NEGOTIABLE INSTRUMENTS LAW

Chapter 3 due course and he is therefore subject to the

INTERPRETATION OF INSTUMENTS defenses of prior parties.

Rules of construction in case of ambiguities in a  If the instrument is negotiable, voluntary transfer

negotiable instrument: thereof can be effected either through Negotiation
1. Words prevail over figures or through Assignment. If the instrument is merely
2. Interest runs from the date of the instrument, if assigned, the transferee does not become a holder
date from which interest is to run is unspecified; and he merely steps into the shoes of the
if undated, from the date of issue transferor. Any defense available against the
3. If undated, deemed dated on the date of issue transferor is available against the transferee.
4. Written provisions prevail over printed
5. If there is doubt whether it is a bill or note, the Methods of transferring a negotiable instrument:
holder may treat it as either at his election 1. Issue – first delivery of the instrument complete
6. When not clear in what capacity it was signed, in form to a person who takes it as a holder.
deemed signed as an indorser 2. Negotiation – an instrument is negotiated when
7. If "I promise to pay" but signed by two or more it is transferred from one person to another in
persons, jointly and severally liable such a manner as to constitute the transferee
the holder thereof.
 Ambiguity should be construed against the party 3. Assignment – absent any express prohibition
who caused the ambiguity. against assignment or transfer written on the
face of a non‐negotiable instrument, the same
PROBLEM: may be assigned or transferred.
X, Y and Z signed a promissory note in favor of A stating:
“We promise to pay A on December 31, 2018 the sum Distinctions between Assignment and Negotiation:
of ₱5,000.00.” When the note fell due, A sued X and Y NEGOTIATION ASSIGNMENT
who put up the defense that A should have impleaded Negotiable Instruments Civil Code of the Philippines
Z. Is the defense valid? Why? Law
Negotiable Instruments Contracts in general or
only assignable rights
A: The defense is not valid. The liability of X, Y and Z The transferee is a holder Transferee is a mere
is joint because solidary liability is not provided for in who may be a holder in due assignee
the note. Hence, they can be sued for their respective course
shares. However, X and Y can invoke as a defense that The transferee can be a The transferee can never
there is no cause of action against them with respect holder in due course in be a holder in due course
proper cases
to the proportionate share of Z in the obligation
The transferee-holder may The transferee cannot
because only Z is responsible therefore. acquire more rights than acquire more rights than
the transferor if he is a the transferor because he
Chapter 4 holder in due course merely steps into the shoes
TRANSFER AND NEGOTIATION of the transferor
The transferee-holder may The transferee is always
be free from personal subject to personal
Negotiation is defined as the transfer of the
defenses if he is a holder in defenses
instrument from one person to another so as to due course
constitute the transferee the holder thereof. Said
holder may, in proper cases, be a holder in due course Delivery is defined as the transfer of possession of the
who is free from personal defenses of prior parties. instrument by the maker or drawer with the intention
Such feature if negotiable instruments is central to its to transfer title to the payee and recognize as holder
function as substitute for money. thereof. It imports such transfer of the instrument to
another as to enable the latter to hold it for himself.
 If an instrument is not negotiable, it can still be  A negotiable instrument that is payable to bearer
transferred through Assignment. The transferee is may be negotiated by mere delivery. No further act
an assignee who merely steps into the shoes of the other than delivery is necessary in order to
transferor. The transferee cannot be a holder in
NEGOTIABLE INSTRUMENTS LAW
negotiate the instrument and to make the
transferee a holder.
 An order instrument may be negotiated by
indorsement completed by delivery. Without
indorsement, the negotiation is incomplete and
the transferee does not become a holder.
 Delivery may be shown to have been conditional,
or for a special purpose only, and not for the
purpose of transferring the property in the
instrument. For instance, it may be established
that delivery was only for the purpose of
safekeeping.
 Where an instrument, payable to bearer, is
indorsed specially, it may be further negotiated by
delivery. Any person indorsing specially is liable as
indorser to only such holders as make title through
the indorsement. (Sec. 40) This means that a
bearer instrument is always a bearer instrument in
the sense that even if it is indorsed specially, it can
be further negotiated by mere delivery.
PROBLEM:
X makes a note payable to bearer, and delivers the
same to Y. Y indorses it to Z in the manner: “Pay to Z,
sgd. Y.” Later Z without indorsing the promissory note
transfers and delivers the same to R. The note is
subsequently dishonored by X. May R hold X liable?
Reason.
A. Yes, R may hold X liable. The instrument is a
bearer instrument, hence, the special indorsement did
not convert the instrument into an order instrument.
Sec. 40 of the NIL provides that “where the instrument,
payable to bearer, is indorsed specially, it may
nevertheless be further negotiated by delivery. Hence,
delivery constitutes negotiation of the instrument to R
and he became a holder of the instrument.
 Where the holder of an instrument payable to his
order transfers it for value without indorsing it, the
transfer vests in the transferee such title as the
transferor had therein, and the transferee acquires
in addition, the right to have the indorsement of
