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Chapter 3: INTERPRETATION OF INSTRUMENTS

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ADOPTED STATUTE: EFFECTS- The history of the NIL as summarized reveals that the
NIL is an adopted statute. As already noted, the NIL was virtually copied from the
Uniform NIL of the United States and the latter was based on the Bill of Exchange Act of
1882. As a consequence of the NIL being an adopted statute, the following rules are
applicable with respect to problems relating to the application of the NIL:
Interpretation of courts in the US of the provisions of the NIL can be applied in this
jurisdiction.
If there is no provision in the NIL or the Code of Commerce, the provisions of the
Uniform NIL or the Bill of Exchange Act may be applied.
Opinions and comments of authorities or legal writers on the provisions of the Uniform
NIL or the Bill of Exchange Act may also be applied in this jurisdiction.
EFFECT OF IMPLIED REPEAL OF CODE OF COMMERCE- the NIL impliedly repealed
the provisions of the Code of Commerce on promissory notes and bills but there are
provisions of the Code of Commerce that can still be applied to cases involving
negotiable instruments. Specifically, Articles 548-558 of the COC and the provisions on
crossed checks because the NIL contains no provision thereon.
RULES THAT APPLY IN CASE OF AMBIGUITY- Rules on interpretation of ambiguous
and incomplete instruments are set forth in Section 17 of the NIL:
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:
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(a) 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;
(b) 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
instrument is undated, from the issue thereof;
(c) Where the instrument is not dated, it will be considered to be
dated as of the time it was issued;
(d) Where there is a conflict between the written and printed
provisions of the instrument, the written provisions prevail;

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(e) 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;
(f) 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 be deemed an indorser;
(g) Where an instrument containing the word "I promise to pay" is
signed by two or more persons, they are deemed to be jointly and
severally liable thereon.

Section 17 (d)
o Paragraph (d) of Section 17 of the NIL provides that where there is conflict between
the written and printed provisions of the instrument, the written provisions prevail.
This rule is consistent with the presumption that when a person writes something on
a document that already contains printed words, the written words or figures
represent the real intent of the person who is writing. It can be inferred that his
intention is to modify what is printed on the document.
o MARGINAL FIGURES- However, the rule does not cover marginal notes. The
figures in the margin of a bill or a note are regarded as simply a memorandum or
abridgment for convenience or reference, and form no part of the instrument.
Section 17(e)
o Section 17(e) provides that 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.
Section 17(f)
o The persons whose signature appears on the face of the instrument are the makers
of promissory notes and drawers of bills of exchange. In the case of a bill, the
signature of the acceptor might appear indicating his assent to the order of the
drawer to pay the payee. In all thee cases, the maker, drawer, or acceptor must
indicate in what capacity they are signing. In other words, if the maker signs the
instrument, there must be no doubt the he signing as the maker.
o If there is a signature in the instrument and there is doubt as to what capacity the
person who affixed the signature is signing, then Section 17(f) provides that he is
deemed to be an indorser.
Section 17(g)
o If there are two (2) or more debtors or obligors with respect to the same obligation,
their liability may either be joint or it may be joint and several. A joint and several
obligation or liability is also referred to as solidary obligation.

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Joint Obligation- If the liability is joint, two or more debtors are bound to pay only
their proportionate share in the obligation.
o Joint and Several Obligation- On the other hand, if the liability is joint and several
or solidary liability, two or more persons are bound to and can be made to comply
with the entire obligation.
Other rules
o If there is an ambiguity, the ambiguity should be construed against the party who
caused the ambiguity
o The NIL was enacted for the purpose of facilitating, not hindering or hampering
transactions in commercial paper. Thus, the said statute should not be tampered with
haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities
in a single case.
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CHAPTER 4: TRANSFER AND NEGOTIATION

MODES OF TRANSFER- Negotiation is defined in Section 191 of the NIL as the transfer of
the instrument from one person to another so as to constitute the transferee the holder
thereof.
o Non- Negotiable Instruments- If an instrument is not negotiable, it can still be
transferred but only through assignment. The transferee is an assignee who merely
steps into the shoes of the transferor. The transferee cannot be a holder in due
course and he therefore subject to the defences of prior parties.
o Negotiable Instruments- If the instrument is negotiable, voluntary transfer thereof
can be effected either through negotiation or through assignment. If the instrument is
merely assigned, the transferee does not become a holder and he merely steps into
the shoes of the transferor. Any defense available against the transferor is available
against the transferee.
It should be emphasized, however, that the distinction between negotiation
and assignment of negotiable instruments is immaterial to the holder where
there is no available defense between the parties. There would still be an
effective transfer of credit to the transferee even if the transfer is by way of
assignment and the assignee can recover from the person liable. Likewise,
the distinction may be immaterial between immediate or contracting parties or
privies because defense may always be raised against each other based on
their contract.
Moreover, it should also be pointed out that there are also warranties even if
the mode of transfer is assignment. In other words, the transferor also gives
warranties at the time he assigned the instrument. Assignment is in the

