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Notes on Campos Negotiable Instruments Law
C c,) L L E E N 1
Introduction
1. kinds of negotiable instruments
a. promissory notes a promise to pay in money
P500.00 October 6, 1979
For value I received, I promise to pay to the order of
Carolina Infante the sum of Five Hundred Pesos
(P500.00), Philippine currency, on or before March 3,
1982.
(Sgd.) Vicente Canlas
Other forms of promissory notes include the certificate
of deposit and the bond
Certificate of deposit an instrument issued by a bank reciting a deposit of a certain sum of money, payable
either at a fixed time or on demand, to the depositor
named therein.
Bond an evidence of indebtedness issued by a corporation, public or private, payable at a definite date
in the future, usually for a long term; a written promise
of the corporation to pay a definite sum of money on the
day named
b. bill of exchange an order made by one person to another to pay money to a third person
P500.00 October 6, 1979
Thirty days after date, pay to Carolina Infante or order
the sum of Five Hundred Pesos (P500.00), Philippine
currency. Value received.
(Sgd.) Vicente Canlas
To: Ferdinand Marcos
249 Dart, Manila
Check most commonly used form of bill of exchange, wherein the one who issues it orders his bank to pay the
person named on the check. A check is always payable
on demand
Draft a form of bill of exchange used mainly in transactions between physically remote from each other.
It is an order made by one person, say the buyer of the
goods, addressed to a person having in his possession
funds of such buyer, ordering the addressee to pay the
purchase price to the seller of the goods
Bank draft order is made by one bank to another bank
2. parties and the nature of their liability
a. promissory note
2 Parties:
Maker promissor Payee the person to whom the promise to pay is made
b. bill of exchange
3 Parties: Drawer person who gives the order to pay the bill Drawee addressee of the order Payee the person whom the payment is to be made
When a negotiable instrument is negotiated or indorsed,
the person so doing is called an indorser. The person to
whom he negotiates it is the indorsee, who, by such
negotiation, becomes the holder of the instrument.
As to the nature of their liability, the parties to a
negotiable instrument are either primarily or secondarily liable.
Primary party is the one who is absolutely and unconditionally required to pay the instrument when it
falls due; e.g. maker of a promissory note, in a bill of
exchange, there is no person primarily liable to pay until
and unless the drawee accepts the order of the drawer to
pay. Before he accepts, such drawee is not liable on the
instrument and he cannot be compelled by the holder to
accept or pay it. But if and when the drawee accepts, he
becomes an acceptor who is absolutely bound to pay on
the date specified on the bill
Secondary party held responsible should the primary parties fail to pay; e.g. drawer of the bill of exchange,
indorsers of either bill or note. Liability is conditioned
on 2 factors (1) that demand or presentment be duly
made on the primary party, and (2) should the said party
dishonor (i.e. fail to pay or accept) such instrument, that
a notice of such dishonor be given to the secondary party
sought to be charged
An indorser by indorsing the bill or note impliedly enters into 2 contracts: (1) he is selling or transferring the
instrument to the indorsee, thus assuming responsibilities
similar to that of a seller or transferor of personal
property; and (2) he warrants that he will pay the
instrument when the 2 conditions for his liability have
been fulfilled. The holder can hold any indorser liable
should the maker or acceptor fail to pay, provided these 2
conditions are complied
3. functions of negotiable instruments
- function 1: as a substitute for money in payment for property or services
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Notes on Campos Negotiable Instruments Law
C c,) L L E E N 2
- function 2: as a means of creating and transferring credit
- function 3: to facilitate the sale of goods
Although negotiable instruments do not constitute legal
tender, they often take the place of money as a means of
payment (it is more convenient means of paying bills as
well as of keeping records of such payments)
Examples for the 3 functions:
- function 1: as a substitute for money in payment
for property or services
Under Article 1249 CC, the delivery of promissory notes payable to order or bills of exchange and other
mercantile documents shall produce the effect of
payment only when they have been cashed or when
through the fault of the creditor they have been impaired.
In the meantime the action derived from the original
obligation shall be held in abeyance. Thus, negotiable instruments validity as a means of payment is conditioned on its being honored by the person bound by
its terms to pay it. There should be payment versus mere
acceptance. However, if non-payment is caused by the
plaintiffs negligence, payment will be deemed to have been effected, and the obligation for which it was given
as conditional payment will be deemed discharged.
The tender of check is sufficient to compel redemption of
foreclosed property since such redemption is not an
obligation but a right. However, such tender is not in
itself payment that relieves the redemptioner from his
liability to pay the redemption price
- function 2: as a means of creating and transferring credit
If Mia wants to buy a car on installment basis, the seller
and Mia may agree that Mia make a down payment and
sign a promissory note for the balance. The car is
delivered to Mia and she will be free to use it subject
only to his obligation to pay the note when it falls due.
In this case, the promissory note is used as a means of
creating credit
- function 3: to facilitate the sale of goods
The conduct of international trade is facilitated by the
use of a bill of exchange called a draft. If A in Manila
wants to import a certain machine from B Co. in San
Francisco, payment thereof in cash would be highly
impractical. A may not be personally known to B Co. so
that his personal check may not be acceptable as
payment. The usual method of payment in transactions
like this is by the use of a draft, usually covered by a
letter of credit.
4. concept of negotiability
A person who takes a negotiable instrument can rely on
its face and need not inquire into past events which gave
rise to its execution. Any inquiry will require delay in
commercial transactions where profitability depends
largely on the briskness with which they are
consummated. The NIL aims to encourage facility,
convenience, and efficiency in commercial transactions.
In the study of law, one has to keep in mind that there are usually two contracts involved whenever a negotiable
instrument is issued a contract of sale and a contract to pay. As far as the original parties are concerned,
promise to pay is dependent on the validity of the
contract of sale. But once the negotiable note is
negotiated to a third person, it becomes completely
independent of the sale which gave rise to it. As far as
the third party is concerned, there is only one contract the promise to pay
5. the origin of negotiable instruments
from the merchants and traders of the Middle Ages, more specifically among Florentine and Venetian
merchants along the Adriatic Sea. The bill of exchange
was devised to facilitate the contract of cambium and to
avoid the risks of transporting money
6. history of the Negotiable Instruments Law
The NIL is a verbatim reproduction of the Uniform
Negotiable Instruments Law of the United States,
approved by the National Conference of Commissioners on Uniform States Laws in 1896. This statute was in
turn patterned after the English Bill of Exchange Act
passed by Parliament in 1882, the first codification of the
law on negotiable paper.
In this country, the NIL has proved to be one of the most
stable statutes. Since its enactment in 1911, not a single
amendment to it has been made. However, in the Unites
States, an amended NIL has been passed otherwise
known as the Uniform Commercial Code, which has not
been adopted by the Philippine Laws.
7. applicability of the Negotiable Instruments Law
NIL only applies to negotiable instruments. If the
instrument is not a negotiable instrument, applicable law
is the general law on contracts. Section 196 of the NIL
provides:
Sec. 196. CASES NOT PROVIDED FOR IN ACT. Any case not provided for in this Act shall be governed
by the provisions of existing legislation, or in default
thereof, by the rules of the Law of Merchant
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Notes on Campos Negotiable Instruments Law
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The Law Merchant is a system which consists of certain
principles of equity and usages of trade which general
convenience a common sense of justice have established,
to regulate the dealings of merchants and mariners in all
the commercial countries of the civilized world
Chapter 1: Requisites of Negotiability
Sec. 1. FORM OF NEGOTIABLE INSTRUMENTS. An instrument to be negotiable must conform to the
following requirements:
1. it must be in writing and signed by the maker or drawer;
2. must contain an unconditional promise or order to pay a sum certain in money;
3. must be payable on demand, or at a fixed or determinable future time;
4. must be payable to order or to bearer; and 5. where the instrument is addressed to a drawee,
he must be named or otherwise indicated therein
with reasonable certainty
Sec. 184. PROMISSORY NOTE DEFINED. A negotiable promissory note within the meaning of this
Act is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay
on demand, or at a fixed or determinable future time, a
sum certain in money to order or to bearer. Where a note
is drawn to the makers own order, it is not complete until indorsed by him.
