NIL (Act No.

2031)

> Act applies only to negotiable instruments and those meet requirements in Section 1
> Any case not provided in this Act, governed by existing legislation or in default – rules of law merchant

3 FUNCTIONS & IMPORTANCE OF NI

1. Used as a substitute for money
*NI differs from money; NI is valuable/worthless depending on financial ability of parties to them
2. Media of exchange
3. Media of credit transaction

NI – contractual obligation to pay money

Check – for immediate payment BofE & PN – for circulation of credits

2 CHARACTERISTICS/FEATURES OF NI

1. Negotiability – quality/attribute where NI give the HDC the right to hold NI & collect sum payable
for himself FREE from defenses
*A bona fide holder, FREE from PERSONAL DEFENSES, may be subject to REAL DEFENSES.
2. Accumulation of Secondary Contracts (as they are transferred from one person to another)

10 COMMON FORMS OF NI (bbbb dd cpt)

1. BofE 6. Drafts
2. Bank check 7. Due bills
3. Bank notes 8. Check
4. Banker’s acceptance 9. Promissory Notes
5. Bonds 10. Trade acceptance

6 INSTRUMENTS W/ LIMITED NEGOTIABILITY

1. LETTER OF CREDIT
− letter from merchant/bank/banker in one place, addressed to another (place/country)
requesting the addressee to pay money/deliver goods to 3rd party
− letter requesting one person to make advances to 3rd person on the credit of writer
2. TREASURY WARRANT
− gov’t warrant for payment of money covering payment/replenishment of cash advances
for official expenditures
3. POSTAL MONEY ORDER
4. BILL OF LADING
− NO unconditional promise/order to pay a sum certain in money
5. CERTIFICATE OF STOCK
− written instrument signed by proper officer of corporation stating name of person (owner
of designated # of shares of its stock)
− NO unconditional promise/order to pay a sum certain in money
6. WAREHOUSE RECEIPT
− NO unconditional promise/order to pay a sum certain in money
TO DETERMINE THE NEGOTIABILITY OF AN INSTRUMENT, CONSIDER THE FF:

1. whole of the instrument

2. only what appears on FACE of the instrument (not ELSEWHERE)
3. provisions of NIL esp. Section1

MAKER – person issuing PN DRAWER – person issuing BofE

UNCONDITIONAL PROMISE – PN UNCONDITIONAL ORDER – BofE

> Where meaning is doubtful : IN FAVOR OF NEGOTIABILITY of the instrument

> There is NO ORAL NI.
> The SIGNATURE (of maker/drawer) is a PRIMA FACIE EVIDENCE of his intention to be bound.
> NI CEASES to be negotiable if INDORSEMENT prohibits FURTHER negotiation of instrument
[RESTRICTIVE]
> PLACE & DATE NOT ESSENTIAL to negotiability of instrument EXCEPT in cases, date IS necessary
to know the due/interest.
> *Instead of “promise to pay”, other acceptable terms can be used:
− I agree to pay − good to A or order
− I will pay − due to A or order
− I bind myself to pay − I acknowledge to be indebted
> MERE acknowledgment of debt w/o the word ORDER or BEARER DOES NOT satisfy negotiability.
> The word TO THE ORDER OF and OR ORDER is a promise to pay as ordered/commanded by
PAYEE but may be payable to BEARER.
> when NO TIME of payment is expressed, an instrument is payable ON DEMAND
> note may be signed by SEVERAL persons either JOINTLY or JOINTLY AND SEVERALLY

PN – maker, payee
BofE – drawer, drawee, payee (parties need NOT ALL be distinct persons. Thus, drawer may draw on
himself payable to his own order.)

December 29, 2013

Manila
To C
College, Sampaloc
Manila

Thirty days after date, pay to (unconditional order to pay) to A or order the sum of One Thousand
(P1000) Pesos. Value received and charges the same account of
(Sgd.) B

B – drawer
C- drawee; not really a party to the bill, assumes liability ONLY when he accepts the bill usually by writing
the word ACCEPTED and signs his name on the face where he becomes ACCEPTOR and NOT A
DRAWEE. By being this (acceptor), he becomes primarily liable like the MAKER of a note; DRAWER is
ONLY A SURETY then.