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nature of sale and the assignor is therefore bound by certain warranties in

favour of the assignee.
Other Modes of Transfer- Note that the mode of transfer may also be through means that
are not through the positive act of the transferor. These include cases involving transfer by
operation of law. Included is transfer through intestate succession.

DISTINCTIONS BETWEEN ASSIGNMENT AND NEGOTIATION

Applicable Law

Type of
Transaction/
Instrument
Nature of
Transferee
Possibility of
becoming a
holder in due
course
Rights
acquired`

Availability
personal
defenses

of

NEGOTIATION
Negotiable
Instruments
Law
Negotiable
Instruments
only
The transferee
is a holder in
due course
The transferee
can be a holder
in due course in
proper cases
The transferreholder
may
acquire
more
rights than the
transferor if he
is a holder in
due course
The transfereeholder may be
free
from
personal
defenses if he is
a holder in due
course

HOW NEGOTIATION TAKES PLACE

ASSIGNMENT
Civil Code of the
Philippines
Contracts
in
general
or
assignable rights
The transferee is a
mere assignee
The transferee can
never be a holder
in due course
The
transferee
cannot
acquire
more rights than
the
transferor
because he merely
steps
into
the
shoes
of
the
transferor
The transferee is
always subject to
personal defenses

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ISSUANCE- the first incident in the life of a negotiable instrument is its preparation,
complete with all the requirements of negotiability under Section 1. This incident is
followed by its transfer to the payee, the process known as issuance. Section 191 of the
NIL defines issue as the first delivery of the instrument complete in form to a person
who takes it as a holder. Issuance to the payee is negotiation because the transfer
constitutes the payee the holder of the instrument. The majority view is that the payee
can even be a holder in due course.
Delivery Essential it can be inferred from the definition of the word issue that
delivery is the final act essential to the consummation of the instrument as an obligation.
Without delivery, the instrument cannot be deemed to have been issued. Delivery is
defined as the transfer of possession of the instrument by the maker or drawer with the
intention to transfer title to the payee and recognize him as holder thereof. Delivery
means more than handing over to another; it imports such transfer of the instrument to
another as to enable the latter to hold it for himself.
Delivery is essential even if the instrument is a Managers check. Under Section 16 of
the NIL, every contract on a negotiable instrument is incomplete and revocable until
delivery of the instrument for the purpose of giving effect thereto, In the same provision,
Section 16, the delivery, in order to be effectual, must be made either by or under the
authority of the party making, drawing, accepting or indorsing.

SUBSEQUENT 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.

A negotiable instrument that is payable to bearer may be negotiated by mere delivery. No

further act other than delivery is necessary in order to negotiate the instrument and to
make the transferee a holder.
On the other hand, 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 Essential- In both cases, delivery must be intended to give effect to the
transfer of the instrument. Section 16 of the NIL provides that As between immediate
parties and as regards a remote party other than a holder in due course, the delivery, in
order to be effectual, must be made either by or under the authority of the party making,
drawing, accepting, or indorsing, as the case may be; and, in such case, the 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. It is likewise provided that where

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the instrument is no longer in the possession of a party whose signature appears

thereon, a valid and intentional delivery by him is presumed until the contrary is proved.
Delivery of a negotiable instrument means that the party delivering did so for the
purpose of giving effect thereto. Otherwise, it cannot be said that there has been delivery
of the negotiable instrument. Once there is delivery, the person to whim the instrument is
delivered gets the title to the instrument completely and irrevocably.
Other Purposes of Transfer- Thus, it may be established as against a holder other than
a holder in due course that the delivery was not intended as absolute transfer of title.
Section 16 proves that the 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 and this may be proved against a holder who is not in due course.
Indorsement of Bearer instrument- It should likewise be noted that a bearer
instrument can also be negotiated by indorsement and delivery. Although indorsement is
not necessary, the NIL does not prohibit such indorsement. It is provided in Section 40 of
the NIL:
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.