Sec. 126. BILL OF EXCHANGE DEFINED. A bill of exchange is an unconditional order in writing addressed
by one person to another, signed by the person giving it,
requiring the person to whom it is addressed to pay on
demand or at a fixed or determinable future time a sum
certain in money to order or to bearer.
Section 1 gives a definition of a negotiable instrument. Any instrument which has the requisites enumerated
therein is negotiable and is governed by the NIL. All
other instruments are non-negotiable
The fact that an instrument does not meet the foregoing
requisites will not affect its validity, the only
consequence being that it will be governed not by the
NIL but by the general law on contracts
1. written form and signature
Sec. 18. LIABILITY OF PERSON SIGNING IN TRADE OR ASSUMED NAME. No person is liable on the instrument whose signature does not appear
thereon, except as herein otherwise provided. But one
who signs in a trade or assumed name will be liable to
the same extent as if he had signed in his own name.
Sec. 19. SIGNATURE BY AGENT; AUTHORITY; HOW SHOWN. The signature of any party may be made by a duly authorized agent. No particular form of
appointment is necessary for this purpose; and the
authority of the agent may be established as in other
cases of agency
In writing includes print and it includes not only what is written with pen or pencil, but also what is typed.
The signature is binding whether it is in ones handwriting, or printed, engraved, lithographed or
photographed, so long as it is intended or adopted as the
signature of the signer or made with his authority. Though the signature of the maker or drawer usually
appears at the lower right hand corner, it may appear on
any part of the instrument. It will be valid and binding as
long as the intention to make the instrument the makers or drawers is shown. However, if the signature is so placed upon the instrument that it is not clear in what
capacity the person intended to sign, he is deemed an
indorser, and not a maker or drawer.
2. unconditional order or promise to pay The instrument must contain a promise or an order to
pay. Mere acknowledgement of a debt does not
constitute a promise. However, the word promise is not absolutely necessary. Any expression equivalent to a
promise is sufficient, i.e. on demand
In a bill of exchange, words equivalent to an order are
sufficient. An order is a command or imperative
direction. A mere request or authority to pay does not
constitute an order. The instrument is by its nature
demanding a right. However, although the use of polite
words like please does not of itself deprive the instrument of its characteristics as an order, its language
must clearly indicate a demand upon the drawee to pay
a. when unconditional
Sec. 3. WHEN PROMISE IS UNCONDITIONAL An unqualified order or promise to pay is unconditional
within the meaning of this Act though coupled with 1. an indication of a particular fund out of which
reimbursement is to be made, or a particular
account to be debited with the amount; or
2. a statement of the transaction which gives rise to the instrument
But an order or promise to pay out of a particular fund is
not unconditional
An unconditional promise or order greatly enhances its
ability to pass freely from one person to another
e.g. of a conditional promise (not negotiable) I promise to pay Andoy or order the sum of P100 if he
passes the board
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Notes on Campos Negotiable Instruments Law
C c,) L L E E N 4
e.g. of promise to pay out of a particular fund (not
negotiable) I promise to pay Andoy or order the sum of P100 out of the rent which may be collected from my
house in Baguio or a Government Treasury warrant which on its face bears the words payable from the appropriation for food administration
e.g. of promise with an indication of a particular fund out
of which reimbursement is to be made, or a particular
account to be debited with the amount (negotiable) Pay to the order of Andoy the sum of P100. Reimburse yourself from the rentals of my house, or xxx debit the same to my account
e.g. of promise with a statement of the transaction which
gives rise to the instrument (negotiable) - Pay to the order of Andoy the sum of P100. This note is given in
payment of the purchase price of a car this day sold and
delivered to Lori and accepted by Inna in full compliance
with the contract, or as per contract
The fact that the condition has been fulfilled will not convert it into a negotiable one
3. sum payable must be certain
Sec. 2. CERTAINTY AS TO SUM; WHAT
CONSTITUTES. The sum payable is a sum certain within the meaning of this Act, although it is to be paid
1. with interest; or 2. by stated installments; or 3. by stated installments with a provision that upon
default in payment of any installment or of
interest, the whole shall become due; or
4. with exchange, whether at a fixed rate or at the current rate; or
5. with costs of collection or an attorneys fee, in case payment shall not be made at maturity
Amount payable must be certain. Thus, P500 or what may be due on my deposit book does not express a sum certain
An agreement to pay interest does not however render
the sum uncertain. The exact amount can be computed
without looking beyond the instrument
Acceleration or deceleration clause does not render an
instrument non-negotiable, since it is entirely without
force until either the maturity or its payment before
maturity
If payable in installments, it has to be stated, i.e., the amount of each installment and its due date are fixed in
the instrument
An instrument expressed in a foreign currency may
contain a provision that the same is payable in Philippine
currency at a fixed rate of exchange or at the rate current
at the time payment is made. This provision does not
affect the negotiability of the instrument
A provision in an instrument for attorneys fees, but leaving the amount thereof blank, amounts to a promise
to pay a reasonable sum as attorneys fees, and does not make the instrument non-negotiable. Such amount may
be fixed by the court.
4. payable in money
Instrument must be capable of being transformed into
money if the holder so wishes. Thus, an instrument is
not negotiable if payable in personal property. Money as used in the law is not necessarily limited to legal tender as defined by law but includes any particular kind of current money. However, if a contract contains a
stipulation that payment is to be made in a currency other
than Philippine currency, such stipulation will be
ineffective and the obligation can be discharged only in
legal tender. But the negotiability of the instrument will not be affected by said stipulation
An instrument which contains an order or promise to do
an act in addition to the payment of money is not
negotiable (for simplicity in form). Thus a note agreeing
to pay taxes assessed upon the note or its mortgage
security is not negotiable.
But if the order or promise gives the holder an election to
require something to be done in lieu of payment of
money, an instrument otherwise negotiable will not be
affected thereby.
But if the option to pay money or something in lieu
thereof is with the maker or the person primarily liable,
the instrument is not negotiable.
5. certainty of time of payment
Instrument must be payable (1) on demand, or (2) at a
fixed time, or (3) at a determinable future time. This
requirement as to certainty of time of payment is for the
purpose of informing the holder of the instrument of the date when he may enforce payment thereof.
a. when payable on demand
Sec. 7. WHEN PAYABLE ON DEMAND. An instrument is payable on demand
1. where it is expressed to be payable on demand, or at sight, or on presentation; or
2. in which no time for payment is expressed Where an instrument is issued, accepted or indorsed
when overdue, it is, as regards, the person so issuing,
accepting, or indorsing it, payable on demand
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Notes on Campos Negotiable Instruments Law
C c,) L L E E N 5
Example:
I promise to pay Andoy or order the sum of P100 at sight
I promise to pay Andoy or order the sum of P100
In both cases, the holder may demand payment at any
time. On the other hand, it has been held that in a
demand note, the maker likewise has an option to pay at
any time, and the refusal of the holder to accept payment will terminate the running of interest, if any is provided
in the note. However, the obligation to pay the note
maintains.
b. payable at a fixed time
Example:
I promise to pay Andoy or order the sum of P100 on December 24, 2008 Only on the said date December 24, 2008 and not before, may the holder demand payment, the instrument
becomes overdue remains valid and negotiable. It is
merely converted to a demand instrument
c. payable at a future determinable time
Sec. 4. DETERMINABLE FUTURE TIME; WHAT
CONSTITUTES. An instrument is payable at a determinable future time, within the meaning of this Act,
which is expressed to be payable 1. at a fixed period after date or sight; or 2. on or before a fixed or determinable future time
specified therein; or
3. on or at a fixed period after the occurrence of a specified event which is certain to happen,
though the time of happening be uncertain.
