Instrument are sometimes payable to two or more alternative

payees. In such a case, the negotiation of the instrument may be made by the indorsement of
either of the payees.

When partial indorsement is allowed.

* if part of the amount has already been paid, the unpaid balance may be indorsed as this
is expressly authorized by law.

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.

Classification of Indorsement

1. as to the methods of negotiation:

a. Special; or

b. Blank

2. as to the kind of title transferred:

a. restrictive; or

b. non-restrictive
 3. as to scope of liability of indorser:

a. qualified; or

b. unqualified or general.

4. as to presence or absence of limitations:

a. conditional; or

b. unconditional.

5. Other kinds of Indorsements:

a. joint;
b. successive:
c. irregular or anomalous:
d. facultative.

Note: once an instrument as issued satisfies all the requirements of negotiability, no

indorsement, even restrictive one, can negate its negotiable status.

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.

Special Indorsement

- is one where the name of the payee is specified. It is also known as specific
indorsement or indorsement in full. Special and Blank indorsements are unqualified
indorsements.

Forms.

1. One that specifies the person to whom the indorsement is to be paid; and

2. One that specifies the person to whose order the instrument is to be payable.

Negotiation of order and bearer instrument.

a. if the instrument is originally payable to order, and it is negotiated by the payee by

special indorsement, the indorsement of the indorsee is necessary to the further negotiation of the
instrument.
 b. if the instrument is originally payable to bearer, it may nevertheless be further
negotiated by mere delivery even if the original bearer indorsed is specially but the special
indorser is liable to only such holders as make title through his indorsement.

Blank Indorsement - one which specifies no particular indorsee.

1. such an indorsement consists only of the signature of the payee or indorser. The use of
bearer instrument involves greater risk through theft or loss than the use of order paper.

2. an instrument so indorsed is payable to bearer or whoever possesses it, and may be

negotiated by mere delivery without any need for further indorsements regardless of whatever
the instrument is originally payable to bearer or not.

3. a check payable to the order of a named person and indorsed by him in blank on the
back makes it a bearer instrument also.

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.

Conversion of Blank indorsement to Special Indorsement

* an indorsement made payable to bearer by an indorsement in blank may be converted

into an order instrument by writing over the signature of the indorser in blank any contract not
inconsistent with the character of the indorsement. But a bearer instrument always remains a
bearer instrument negotiable by mere delivery whether the last indorsement is a blank or a
special one.