the transferor. But for the purpose of determining
whether the transferee is a holder in due course,
the negotiation takes effect as of the time when
the indorsement is actually made. (Sec. 49)
 If negotiation of an order instrument is incomplete
because of the absence of indorsement, the
instrument is in effect merely assigned to the
transferee. It is only at the time of indorsement
that the transferee acquires all the rights of a
holder. The requisites of a holder in due course
must therefore be present at the time of such
indorsement and not at the time of delivery. Any
knowledge about any infirmity in the instrument,
acquired after delivery but before indorsement will
prevent the transferee from becoming a holder in
due course.
 Where the negotiable instrument is merely
assigned, the transferee foes not become a holder
and merely steps into the shoes of the transferor.
Any defense available against the transferor is
available against the transferee.
Indorsement is the writing of the name of the indorser
on the instrument or upon a paper attached thereto
with the intent to transfer title to the same. The
signature of the indorser, without additional words, is
a sufficient indorsement. (Sec. 31)
 Indorsement must be of the entire instrument.
Except when there is partial payment, it may be
indorsed as to the residue. (Sec. 32)
Different kinds of Indorsement:
1. Special (Sec. 34)–Specifies the person to whom
or to whose order the instrument is to be
payable. Also known as specific indorsement or
indorsement in full.
2. Blank (Sec. 34) –Specifies no indorsee.
a. Instrument is payable to bearer and may be
negotiated by delivery;
b. May be converted to special indorsement
by writing over the signature of the indorser
in blank any contract consistent with the
character of indorsement (Sec. 35).
3. Absolute–The indorser binds himself to pay:
a. upon no other condition than failure of
prior parties to do so
b. upon due notice to him of such failure
4. Conditional –Right of the indorsee is made to
depend on the happening of a contingent
event. Party required to pay may disregard
the conditions (Sec. 39)
5. Restrictive –When the instrument:
NEGOTIABLE INSTRUMENTS LAW
a. Prohibits further negotiation of the
instrument (it destroys the negotiability of
the instrument);
b. Constitutes the indorsee the agent of the
indorser; (Sec. 36)
c. Vests the title in the indorsee in trust for or
to the use of some persons. But mere
absence of words implying power to
negotiate does not make an instrument
restrictive.
6. Qualified (Sec. 34)– constitutes the indorser a
mere assignor of the title to the instrument. It
is made by adding to the indorser’s signature
words like, without recourse (serves as an
ordinary equitable assignment) (Sec. 38)
7. Joint–indorsement made payable to 2 or more
persons who are not partners. (Sec. 41)
Note: All of them must indorse unless the one
indorsing has authority to indorse for the
others.
6. Irregular (Sec. 64)– A person who, not
otherwise a party to an instrument, places
thereon his signature in blank before delivery.
7. Facultative –Indorser waives presentment and
notice of dishonor, enlarging his liability and
his indorsement.
8. Successive – indorsement to two persons in
succession.
Note: Any of them can indorse to effect
negotiation of the instrument.
 Where an instrument is negotiated back to a prior
party, such party may reissue and further negotiate
the same. But he is not entitled to enforce
payment thereof against any intervening party to
whom he was personally liable. (Sec. 50)
 The holder may at any time strike out any
indorsement which is not necessary to his title. The
indorser whose indorsement is struck out, and all
indorsers subsequent to him, are thereby relieved
from liability on the instrument. (Sec. 48)
 Every negotiable instrument is deemed prima facie
to have been issued for a valuable consideration;
and every person whose signature appears
thereon to have become a party thereto for value.
(Sec. 24)
Value is any consideration sufficient to support a
simple contract. An antecedent or pre-existing debt
constitutes value; and is deemed such whether the
instrument is payable on demand or at a future time.
(Sec. 25)
 A negotiable instrument is deemed transferred for
a valuable consideration if it was transferred in
consideration of the obligation of the transferee to
give or deliver a thing or to perform a service.
 Valuable consideration consists either of rights,
interest, profit or benefit accruing to the party who
makes the contract or some forbearance,
detriment, loss or some responsibility to act, or
labor, or service given, suffered or undertaken by
the other party.
 There is valuable consideration if the parties
resorted to Discounting. In discounting, the
instrument is negotiated to another because the
transferee will pay the amount of the instrument.
However, the transferee charges or deducts a
certain percentage from the principal as its
compensation.
 “Love and affection” do not constitute valuable
consideration.
 A lien is a valuable consideration. Where the
holder has lien on the instrument arising either
from contract or by implication of law, he is
deemed a holder for value to the extent of his lien.
(Sec 27)
 Where value has at any time been given for the
instrument, the holder is deemed a holder for
value in respect to all parties who become such
prior to that time. (Sec. 26) For example:
An instrument was negotiated to Mr. A by Mr. P, the
payee. Thereafter, the instrument was negotiated by
indorsement and delivery to Mr. B, then to C and D. Mr.
D obtained the instrument from Mr. C by way of a gift.
C in turn obtained the instrument form B in payment of
a car. In this case, D is a holder for value as to B because
value has been given by C and B became a party to the
instrument prior to such time value was given by C.