An instrument payable upon a contingency is not
negotiable, and the happening of the event does not cure
the defect
Sec. 11. DATE, PRESUMPTION AS TO. Where the instrument of an acceptance or any indorsement thereon
is dated, such date is deemed prima facie to be the true
date of the making, drawing, acceptance or indorsement, as the case may be.
Sec. 17. CONSTRUCTION WHERE INSTRUMENT IS
AMBIGUOUS. Where the language of the instrument is ambiguous, or there are omissions therein, the
following rules of construction apply:
xxx
3. where the instrument is not dated, it will be considered to be dated as of the time it was
issued
Examples under Section 4:
e.g. 1 - I promise to pay Andoy or order the sum of P100 thirty days after date
e.g. 2 - I promise to pay Andoy or order the sum of P100on or before December 24, 2008
e.g. 3 - I promise to pay Andoy or order the sum of P100sixty days after the death of Adoring
d. effect of acceleration provisions
Where the option to accelerate the maturity of the
instrument is on the maker, the negotiability of the
instrument is not affected, whether such option is
absolute or conditional. This is the situation covered by
Sec 4(b) when it allows a negotiable instrument to be
payable on or before a fixed date. The maker may pay earlier than the date fixed but this option, if exercised,
would be payment in advance of a legal liability to pay.
Where the acceleration is at the option of the holder,
whether such acceleration provision renders the
instrument non-negotiable depends on the nature of the
provision. If the option can be exercised by the holder
only upon the happening of a specified event or act over
which he has no control, then the negotiable character of
the instrument is not affected by the option to accelerate.
But where the holders right to exercise the option is unconditional, the time of payment is rendered uncertain
and the instrument would not be negotiable.
However, the option given to the holder to accelerate the maturity of an installment note upon failure of the maker
to pay any installment when due does not affect the
negotiability of the instrument. This provision is in fact
expressly allowed by Sec 2(c) of the law. The rule
would be the same where the acceleration is automatic
upon such default. Where the acceleration takes place
upon the failure of the maker to deposit additional
collateral security to make good a depreciation in value
of the original security, the majority view is that such a
provision does not destroy the negotiability
Acceleration of the maturity of the instrument by
operation of law does not affect its negotiability. Should
the maker die before the maturity, for instance, the due
date is disregarded because the holder should file his
claim against the makers estate. A similar situation obtains where the maker is declared an insolvent and the
holder proves his claims in the insolvency proceedings
e. provisions extending time of payment
Instead of acceleration provision, the instrument may contain a provision allowing extension of payment. An
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Notes on Campos Negotiable Instruments Law
C c,) L L E E N 6
instrument is negotiable if the extension is exercised by
both maker and holder. However, where a note with a
fixed maturity provides that the maker has the option to
extend the payment until the happening of the
contingency, the instrument would be non-negotiable
under the second paragraph of Sec 4. The time for
payment may never come at all.
6. must be payable to order or bearer
The instrument in order to be considered negotiable must contain the so-called words of negotiability i.e., must be payable to order or to bearer. These words serve as an expression of consent that the instrument may be
transferred.
A postal money order is not a negotiable instrument. It
does not contain words of negotiability and although it
may be indorsed once, such indorsement does not
convert it into a negotiable instrument because the words
of negotiability must appear on the face of the instrument
as part of the original contract. On the other hand, where the words or bearer printed in a check are cancelled by the drawer, the instrument cannot be considered
negotiable.
It is important to distinguish a bearer instrument from an
order instrument because they vary in their effects on the
rights of the parties. Furthermore, the former may be
negotiated by mere delivery, while the latters negotiation requires not only delivery but also the
indorsement of the transferor.
a. when instrument is payable to order
Sec. 8. WHEN PAYABLE TO ORDER. The instrument is payable to order where it is drawn payable
to the order of a specified person or to him or his order
Illustrations:
1. Pay to the order of Andoy, or I promise to pay to the order of Andoy
2. Pay to Andoy or order, or I promise to pay Andoy or order.
These are the only 2 ways by which an instrument may
be made payable to order. There must always be a specified name in the instrument. Without the words to order or to the order of, the instrument is payable only to the person designated therein and is therefore non-
negotiable. Any subsequent purchaser will not enjoy the
advantages of being a holder of a negotiable instrument,
but merely step into the shoes of the person designated in the instrument and will thus be open to all defenses
available against the latter
b. when instrument is payable to bearer
Sec. 9. WHEN PAYABLE TO BEARER. The instrument is payable to bearer
1. when it is expressed to be so payable; or 2. when it is payable to a person named therein or
bearer; or
3. when it is payable to the order of a fictitious or non-existing person, and such fact was known
to the person making it so payable; or
4. when the name of the payee does not purport to be the name of any person; or
5. when the only or last indorsement is an indorsement in blank
Illustrations:
1. I promise to pay to bearer the sum of P100
If instrument states bearer, Andoy is not negotiable since the word bearer here is used merely to describe Andoy.
Payable to holder is payable to bearer because the word holder can be said to be equivalent to the word bearer
2. Pay to Andoy or bearer 3. Payable to Batman/ John Doe or order
A name is fictitious when it is feigned or pretended
A note payable to the order of an estate of a person still
alive at the time of the execution of the note has been
held to constitute to valid bearer paper, since it is payable
to a non-existing person.
A note payable to the order of the estate of an already
deceased person, although not an order note, is a bearer
note because the name of the payee does not purport to
be the name of any person
That the payee is a fictitious or non-existing person must
however be known to the maker or drawer. Theory is
that maker or drawer intended the instrument to be
transferred by mere delivery.
If the maker or drawer is not aware that the person he
named as payee is a fictitious or non-existent, then the
instrument is not a bearer instrument but an order one.
Obviously, there is no one who can indorse it, so in
effect, it cannot be validly negotiated.
4. Pay to cash or Pay to sundries 5. when the indorsement is an indorsement in
blank, the instrument becomes payable to bearer
even if originally payable to the order of a
specified person
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Notes on Campos Negotiable Instruments Law
C c,) L L E E N 7
A blank indorsement cannot however convert a non-
negotiable note to a negotiable one
It should be noted that only instruments under
paragraphs a and b of Sec 9 are expressly made payable
to bearer.
See case: Ang Tek Lian v. CA 87 Phil 383 (1950)
7. parties must be designated with certainty a. maker and drawer
The maker or drawer must sign the instrument and his
signature is usually written at the lower right-hand corner
thereof. The drawees name is usually written on the lower left-hand corner, although in checks the banks name sometimes appears across the top. The payee and
the successive indorsees negotiate the instrument by
signing on the back. However, if it is not clear from the
instrument in what capacity he signs, ambiguity arises.
The law solves this by considering such a person as an indorser, and not as a maker or drawer
b. payee
Sec. 8. WHEN PAYABLE TO ORDER. The instrument is payable to order where it is drawn payable
to the order of a specified person or to him or his order.
It may be drawn payable to the order of 1. a payee who is not maker, drawer, or drawee; or 2. the drawer or maker; or 3. the drawee; or 4. two or more payees jointly; or 5. one or some of several payees; or 6. the holder of an office for the time being
Where the instrument is payable to order the payee must
be named or otherwise indicated therein with reasonable
certainty.