*The words (in BofE) CHARGE THE SAME TO THE ACCOUNT OF means amount to be paid by
DRAWEE is to be charged against the funds of DRAWER. But this may be omitted.
2 IDEA & PURPOSE OF BofE

1. DRAWER’s funds in hands of DRAWEE

2. Liability of DRAWEE for non-payment

> If DRAWEE refuses to accept when he has funds for purpose, he is LIABLE TO DRAWER (not to
PAYEE) for resulting damages & harm done to his (DRAWER) credit.
> -If DRAWER no funds in DRAWEE, presumed that DRAWER made arrangements with DRAWEE so
he will honor the bill. In such case, DRAWEE must look to the DRAWER for reimbursement and NOT
TO BONA FIDE HOLDER.

CERTAINTY AS TO SUM, WHAT CONSTITUTES

Sum payable is SUM CERTAIN although paid:

• w/ interest
• by stated installments
• by stated installments w/ provision that upon default in payment of any installment/interest, the whole
shall become due
• w/ exchange, fixed/current rate
• w/ costs of collection/attorney’s fee in case payment not made at maturity

> If instrument calls for an ACT OTHER THAN payment of money – NON-NEGOTIABLE
> A note giving the MAKER the right to ascertain the AMOUNT payable – NON-NEGOTIABLE
> A promise to pay P1000 in “two installments” or “in installments” – NON-NEGOTIABLE
> Acceleration at option of HOLDER – NON-NEGOTIABLE
> Acceleration at option of MAKER – NEGOTIABLE
− The MAKER can avoid acceleration by paying the installments on their due date
> The promise/order to pay “w/ exchange” – NEGOTIABLE
− EXCHANGE – charge for providing funds, may be fixed/current rate; eg. compensating balance)
> Payment in FOREIGN CURRENCY – NEGOTIABLE
> Payment w/ EXCHANGE RATE – NEGOTIABLE
− applicable only to foreign bills
> If payment not made at maturity, then there is ADDED amount due (eg. Cost of collection, attorney’s
fee) – NEGOTIABLE
> Attorney’s fee may be REDUCED by courts if found UNREASONABLE; if attorney’s fee NOT
specified, it shall be in REASONABLE SUM.
> A provision of “to pay ALL costs, charges and expenses incurred by PAYEE in ANY legal proceedings
for collection of debt” – NON-NEGOTIABLE
> Acquisition of instrument AFTER MATURITY
− a transferee acquiring an instrument when it is OVERDUE would NOT BE HDC & would hold
instrument subject to defenses, as if it were NON-NEGOTIABLE.

PROMISE IS UNCONDITIONAL WHEN

• INDICATION of a particular fund out of w/c reimbursement is to be made or particular account to be

debited w/ the amount (NOT direct source of payment, only source of reimbursement) - NEGOTIABLE
• statement of transaction w/c gives rise to instrument - NEGOTIABLE
> Promise is NOT UNCONDITIONAL – an order/promise to pay OUT OF particular fund (direct source of
payment) – NON-NEGOTIABLE
− The test of NEGOTIABILITY is whether the instrument carries the GENERAL PERSONAL
CREDIT of MAKER/DRAWER.
> BARE acknowledgment of indebtedness (eg. IOU, due A P1000, for value received) ALONE – NON-
NEGOTIABLE. But if words like DUE A OR ORDER, DUE B OR BEARER – NEGOTIABLE although
NO express promissory words
> *In BofE, there must be an ORDER (command/imperative direction) TO PAY one party to another,
OTHERWISE, it is NON-NEGOTIABLE.
− A MERE request IS NOT an ORDER. (eg. I request you to pay, I wish you would pay, I authorize
you to pay)
− The MERE use of POLITE words like PLEASE does NOT convert ORDER into REQUEST.
> The NOTE/BILL must be payable ABSOLUTELY.
> It is IMMATERIAL whether the DRAWEE obeys the order to pay or not. The NEGOTIABILITY of a bill
DEPENDS upon the TERMS OF ORDER. The DRAWER has his liability under the law.
> If there is CONDITION or subject to CONTINGENCY – NON-NEGOTIABLE
> If language used is AMBIGUOUS or OBSCURE, courts usually decide IN FAVOR OF
NEGOTIABILITY.
− A MERE recital of consideration for instrument is STILL UNCONDITIONAL – NEGOTIABLE
(statement merely identifies the transaction w/c gives rise to instrument) (eg. I promise to pay to
order of P1000 being the price of the car this day sold and delivered to me; as per our contract;
accordance w/ our contract)
> If promise/order is subject to TERMS AND CONDITIONS – NON-NEGOTIABLE