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.

INCOMPLETE NEGOTIATION OF ORDER INSTRUMENT- Section 49 of the NIL governs

cases where an order is delivered to another for the purposes of transferring title but no
indorsement was made. It provides:
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.

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Based on the above-quoted provision, 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 there be present at the time of such indorsement and not at the time
of delivery. This means that 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.
Equitable Assignment- An incomplete negotiation is an equitable assignment
and the transferee acquires the instrument subject to defenses and equities
available among prior parties. Thus, if the transferor had legal title, the transferee
acquires such title and, in addition, the right to have the indorsement of the
transferor and also the right, as holder of the legal title, to maintain legal action
against the maker or acceptor or other party liable to the transferor. The
underlying premise of Section 49 of the NIL, however, is that a valid transfer of
ownership of the negotiable instrument in question has taken place.
No presumption- the presumption of sufficiency of consideration and title that is
enjoyed by holders of duly negotiated instruments will not be enjoyed by the
transferee contemplated under Section 49.
Example of Right of Holder- For example, Mr. M through fraud was induced by
Mr. A to issue a negotiable promissory note payable to the order of Mr. A. The
payee, Mr. A, delivered the note to Mr. B on 3 May 2013 without indorsing it. On
20 May 2013, Mr. A, upon Mr. Bs request, placed his indorsement at the back of
the note: Pay to B, Sgd. A. If Mr. B learned about the fraud committed by Mr. A
prior to 20 May 2013, Mr. B cannot be a holder in due course because he had
knowledge of the defect of title of Mr. A at the time the negotiation was made
complete. He can be holder in due course if he had no such knowledge at the
time the indorsement was made on 20 May 2013.

INDORSEMENT

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WHERE INDORSEMENT SHOULD BE PLACED- Indorsement is necessary to

complete the negotiation of an order instrument. It is most often written at the back of
the instrument itself. However, an indorsement on the face of the instrument is
equally effective.
An indorsement is usually written on the back of the instrument, but the
place is not essential. If the payee write(s) his name on any part of the
instrument, with the intention of indorsing it, that is a sufficient indorsement.
Signature of Indorser- It should be noted in this connection that the
signature that is affixed by an indorser must have been adopted for purposes
of indorsing it. It need not be the usual signature of the indorser.
Indorsement in Allonge-Section 31 of the NIL likewise provides that the
indorsement may also be made in the separate paper attached to the
instrument called 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.

INDORSEMENT MUST BE OF ENTIRE INSTRUMENT- Section 32 provides that

indorsement must be of the entire instrument. If the instrument is indorsed for a
lesser amount, the transfer is still effective but is merely an assignment of credit.
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.

PERSONS WHO WILL INDORSE

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 to indorse for the others.
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

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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.

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.
robles virtual law library
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iNDORSER WITH MISPELLED NAME

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.

TIME AND PLACE OF INDORSEMENT- The presumption as to the time of

indorsement is important because a holder can be considered a holder in due course
only if he has taken the instrument before it has become overdue.
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 was overdue.
Sec. 46. Place of indorsement; presumption. - Except where the
contrary appears, every indorsement is presumed prima facie to
have been made at the place where the instrument is dated.

KINDS OF INDORSEMENT
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Blank and Special Indorsement- In a blank indorsement, no

specified and it is done by affixing the indorsers signature.
indorsement on the other hand, designates the indorsee. In other
indorser identifies the person to whom he intends to make the
payable.

Sec. 34. Special indorsement; indorsement in blank. - A special

indorse is
A special
words, the
instrument

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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.

Conversion of Blank to Special Indorsement- An order instrument is

converted into a bearer instrument if the indorsement is in blank. , the risk of
loss from theft is increased because the taker need not not commit any
forgery before he can validly negotiate the same. To prevent this eventuality,
the law allows the holder of the blank indorsement to a special 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.
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Qualified indorsement- If the indorser wants to transfer his rights over the
instrument but does not want to assume responsibilities under the secondary
contract, he may do so by resorting to what is know as qualified indorsement.
By his qualified indorsement, the indorser disclaims his liability to any holder
or any subsequent party who might be compelled to pay by another.

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 indorser's signature
the words "without recourse" or any words of similar import. Such
an indorsement does not impair the negotiable character of the
instrument.
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Conditional Indorsement- An indorsement that is subject to a

suspensive condition.