An instrument may be payable to anyone of the
following as payees:
(1) it may be drawn payable to the order of the payee who is not a maker, drawer or drawee
I promise to pay Inna or order the sum of P100.
(sgd.) Paolo
The payee, Inna is not the maker
(2) it may be made payable to the order of the maker or the drawer
Pay to the order of myself the sum of P100
(sgd.) Paolo
To Lori
Manila
The payee, Paolo is the drawer. Or a note, thus:
I promise to pay myself or order the sum of P100
(sgd.) Paolo
The payee, Paolo is the maker. However, a note payable
to the order of the maker is not complete unless indorsed
by the maker first.
(3) it may be made payable to the order of the drawee
Pay to the order of yourself the sum of P100
(sgd.) Paolo
To: Lori
Manila
The payee, Lori is the drawee and the drawer of the bill,
Paolo is ordering her to pay herself.
(4) it may be made payable to 2 or more payees jointly
Pay to the order of Andoy and Inna the sum of P100
The payees are 2 and are constituted jointly, not in the
alternative. Thus, when negotiating the instrument, both
of them must indorse.
(5) it may be made payable to one or some of several payees in the alternative. In this case,
the law does not consider the payee as uncertain
Pay to the order of Andoy or Inna the sum of P100
The payees are constituted in the alternative so that only
one of them may demand payment for the full amount.
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Notes on Campos Negotiable Instruments Law
C c,) L L E E N 8
And only one of them needs to indorse when negotiating
the instrument. An instrument payable to the order of A
and/ or B is payable in the alternative and not joint
payees
(6) it may be made payable to the holder of an office for the time being
I promise to pay to the order of the Secretary of X
Association the sum of P100
Under this, payee is uncertain. Best interpretation is that
the payee is the person who happens to be secretary at
any particular moment thereby making the instrument a floating promise
Should the name of the payee be misspelled or wrongly
designated, does the instrument lose its negotiability as
one wherein the payee is not indicated with reasonable
certainty?
Answer: This is impliedly answered in the negative by Sec 43 which provides that where the name of the payee is wrongly designated or misspelled, he may indorse the
instrument as therein described, adding, if he thinks fit,
his proper signature. If he may indorse it, then that means that even if his name is misspelled, he can still be
regarded as having been otherwise indicated with reasonable certainty. Thus, if the payee is designated as Inna Infanti instead of Inna Infante she should indorse
the instrument by signing Inna Infanti and not Infante but she may add the latter if she wants to
c. drawee
Sec. 128. BILL ADDRESSED TO MORE THAN ONE
DRAWEE. A bill may be addressed to two or more drawees jointly, whether they are partners or not; but not
to two or more drawees in the alternative or in
succession
Sec. 130. WHEN BILL MAY BE TREATED AS A
PROMISSORY NOTE. Where in a bill the drawer and drawee are the same person, or where the drawee is a
fictitious person, or person not having the capacity to
contract, the holder may treat the instrument, at his
option, either as a bill of exchange or a promissory note.
Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable
certainty. Although a bill may be addressed to 2 or more
drawees jointly, it may not be addressed to 2 or more
drawees in the alternative or in succession, for otherwise,
there would be no certainty as the person to whom the
bill should be presented for payment or acceptance.
Where the drawer and drawee are the same person, or
where the drawee is a fictitious person, or a person
having no capacity to contract, the holder may treat the
instrument either as a bill or note, because otherwise, no
one can ever be made primarily liable on the bill. Since
the drawer is responsible for naming such a drawee, it is
to be assumed that he intended to be primarily liable
himself. If the bill names no drawee but is accepted by a
third party, although the issuer of the bill cannot be held
as a drawer, the acceptor should be held as a maker. So
that the instrument in this case is treated as a note instead of a bill
8. provisions not affecting negotiability
Sec. 5. ADDITIONAL PROVISIONS NOT
AFFECTING NEGOTIABILITY. An instrument which contains an order or promise to do any act in
addition to the payment of money is not negotiable. But
the negotiable character of an instrument otherwise
negotiable is not affected by a provision which 1. authorizes the sale of collateral securities in
case the instrument be not paid at maturity; or 2. authorizes a confession of judgment if the
instrument be not paid at maturity; or
3. waives the benefit of any law intended for the advantage or protection of the obligor; or
4. gives the holder an election to require something to be done in lieu of the payment of
money
But nothing in this section shall validate any provision or
stipulation otherwise illegal.
The negotiable character of an instrument otherwise
negotiable is not affected by a provision which
authorizes the sale of collateral securities in case the instrument be not paid at maturity. Thus, not only may
the instrument state that the note is secured by the
pledged or mortgaged property, but also that the
collateral may be sold for discharging the debt evidenced
by the instrument, thus discharging the instrument itself.
An authorization, however, which empowers the holder
to sell the collateral before the maturity of the note
renders it non-negotiable, because it would in effect
grant the holder an option to accelerate the maturity of
the instrument, thus rendering the time of payment uncertain.
A clause in the instrument which waives the rights of
secondary parties to have the instrument duly presented
for payment, and their right to due notice of dishonor and
of protest is required, does not destroy its negotiability.
Likewise, the fact that an instrument bears a seal or
designates a particular kind of current money in which
payment is to be made, does not affect its negotiable
character.
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See case: PNB v. Manila Oil Refining & By-Products
Company, Inc. 43 Phil 445 (1922)
The practice of entering judgments in debt on warrants of
attorney is of ancient origin. In the course of time a
warrant of attorney to confess judgment became a
familiar common law security. At common law, there
were two kinds of judgments by confession; the one a
judgment by cognovit actionem, and the other by
confession relicta verificatione. In the absence of
statute, there is a conflict of authority as to the validity of a warrant of attorney for the confession of judgment.
The weight of opinion is that, unless authorized by
statute, warrants of attorney to confess judgment are
void, as against public policy
cognovit actionem a defendants written confession of action against him; impliedly authorizes plaintiffs attorney to sign judgment and issue execution
relicta verificatione a confession of judgment made after plea pleaded; viz., a cognovit actionem accompanied by a withdrawal of the plea
9. omissions not affecting negotiability
Sec. 6. OMISSIONS; SEAL; PARTICULAR MONEY.
The validity and negotiable character of an instrument are not affected by the fact that
1. it is not dated; or 2. does not specify the value given, or that any
value has been given therefore; or
3. does not specify the place where it is drawn or the place where it is payable; or
4. bears a seal; or 5. designates a particular kind of current money in
which payment is to be made
But nothing in this section shall alter or repeal any
statute requiring in certain cases the nature of the
consideration to be stated in the instrument
The seal is considered to be part of a, say a corporations signature.
The validity and negotiable character of an instrument
are not affected by the fact that it is not dated. If date is
necessary to fix the maturity of the instrument, the law fills in the gap and considers date of issue as the date of
the instrument, and allows any holder to insert the true
date
It is not necessary to express in a negotiable bill or note
that the value was received, because the instrument was
presumed to have been issued for a valuable
consideration
Place is important but not essential. If no place is
mentioned, the law again fills in the gap by providing
that presentment should be made at the address of the
person who is to pay, if such address is stated; if not, at
the place of business or residence of the person to make
payment.