DETERMINABLE FUTURE TIME, WHAT CONSTITUTES

• fixed period after date/sight - NEGOTIABLE

• on/before a fixed or determinable future time specified - NEGOTIABLE
• ON/AFTER (fixed period) the occurrence of a specified event w/c is CERTAIN to happen, not known
when – NEGOTIABLE (eg. Death of father); if BEFORE – NON-NEGOTIABLE

> An instrument payable w/ CONTINGENCY (an uncertain future event, or an event w/c may or may not
happen) is NON-NEGOTIABLE, and the happening of the event DOES NOT cure the defect.

> DEMAND INSTRUMENT – payment at anytime

TERM INSTRUMENT – payable only UPON ARRIVAL of time for payment
> AFTER SIGHT – AFTER instrument is SEEN by the DRAWEE upon presentment of acceptance
DETERMINABLE FUTURE TIME –a time that can be DETERMINED W/ CERTAINTY AFTER
execution of instrument

ADDITIONAL PROVISIONS STILL NEGOTIABLE:

• authorizes SALE OF COLLATERAL securities

• authorizes a CONFESSION OF JUDGMENT (written acknowledgment by defendant of his
indebtedness/liability to plaintiff) if not paid at maturity
• waives the BENEFIT OF ANY LAW intended for advantage/protection of obligor.
(eg. Pay bearer P1000. Notice of dishonor waived.)
• gives HOLDER the election to require something to be done in lieu of payment of money
(eg. I promise to pay P1000 to A or order or an air conditioner at the option of the holder –
NEGOTIABLE;
• I promise to pay P1000 to A or order or air conditioner – NON-NEGOTIABLE because HOLDER cannot
COMPEL him to make payment in MONEY)

OMISSIONS; SEAL; PARTICULAR IN MONEY

Still NEGOTIABLE:
> NO DATE
− If there is a date stated but there is no such date in calendar, the law will deem the NEAREST
DATE of the month the date intended
> NO VALUE given
− eg. NO written “for value received”
> NO PLACE where it is drawn or is payable
− An instrument that does not specify the place of payment is presumed to be payable at the
place/residence/business of MAKER/DRAWER.
> WITH SEAL
> Designates a PARTICULAR KIND of current money as payment
− eg. I promise to pay A or order P1000 in Central Bank of fifty peso bills

PAYABLE ON DEMAND WHEN

• EXPRESSED to be payable ON DEMAND, at sight, or on presentation

• NO TIME for payment is expressed
(eg. Pay to A or order P1000)

> Where the instrument is issued, accepted, or indorsed when OVERDUE, it is, as regards the person
so issuing, accepting, or indorsing it, PAYABLE ON DEMAND.
> An OVERDUE instrument is a DEMAND paper. A HOLDER has immediate right of payment for money
promised/ordered to be paid.
> Instead of ON DEMAND, other acceptable terms can be used:
- at sight (used in BofE) - on call
- on presentation - at anytime called for
> PAYABLE ON DEMAND as regards the MAKER (late issuance), the ACCEPTOR (late received), the
INDORSER (late indorsed)

INSTRUMENT MAY BE DRAWN PAYABLE TO THE ORDER OF:

• PAYEE; not maker/drawer/drawee

• DRAWER
• MAKER
• 2 or more PAYEES jointly
• 1 or more of several PAYEES
• HOLDER OF AN OFFICE at the time being
(eg. Pay to the order of myself P1000)
(eg. I promise to pay to the order of myself P1000)
(eg. Pay to the order of A and B P1000)
(eg. Pay to the order of A or B P1000)
(eg. Pay to the order of the Commissioner of BIR)
> An instrument is PAYABLE TO ORDER where it is drawn payable:
− to the order of a specified person
− to him or his order
> Consequently, an instrument payable to a SPECIFIED person (eg. Pay to A) is NON-NEGOTIABLE as
the promise/order is LIMITED to paying one person.
> ”to the order of”, “or order”, “to A and his assigns” can be used.
> NO PAYEE, not named, not described – NON-NEGOTIABLE because there would be nobody who
could indorse the instrument and nobody who could give the order or authority to collect.

PAYABLE TO BEARER WHEN:

• Expressed to be SO PAYABLE.
But an instrument payable to bearer, A is NON-NEGOTIABLE, since the word BEARER in such
case describes A, therefore, payable to A DEFINITE PERSON ONLY
• Payable to person named therein or BEARER.
eg. Pay to A or bearer P1000; Pay to B or holder P1000
• Payable to order of FICTITIOUS PERSON and such fact was KNOWN to person making it so payable.
eg. Pay to King Kong or order P1000
• The bill is PAYABLE TO BEARER and NOT TO ORDER because King Kong is a fictitious
(feigned/pretended) person.
• Name of PAYEE is not name of any person.
eg. Pay to the order of Queen of Planet Venus, Pay to cash, Pay to money, Pay to sundries
• The intention of the DRAWER is to make the instrument a BEARER PAPER negotiable by delivery.
• Only/last INDORSEMENT [as used in the law, refers only to NI] is indorsement in BLANK.

TERMS, SUFFICIENT WHEN:

> CLEARLY INDICATE THE INTENTION to conform the requirements thereof.

> A MERE defect in language/grammatical error – still NEGOTIABLE

PRESUMPTION AS TO DATE

> If instrument BEARS A DATE, it is PRESUMED to be the TRUE DATE (prima facie) made by maker,
drawn by drawer, accepted by drawee, or indorsed by payee/holder.
− He who claims that some other date is the true date has the burden to ESTABLISH the CLAIM.

ANTE-DATED AND POST-DATED

> Instrument is VALID although it is ANTE-DATED (earlier than true date) or POST-DATED (later than
true date), provided that it is NOT DONE for illegal/fraudulent purpose (eg. Bouncing check, NSF).
> The person TO WHOM an instrument is dated is delivered acquires the TITLE thereto as of the date of
delivery.
> The ANTE-DATED/POST-DATED may be negotiated BEFORE/AFTER the date given as long as it is
NOT NEGOTIATED AFTER ITS MATURITY.

DATE MAY BE INSERTED WHEN

1. an instrument is payable at a fixed period AFTER DATE but is ISSUED UNDATED

2. an instrument is payable at a fixed period AFTER SIGHT but the ACCEPTANCE is UNDATED

> ANY HOLDER may insert therein the true date of issue/acceptance and the instrument shall be
payable accordingly.
> The insertion of a WRONG DATE DOES NOT avoid the instrument in the hands of the SUBSEQUENT
HDC; but as to him the date so inserted is to be regarded as the TRUE DATE.
> The insertion of WRONG DATE constitutes MATERIAL ATERATION.