Sec. 39. Conditional indorsement. - Where an indorsement is

conditional, the 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

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indorsing conditionally.
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Restrictive indorsement- Section 47 of the NIL provides that

an instrument negotiable in its origin continues to be negotiable
until it has been restrictively indorsed or discharged by payment
or otherwise.
The mere absence in the indorsement of words implying power to
negotiate does not make an indorsement restrictive that prevents
further negotiation of the instrument.

Sec. 36. When indorsement restrictive. - An indorsement is

restrictive which either:
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(a) Prohibits the further negotiation of the instrument; or

(b) Constitutes the indorsee the agent of the indorser; or
(c) Vests the title in the indorsee in trust for or to the use
of some other persons.
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:

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(a) to receive payment of the instrument;

(b) to bring any action thereon that the indorser could
bring;
(c) 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.
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NEGOTIATION BY PRIOR PARTY- If a prior party acquires the

instrument again through negotiation, he is in effect remitted to his former
rights as prior party.

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It should be noted that unless their indorsements are cancelled, the
intervening parties are not discharged as to parties other than the reacquirer.

Sec. 50. When prior party may negotiate instrument. - Where an

instrument is negotiated back to a prior party, such party may,
subject to the provisions of this Act, reissue and further negotiable
the same. But he is not entitled to enforce payment thereof against
any intervening party to whom he was personally liable.
Sec. 121. Right of party who discharges instrument. - Where the
instrument is paid by a party secondarily liable thereon, it is not
discharged; but the party so paying it is remitted to his former
rights as regard all prior parties, and he may strike out his own and
all subsequent indorsements and against negotiate the instrument,
except
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(a) Where it is payable to the order of a third person and

has been paid by the drawer; and
(b) Where it was made or accepted for accommodation and has
been paid by the party accommodated.

STRIKING OUT OF INDORSEMENT- Section 48 of the NIL provides that

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.

CONSIDERATION FOR ISSUANCE AND SUBSEQUENT TRANSFER

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CONSIDERATION IS PRESUMED- Section 24 of the NIL

provides that every negotiable instrument is deemed prima facie
to have been issued for a valuable consideration; and every
person who signature appears thereon to have become a party
thereto for value. Therefore, it is up to the party who alleges that
there was absence of consideration to prove such fact. The
presumption will operate only if there was negotiation.
Consideration is not presumed if there was transfer without
indorsement.

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o

However,
Section
28
provides
that
absence or failure of consideration is a matter of defense as
against any person not a holder in due course; and partial failure
of consideration is an ascertained and liquidated amount ot
otherwise.

WHAT CONSTITUTES VALUE- Section 25-27 set forth the rules

on what constitutes valuable consideration for purposes of
issuance and negotiation of negotiable instruments.

Sec. 25. Value, what constitutes. Value is any consideration

sufficient to support a simple contract. An antecedent or preexisting debt constitutes value; and is deemed such whether the
instrument is payable on demand or at a future time.
Sec. 26. What constitutes holder for value. - 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. 27. When lien on instrument constitutes holder for value.
Where the holder has a 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.
o

The simple contract referred to in Section 25 refers to onerous

contracts. In onerous contracts, the cause is understood to be,
for each contracting party, the prestation or promise or a thing or
service.
Adopting such provision, a negotiable instrument is therefore
deemed transferred for 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. What is
acceptable is the prestation to give, to do, or not to do.
o Payee Need not be the Obligee- The consideration need
not benefit the transferor or issuer directly. It is sufficient if
the consideration was a benefit conferred upon a third
person or a detriment suffered by the promise, at the
instance of the promisor. It is enough that the obligee

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foregoes some right or privilege or suffers some
detriment.
o Issuance of Another Instrument- The rule is the same
under the Uniform Commercial Code in the US which
provides that value is deemed given by giving a
negotiable instrument or irrevocable commitment as
payment.
o Discounting- There is valuable consideration if the
parties resorted to what is known as discounting. In
discounting, the instrument is negotiated to another
because the transferee will pay the amount of the
instrument. However, the transferee deducts a certain
percentage from the principal as its compensation.
o No Valuable Consideration in Donation and Gift- Love
and affection do not constitute valuable consideration.
Hence, a transferee who acquired the instrument, as a gift
from another is not considered a holder for value.
o Lien as Valuable Consideration- A lien is also valuable
consideration. Section 27 of the NIL provides that where
the holder has a lien on the instrument arising either from
contract or by implication of law, he is deemed a holder
for value in respect to all parties who become such prior
to that time.