10. rules of construction
Sec. 17. CONSTRUCTION WHERE INSTRUMENT IS
AMBIGUOUS. Where the language of the instrument is ambiguous, or there are omissions therein, the
following rules of construction apply:
1. where the sum payable is expressed in words and also in figures and there is a discrepancy
between the two, the sum denoted by the words
is the sum payable; but if the words are
ambiguous or uncertain, reference may be had
to the figures to fix the amount;
2. where the instrument provides for the payment of interest, without specifying the date from
which interest is to run, the interest runs from
the date of the instrument, and if the instruments
is undated, from the issue thereof;
3. where the instrument is not dated, it will be considered to be dated as of the time it was
issued;
4. where there is a conflict between the written and printed provisions of the instrument, the written
provisions prevail;
5. where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder
may treat it as either at his election;
6. where a signature is so placed upon the instrument that it is not clear in what capacity
the person making the same intended to sign, he
is to deemed as indorser; 7. where an instrument containing the words I
promise to pay is signed by two or more persons, they are deemed to be jointly and
severally liable thereon
Figure $1200 versus written words twelve dollars note is valid up to $12 only as written words are
controlling over the figure
But in case the words are so ambiguous or uncertain,
reference to the figures is made to determine the true
amount. Thus, if the check bears the figures $365 and the amount is written as three sixty five dollars, the marginal figures will control
Typewritten phrase 7 percent from date a circle was drawn around the figure 7 with pen and ink and above it
the figure 8 was made with pen and ink the court held that there is no uncertainty of the interest and that the
instrument is negotiable and that the written rate (8%)
prevails
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An instrument which begins with I promise to pay but which contains the name of the drawee creates a doubt as
to whether it is meant to be a note or bill and may this be
treated by the holder as either. The drawer may be held
liable as a maker of a note, should the holder choose
I promise to pay, and I, we, or either of us, promise to pay, when signed by two persons make them solidarity liable
We promise to pay, signed by two persons make them jointly liable
Where a person places his signature on the instrument in
such a manner that his capacity is not clear, he is deemed
to be an indorser, and not a maker, drawer, or acceptor,
nor a mere assignor. He therefore assumes all the
liabilities imposed by Sec 66 on a general indorser.
Chapter 2: Transfer
1. delivery and issuance
Sec. 16. DELIVERY; WHEN EFFECTUAL; WHEN
PRESUMED. Every contract on a negotiable instrument is incomplete and revocable until delivery of
the instrument for the purpose of giving effect thereto
Delivery of the instrument means transfer of possession,
actual or constructive, from one person to another.
Delivery may be accomplished by manual transfer of
possession or by any other act manifesting intent to
transfer right of possession. Without the initial delivery
of the instrument from the maker to the payee, there can
be no liability on said instrument. Moreover, such
delivery must be intended to give effect to the instrument. Once the instrument is no longer in the
possession of the person who has signed it, a valid
delivery by him is presumed, until the contrary is proved,
and as to the holder in due course, the presumption is
conclusive, provided the instrument is complete
The first delivery of the instrument complete in form, to
a person who takes it as a holder, is called the issue or
issuance of the instrument.
2. 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 completed by delivery
Sec. 191. DEFINITIONS AND MEANINGS OF
TERMS. . . . . . . . . . . . . . . . . . . . . .
bearer means the person in possession of a bill or note which is payable to bearer;
holder means the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof;
. . . . . . . . . . . . . . . . . . . . .
A negotiation is a transfer of a negotiable instrument
made in such manner that the transferee becomes a
holder and possible a holder in due course capable of
acquiring a better title to the instrument than that of his transferor. Where an instrument is payable to order, the
payee or indorsee in possession of it is the holder. If it is
payable to bearer, the person in possession of it is the
bearer as well as the holder of the instrument
Transfer is a broader term than negotiation. If an
instrument is transferred without negotiation, the transfer
is a mere assignment which constitutes the transferee as a
mere assignee, not a holder, subject to all defenses
existing among prior parties. Transfer includes both an
ordinary assignment and a negotiation
A negotiation may be for value as in a sale, or by way of
gift. In either case, there will be a valid transfer.
However, the rights acquired by the transferee in each
case may be different
3. methods of negotiation
An instrument payable to order requires for its
negotiation, first, an indorsement by the payee or present
holder, and second, its delivery to the transferee or
indorsee, who now becomes the holder. An indorsement consists of the signature of the indorser usually on the
back of the instrument. An indorsement has a double
significance: it constitutes a transfer or sale of the
instrument to the indorsee or transferee, and it signifies
the agreement of the indorser to answer for the amount
represented by the instrument in case of default of the
maker or the party primarily liable
An instrument payable to bearer can be negotiated by
mere delivery. It is a common practice, however, to
indorse a bearer instrument whenever it is transferred. It does not impair the negotiation but serves as an
additional security to the transferee, since he can hold the
indorser liable as such i.e., not only on his warranty that he will pay in case of default of the primary party.
One who negotiates by delivery, although he assumes the
liabilities of a seller or transferor of the note or bill, does
not warrant that he will pay in case the primary party
fails to pay.
A transfer of a negotiable instrument is effected
otherwise than by negotiation when an order instrument
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is delivered by the payee or special indorsee without his
indorsement or where the indorsement is not made
properly as required by law. In this case, the transfer is
an ordinary assignment of the transferors rights and places the assignee in the place of the assignor, subject to
the defenses which may be existing between the prior
parties
4. how indorsement made a. by signature on instrument or on
allonge
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
The question as to when the indorsement on a separate
paper called an allonge, may be valid, has given rise to
much conflict. Although the law makes no distinction,
the prevailing view follows the common law rule that an
allonge can be validly used only when there is no longer
any room on the instrument for further indorsements. He will be subject to defenses such as failure of
consideration. A contrary rule would open the door to
fraud
Note that the law requires the allonge to be attached to
the instrument. The Uniform Commercial Code is more
specific and requires that the paper be so firmly attached affixed thereto as to become a part thereof
b. in case of joint payees
Where the instrument is payable or indorsed to A and B, they are joint payees and an indorsement by either A or B will not constitute a valid negotiation so as to free
the instrument from defenses, unless one indorsing is
authorized by the other. But where the instrument is
payable to A or B, the payees are merely in the alternative, and either one may validly negotiate the
same
c. if name misspelled
Sec. 43. INDORSEMENT WHERE NAME IS
MISSPELLED, AND SO FORTH. Where the name of a payee or indorsee is wrongly designated or misspelled,
he may indorse the instrument as therein described,
adding, if he thinks fit, his proper signature
Under the above provision, the indorsement should be
made by the holder in the manner he was designated,
otherwise the signature will prima facie not be a valid
indorsement of the instrument. After such indorsement,
he may sign his correct name.
5. indorsement must be of entire instrument
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
The purpose of this provision is to protect the obligors for more than one action on the instrument. The maker
and all the prior parties, in assuming liability, took the
risk of only one cause of action against them.
Example: If a bill for P100 is indorsed by the payee to A
for P50 and to B for P50, there is no valid negotiation
since it purports to transfer the instrument to two or more
persons severally. Neither of them can be considered a
holder. At most they are mere assignees, and even so,
neither of them can sue on the instrument without
bringing in the other as a party to the action. Neither may an indorsement of the instrument to only one person
for P50 be valid, for then it would only be partial
transfer.
However, where the payees or indorsees are joint, i.e.,
Pay to A and B the negotiation is valid. In such a case, the instrument is indorsed in its entirety to both A and B,
who can negotiate the instrument only by both their
indorsements.
The provision does not cover a situation where part of
the amount of the instrument has been paid, in which case, it may be negotiated for the balance. Thus, in a
note payable by installments, where some installments
have been paid, the instrument may still be negotiated for
the remaining unpaid installments
Neither does the provision prohibit a transaction where
the indorsee pays the indorser less than the face amount
of the instrument, title transferring to the indorsee. This
is what is called a discount of the instrument. The discount is given in consideration of the period during
which the purchaser has to wait before he can cash the instrument with the maker or acceptor, which can be
done only at the maturity of the instrument
When an indorsement does not comply with Sec 32, the
transfer is not necessarily void. It remains valid, not as a
negotiation, but as a mere assignment which subjects the
holder to all defenses on the instrument
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6. kinds of indorsements
Sec. 33. KINDS OF INDORSEMENTS. An indorsement may be either special or in blank; and it may
also be either restrictive or qualified or conditional
a. basis of classification
Although the signature of the indorser is sufficient to
constitute an indorsement, additional words may be
added which may modify the rights of subsequent
holders or the liabilities of the indorser
Blank indorsement Where only the signature of the indorser appears
Classification Purpose
Blank or Special For future method of negotiation,
whether by indorsement and
delivery or by delivery alone
Restrictive or Non-
restrictive
For the kind of title transferred
Qualified or
unqualified
Lies in the scope of liability
assumed by the indorser
Conditional or
Unconditional
For the presence or absence of
express limitations put by the
indorser upon the primary
obligors privileges of paying the holder
b. special and blank indorsements
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
Sec. 40. INDORSEMENT OF INSTRUMENT
PAYABLE TO BEARER. Where an instrument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery; but the
person indorsing specially is liable as indorser to only
such holders as make title through his indorsement.
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
2 forms of special indorsement: Pay X or Pay X or order, followed by the signature of the indorser. An indorsement need not contain words of negotiability as
long as these appear on the face of the instrument.
Suppose that an instrument is on its face payable to
bearer and it is specially indorsed thus: Pay to X (sgd) Y, is Xs signature necessary for the future negotiation of the instrument? Sec 34 taken alone would seem to
answer this query in the affirmative. Sec 40 however
offers the opposite result. This apparent conflict can be
settled by applying Sec 40 only to original bearer
instruments
Illustration:
A-------------------bearer B
(no indorsement by B)
C
Pay to D
(sgd.) C
Pay to E
(sgd.) D
(no indorsement by E)
F
A person who negotiates it by mere delivery is liable
only to his immediate transferee. A special indorser
however is liable to subsequent holders, unless the
instrument is an originally bearer instrument, in which
case he is liable only to those who takes title through his
indorsement
Applying these principles in the illustration:
B is liable only to C and not to D, E, and F.
C and D, the special indorsers, are not liable to F who does not take title through their
indorsements.
C is however liable to both D and E because they take title through his indorsement.
D is liable only to E, since E is the only one who take title through his indorsement
E is of course liable to F
An indorsement in blank specifies no indorsee, and an
instrument so indorsed is payable to bearer, and may be
negotiated by delivery. Thus, where only the signature
of the indorser appears, with no indication of the person to whom it is payable it is a blank indorsement, and the
further negotiation of such an instrument may be effected
by mere delivery regardless of whether the instrument is
on its face payable to bearer or not. A blank indorsement
is not as safe as a special indorsement. Being negotiable
by mere delivery, a thief or finder thereof can give good
title to a holder in due course
A blank indorsement may be converted into a special
indorsement by writing over the signature of the indorser
in blank any contract consistent with the character of the
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C c,) L L E E N 13
indorsement. Thus, the holder may write his name above
the signature of the indorser in blank, thus converting the
indorsement into a special one, rendering it negotiable by
indorsement and delivery, unless it is upon an originally
bearer instrument
If a blank indorsement is followed by a special
indorsement and the instrument is one which is payable
to order on its face, the special indorsement controls,
since under Sec 34 its further negotiation may be
effected only by indorsement of the special indorsee. And as previously stated, Sec 40 will not apply,
otherwise inconsistency between the two provisions will
result. Furthermore, under Sec 9(e) it is no longer a
bearer instrument because the last indorsement is not a
blank indorsement.
In short, an instrument payable to order on its face may
be converted into a bearer instrument by means of a
blank indorsement, and may later be reconverted into an
order instrument by a subsequent special indorsement,
the last indorsement always controlling the means of further negotiation.
On the other hand, and instrument payable to bearer on
its face always remain a bearer instrument, i.e., may be
further negotiated by delivery alone, whether the last
indorsement is a blank or special one. An indorsement
of a bearer instrument does not convert it to an
instrument payable to order.
c. qualified indorsements
Sec. 38. QUALIFIED INDORSEMENT. A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to
the indorsers signature the words without recourse or any words of similar import. Such an indorsement does
not impair the negotiable character of the instrument.
An indorser by his indorsement impliedly enters into two
contracts: (1) a contract of sale or assignment of the
instrument, and (2) a contract to pay the instrument if the
maker is unable to pay on maturity. If he wants to
relieve himself of either contract he must do so in clear
and express terms. By adding the words without recourse above his signature, he expressly rids himself of the second implied contract. Words of similar import
would include sans recourse, or at indorsees own risk.
A qualified indorser becomes a mere assignor of the title
of the instrument. But a qualified indorsement does not
affect the negotiability of the instrument. The transfer
would still be a negotiation and the transferee would still
be a holder capable of acquiring a title free from
defenses of prior parties.. the only effect of the qualified
indorsement is to relieve the qualified indorser of his
liability to pay the instrument should the maker be
unable to pay at maturity. He does not guarantee the
solvency of the maker, but merely his legal title to the
instrument.
In the absence of clear and unmistakable language
qualifying liability, an indorser will be liable on both his
contracts. His liability cannot be limited by implication.
Thus, words expressing assignment of title to the
instrument cannot by implication exclude his second
contract. Similarly, words guaranteeing the makers payment on maturity will not impliedly exclude the
contract of sale or assignment
d. conditional indorsement
An indorser is liable to pay the instrument on two
conditions: that due demand or presentment be made on
the party primarily liable on the date of maturity, and that
the latter fails to pay or, such presentment, a notice of
dishonor be promptly sent to the indorser. Implied in all
indorsements.
A conditional indorsement is one where an additional
condition is annexed to the indorsers liability. Necessarily, the condition must be express. Such an
indorsement does not affect the negotiability of the
instrument because the original promise or order remains
unconditional. It is only the liability of the particular
indorser which is conditional. But all holders subsequent
to the conditional indorsement take subject to the
condition
Sec. 39. CONDITIONAL INDORSEMENT. Where an indorsement is conditional, a party required to pay the instrument may disregard the condition, and make
payment to the indorsee or his transferee, whether the
condition has been fulfilled or not. But any person to
whom an instrument so indorsed is negotiated, will hold
the same, or the proceeds thereof, subject to the rights of
the person indorsing conditionally.
If an instrument on its face payable on December 1,
1995, is indorsed by the payee to A if he marries before he is 25, there is a valid but conditional indorsement. Should A not fulfill the condition, he or any holder after
him cannot compel the maker to pay him on that date. However, the maker, if he chooses, may disregard the
condition and pay the holder. Should he pay, A or the
holder who received payment will hold the money
subject to the rights of the conditional indorser.
Thus, if A does not marry before hes 25, then A will have to deliver the money to the conditional indorser. If
A should fail to deliver, the latter would have no right of
action against the maker who paid before the fulfillment
of the condition, because the maker is expressly
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authorized to do so under Sec 39. His payment
discharged him from liability on the instrument
e. restrictive indorsement
Sec. 36. WHEN INDORSEMENT RESTRICTIVE. An indorsement is restrictive, which either:
1. prohibits the further negotiation of the instrument; or
2. constitutes the indorsee the agent of the indorser; or
3. vests the title in the indorsee in trust for or to the use of some other person
But the mere absence of words implying power to
negotiate does not make an indorsement restrictive
Sec. 37. EFFECT OF RESTRICTIVE INDORSEMENT;
RIGHTS OF INDORSEE. A restrictive indorsement confers upon the indorsee the right:
1. to receive payment of the instrument; 2. to bring any action thereon that the indorser
could bring;
3. to transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so
But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement
A restrictive indorsement either restricts the right of the
indorsee to further negotiate the instrument or reserves
beneficial interest therein in the indorser or in the third
person. In the latter case, although the instrument may
be further negotiated, all subsequent indorsees take
subject to the rights of the restrictive indorser or the third
person, as the case may be.
Illustration of the 3 cases:
(1) Pay to X only. This prohibits entirely the further negotiation of the instrument. Full title however passes to X who can receive payment
of the instrument and bring any action thereon
which the indorser could bring
Pay to X without any words, is not a restrictive indorsement
(2) Pay to X for collection constitutes the indorsee an agent to collect in behalf of the
indorser. X may receive payment on the
instrument and may sue thereon in his own name. Such indorsement does not pass title, nor
deprive the maker of any defense he may have
otherwise on the note. The restrictive indorsee
may negotiate. However, no subsequent holder
can acquire any right in the instrument
antagonistic to the right of the first restrictive
indorser for subsequent indorsees acquire only the title of the first indorsee under a restrictive
indorsement. They merely become sub-agents
to collect. Other forms of this kind of restrictive
indorsement are: Pay to X for my use, or Pay X for my account.
(3) Pay to X for Ys use is a restrictive indorsement which vests the title of the indorsee
in trust for or to the use of some other person.
X may receive payment on the instrument and
may sue thereon but whatever he collects he
holds in trust or for the use of Y. He may also
further negotiate the instrument but subsequent holders cannot acquire rights which will defeat
the rights of Y.
7. indorsement to or by collecting agent
A holder of a check may either cash it with the drawee
bank, or may deposit to his credit wether in the drawee
bank or in another bank. Should he cash or deposit it
with the drawee bank, then payment or credit to him by
the latter would discharge the instrument and terminate
all rights and liabilities of the parties thereto. Where the holder deposits the check with a bank other than the
drawee bank, he would in effect be negotiating the check
to such bank, since he would have to indorse the check
before the bank will accept it for deposit.
If the indorsement is for collection, we have seen that this is a restrictive indorsement where the bank is merely
an agent for collection. If the indorsement states for deposit, what is in effect on the indorsers relationship with the bank? There has been much controversy about
this matter. Some courts have held this to be a restrictive
indorsement because it merely makes the bank an agent to collect the funds and credit them as deposit to the
customers account from the moment of collection. Other courts have considered the indorsement as non-
restrictive, treating the transaction as a purchase of the
check by the bank in cash and a deposit of such cash to
the credit of the depositor.
In most cases, whatever kind of indorsement is made by
the holder, the bank is in fact a collecting agent. As a
rule, the indorsement made by the depositor of a check
would be in blank, just his signature without any other words, thus no restrictions whatsoever. However, the
deposit slip which the depositor fills up in making the
deposit will usually state that the bank is a mere
collecting agent, thus its effect on a for deposit indorsement would be the same.
In forwarding negotiable instruments for collection,
banks customarily use the indorsement Prior indorsements and/ or lack of indorsements guaranteed. According to one view, this type of indorsement is non-
restrictive and does not prevent the holder from
acquiring an unlimited title. But if in a deposit slip filled up by the holder, a provision similar to the one quoted
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above appears, the bank would still be only a collecting
agent. However, with respect to the drawee bank to
which it has forwarded the check for payment, it has
guaranteed the validity of all prior indorsements as well
as the lack of any necessary indorsement. Thus, if the
collecting bank received the check from a forger, it has
to return to the drawee bank whatever collected from the
latter.
In some cases, the words For Payees account only are written on the left-hand corner of the face of the check. This means that the check should be deposited in a bank
in which the payee has an account. The payee will have
to indorse the check, and although his indorsement may
not necessarily state that it is for collection, again, here,
the bank would in effect be a mere collecting agent.
8. negotiation by joint or alternative payees or indorsees
Sec. 41. INDORSEMENT WHERE PAYABLE TO
TWO OR MORE PERSONS. Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all must indorse, unless the one
indorsing has authority for the others
Under Sec 8(d), an instrument is negotiable which is
payable to the order of two or more payees jointly. Under Sec 8(e), an instrument is negotiable which is
payable to the order of one or some several payees.
If an instrument is payable to the order of A and B, either
as payees or indorsees, both must indorse in order for the
transaction to operate as a negotiation. A and B will then
be jointly and severally liable and action will lie against
any of them individually. If only one of them indorses, his indorsee can have no right of action on the instrument
because this would be violating the rule against splitting
of actions
Under Sec 41, if the joint payees or joint indorsees are
partners, then the indorsement by one of the partners of
his own name and that of his partner, who is a co-payee
or joint indorsee with him, may constitute an
indorsement by each of them, and thus effect a valid
negotiation. Unlike common law concept, our civil law
concept of partnership as a juridical person which has personality distinct and separate from the partners
composing it. Thus, if an instrument is intended to be
negotiated to A and B as partners doing business under
the firm name Manila Book Co., then the indorsement must name such firm and not A and B as joint payees or
indorsees. Otherwise, if the latter is done, then the
proceeds belong to A and B and not to the partnership,
and any further negotiation, must be signed by both A
and B, even if they are partners, unless of course one
authorizes the other to sign for him. But if indorsement
is made as it should be, i.e., Pay to Manila Book Co.,
then should the instrument be further negotiated, it
should be indorsed in the following manner:
Pay to X Manila Book Co.
By A
assuming that A has implied or express authority to sign
for the partnership
if one of several joint payees or joint indorsees indorses his own name and, without authority from his co-obligee,
indorses the latters name and delivers the instrument to a purchaser, such transaction does not constitute a
negotiation of the instrument. But it has been held that
one of two joint payees, by indorsement and delivery of
the instrument to his co-payee, may transfer full title to
the latter.
Where the instrument is payable to the alternative
payees, i.e., A or B, either one in possession of the instrument is the holder. The ultimate ownership of the fund as between the parties is not controlled by the form
of the indorsement
9. unindorsed instruments
Sec. 49. TRANSFER WITHOUT INDORSEMENT;
EFFECT OF. 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
If his predecessor had legal title, the transferee of
unendorsed instrument acquires as such, subject however
to the defenses and equities available among prior
parties. This, he has the right to sue in his own name,
but he cannot be considered a holder of the instrument since he is neither a payee nor indorsee, nor is he a
bearer because the instrument is not payable to bearer. Presumption of ownership does not vest, hence, he has to
prove that he is the owner of the instrument as a condition precedent to his right to introduce the
instrument in evidence to recover thereon. It is an
exception rather than the rule for payee of an order
instrument or a special indorsee to transfer the
instrument without indorsement, and since the situation
is abnormal, it is only fair for the holder to prove
ownership
But the transferee of an unendorsed instrument may
become a holder obtaining the indorsement of his
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Notes on Campos Negotiable Instruments Law
C c,) L L E E N 16
transferor. It is only at this time that the instrument can
be considered as having been negotiated.
Note that this section applies only to an instrument
payable to the order of the transferor, i.e., where he is
either the specified payee or a special indorsee of an
order instrument. It cannot apply to bearer instruments
Some cases have held that a gratuitous transferee of an
unindorsed instrument does not acquire title to the
instrument because Sec 49 speaks of a transferee for value. Most authorities however have the contrary view, since, according to them, a negotiable instrument
being a species of property is a proper subject of gift by
negotiation. There can be no apparent reason therefore
why an unendorsed instrument should not also be the
subject of gift passing title to the donee. However, such
a donee, although he has a right to sue on an instrument
as a legal owner thereof, does not have a right to compel
the indorsement of his donor. This is the only difference
in the effect which Sec 49 should have on a gratuitous
transfer as contrasted with the transfer for value
10. cancellation of indorsements
Sec. 48. STRIKING OUT INDORSEMENTS. 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
A holder must be able to trace his title to the instrument
back to the original owner, the payee. If the instrument
is payable to bearer on its face, then whether or not there
are indorsements on the back of the instrument would be
immaterial to the title of the bearer, who is presumptively the owner and holder by his mere
possession of such instrument. None of the indorsements
would be necessary to his title since mere delivery would
have been sufficient to transfer title from one holder to
another. The holder would thus have the right to cancel
any or all indorsements. Should he do so, then any
indorser whose signature is cancelled and all indorsers
subsequent to him would be discharged from liability on
the instrument
Where the instrument is payable to order on its face, the situation is different. If all the indorsements appearing
on the back of the instrument are special, then all of them
would be necessary to the holders title. Suppose that the indorsements are as follows:
Pay to B
(sgd.) A
(sgd.) B
C is the holder of the instrument to whom B negotiated it
by means of his blank indorsement. May C cancel Bs
indorsement? Obviously not because it is necessary to
his title. Suppose the instrument is further negotiated
and the following indorsements follow the former ones:
Pay to D
(sgd.) C
Pay to E
(sgd.) D
May E, the holder, cancel the indorsements of C and D?
It has been held that in such cases the last indorsee may strike out all indorsements subsequent to the blank
indorsement and sue as holder under the blank
indorsement. It is however submitted that this ruling is
inconsistent with the NIL. First of, the indorsement of a
special indorsee is necessary for future negotiation of the
instrument. Ds indorsement is necessary for a valid negotiation to E. he can therefore not strike out Ds indorsement, Second of, in an order instrument the last
indorsement controls the method of future negotiation.
Although in the hands of C it was payable to bearer
because of Bs blank indorsement, Cs special indorsement to D converted the paper to an order one,
making Ds indorsement necessary to Es title.
Suppose the instrument is still in Ds hands after Cs indorsement to him, may D cancel Cs indorsement? It is submitted that he may because it is not necessary to his
title. He is in a different situation from E as a holder
after Ds special indorsement, following Cs special indorsement.
Cancellation of indorsements would be proper in order
instruments where the instrument, after several negotiations, is indorsed back to a previous indorser. To
illustrate
Pay to B
(sgd.) A
Pay to C
(sgd.) B
Pay to D
(sgd.) C
Pay to E
(sgd.) D Pay to C
(sgd.) E
C, the reacquirer, may strike out his own indorsement as
well as those of D and E. As a prior party, he cannot
have any rights against those to whom he is liable under
his indorsement to D. Their indorsements are therefore
not necessary to his title.
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Notes on Campos Negotiable Instruments Law
C c,) L L E E N 17
11. indorsement by agent
Sec. 44. INDORSEMENT IN REPRESENTATIVE
CAPACITY. Where any person is under obligation to indorse in a representative capacity, he may indorse in
such terms as to negative personal liability
An instrument may be indorsed either personally or
through an agent. And the authority of the agent need
not be in writing. In so signing, an agent should make it
plain that he is merely signing in behalf of the principal,
otherwise he may be held personally liable. The most
common form of indorsement by an agent is Annabelle San Roque by Pedro Rodriguez, agent
12. presumption as to indorsements
Sec. 45. TIME OF INDORSEMENT; PRESUMPTION.
Except where an indorsement bears date after the maturity of the instrument, every negotiation is deemed
prima facie to have been effected before the instrument is
overdue
Sec. 46. PLACE OF INDORSEMENT;
PRESUMPTION. Except where the contrary appears, every instrument is presumed prima facie to have been
made at a place where the instrument is dated
Although indorsements after maturity are good to
transfer title, they prevent a holder from becoming a
holder in due course, thus subjecting him to defenses, if
any. The presumption that every negotiation was
effected before the instrument was overdue is therefore
significant, since indorsements are usually not dated
The law of the place of dating will govern any
controversy should there be a conflict of laws
Sec. 42. EFFECT OF INSTRUMENT DRAWN OR
INDORSED TO A PERSON AS CASHIER. Where an instrument is drawn or indorsed to a person as cashier or other fiscal officer of a bank or corporation, it is
deemed prima facie to be payable to the bank or
corporation of which he is such officer and may be
negotiated by either the indorsement of the bank or
corporation, or the indorsement of the officer
When an instrument is intended for a corporation, it is
usually issued or indorsed in its name, i.e., Pay to ABC Corporation. Sometimes, the indorsement or designation of payee is made to the fiscal officer of the
corporation, thus, Pay to Cashier, ABC Corporation or ABC Corporation, by Pedro Rodriguez, Cashier. Assuming the authority of Pedro Rodriguez to indorse
for the Corporation, such indorsement would bind it.
Pedro Rodriguez may however prove that the instrument
was intended for him personally and not for the
corporation, in which case his personal indorsement
would be the proper one.
The word corporation in Sec 42 does not include cities and towns and confers no authority upon the town
treasurer to impose upon his town the liability of an
indorser, although an instrument payable to the
Treasurer of the town of X in legal aspects stands on the same footing as if payable to the town which is the
real payee
13. continuation of negotiable character
Sec. 47. CONTINUATION OF NEGOTIABLE
CHARACTER. An instrument negotiable in its origin continues to be negotiable until it has been restrictively
indorsed or discharged by payment or otherwise.
A negotiable instrument, although overdue, retains its
negotiability unless it has been paid or restrictively
indorsed so as to prohibit further negotiation. Other
forms of restrictive indorsements do not destroy
negotiability, for Sec 37 recognizes the right of the
restrictive indorsee to further negotiate the instrument.
The fact that the instrument is overdue does not affect
the right of the holder to further it if he wishes to, but
merely prejudices the status of subsequent holders as
they cannot be considered holders in due course
Chapter 3: Holder in Due Course
Sec. 52. WHAT CONSTITUTES A HOLDER IN DUE
COURSE. A holder in due course is a holder who has taken the instrument under the following conditions:
1. that it is complete and regular upon its face; 2. that he became a holder of it before it was
overdue, and without notice that it had been
previously dishonored, if such was the fact;
3. that he took it in good faith and for value; 4. that at the time it was negotiated to him he had
no notice of any infirmity in the instrument or
defect in the title of the person negotiating it,
These four requisites must concur for a holder to be a
holder in due course
1. rights of a holder in due course
Sec. 57. RIGHTS OF A HOLDER IN DUE COURSE. A holder in due course holds the instrument free from
any defect of title of prior parties, and free from defenses
available to prior parties among themselves, and may
enforce payment of the instrument for the full amount
thereof against all parties liable thereon
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Notes on Campos Negotiable Instruments Law
C c,) L L E E N 18
Sec. 58. WHEN SUBJECT TO ORIGINAL DEFENSES.
In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same
defenses as if it were non-negotiable
These provisions indicate the significance of due course
holding. A holder in due course can acquire a better title
than his predecessors because he takes the instrument
free from any defect of title of prior parties. He is
furthermore free from defenses available to prior parties
among themselves. A holder not in due course, on the
other hand, operates as a transferee or assignee subject to
defenses. Real defenses, however, which attach to the instrument itself would be available even against a
holder in due course
Real defenses are the following: F2EU ADM2 WIWI
forgery
fraud in factum
between public enemies
ultra vires acts of a corporation
alteration (material)
duress amounting to forgery
minority
marriage
want of authority
incapacity of parties
want of delivery of an incomplete instrument
illegality of contract
The fact that a holder is not in due course will in no way
affect the negotiability of the instrument. It only affects
such holders rights, and does not necessarily prevent subsequent holders from acquiring the status of due course holders.
It should be kept in mind that the question of whether a
holder is a holder in due course or not is significant only
when there is an existing defense between prior parties.
If there is no such defense and the instrument is
completely valid, then it will not matter whether the
holder lacks one or mo