INCOMPLETE AND DELIVERED (personal defense)

> AUTHORITY TO FILL UP THE BLANKS

− The HOLDER/person in possession has prima facie authority TO COMPLETE an INCOMPLETE
INSTRUMENT by filling up the blanks therein
− The law speaks of MATERIAL PARTICULAR (blanks for date, due date, name of PAYEE, amount,
rate of interest) may be filled in. It has been held that even the blank for the name of the DRAWER
may be filled up.
− The authority to complete is not an authority to alter (amount after it has been filled in, or to insert
the words OR ORDER or OR BEARER after the name of the PAYEE)
> AUTHORITY TO PUT ANY AMOUNT
− A signature on a BLANK paper delivered in order to be converted into a NI is a prima facie authority
to fill it up as such for any amount.
> RIGHT AGAINST PARTY PRIOR TO COMPLETION
− If an instrument is incomplete when delivered, the HOLDER has prima facie authority to fill up the
blanks thereon.
− If a blank paper is delivered by the person making the signature, the HOLDER has prima facie
authority to fill it up for any amount if the person making the signature INTENDED TO CONVERT it
into NI.
− In either case of the above (2) situations, the presumption is that the BLANK was filled in
ACCORDANCE W/ THE AUTHORITY GIVEN and W/IN REASONABLE TIME.
> RIGHT OF HDC
− not enforceable; personal defenses
− the rule is founded upon the principle that where one of 2 persons must suffer by the bad faith of
another, the loss must fall upon the one who FIRST REPOSED confidence and made it possible for
the loss to occur

INCOMPLETE AND UNDELIVERED (real defense)

• When an INCOMPLETE instrument is UNDELIVERED, if completed & negotiated w/o authority, be a

VALID CONTRACT in the hands of ANY HOLDER, as against any person whose signature was placed
thereon before delivery.
• In the absence of any delivery, the instrument though complete in all particulars, there is NO
CONTRACT.

> DEFENSE EVEN AGAINST HDC

− instrument is NOT a VALID CONTRACT in the hands of any HOLDER even HDC.
> DEFENSE AVAILABLE TO PARTIES PRIOR TO DELIVERY
− The invalidity of the instrument is only w/ reference to the parties whose signatures appear on the
instrument BEFORE and NOT AFTER DELIVERY.
eg. A(maker) – P(steals) – B – C – D; Instrument can be enforced against P, B, C because, as indorsers,
they warrant that the instrument is GENUINE and in all respects what it purports to be, etc. As their
signatures appear on the instrument after delivery, the instrument is valid as to them; In case of P, he is
liable not merely because he is an indorser but also because he is the one responsible for the theft, and
the completion and negotiation of the instrument.

COMPLETE AND UNDELIVERED (personal defenses)

> UNDELIVERED – Every contract on NI even if it is completely written is INCOMPLETE AND

REVOCABLE UNTIL it is delivery for the purpose of giving it effect.
− DELIVERY – transfer of possession, actual/constructive, from one person to another. It may be
made either by the maker/drawer himself or through a duly authorized agent.
− ISSUE – FIRST delivery of the instrument, complete in form, to a person who takes it as HOLDER.
− HOLDER – PAYEE/INDORSEE of bill/note who is in possession of it, or the BEARER thereof.
> IN POSSESSION OF PARTY OTHER THAN HDC
− If a complete instrument is found in the possession of an IMMEDIATE PARTY (know the
conditions/limitations placed upon delivery of instrument) or a REMOTE PARTY (indirect
contractual relation to each other) other than HDC, there is prima facie presumption of delivery but
subject to rebuttal.
− An UNDELIVERED instrument is INOPERATIVE because DELIVERY is a PREREQUISITE to
LIABILITY. However, if instrument is NO LONGER in the possession of the person who signed it
and it is COMPLETE in its terms, “a VALID AND INTENTIONAL delivery by him is PRESUMED
until the contrary is proved”.
> DELIVERED UNCONDITIONALLY OR FOR A SPECIAL PURPOSE
− If delivery was made/authorized, it may be shown to have been conditional, or for a special purpose
only and not for the purpose of transferring the property (title) to the instrument.
− When delivery is made, it is presumed to be made w/ the intention to transfer ownership of the
instrument to the payee.
− eg. A delivers the note to B on condition that it will not be binding on him UNTIL co-maker has been
procured or for safekeeping, or for collection only. B cannot enforce the instrument against A
because A can set up the defense that the delivery was conditional or for a special purpose only
and not for the purpose of transferring title to the instrument.
> IN THE HANDS OF HDC
− If a COMPLETE instrument is in the hands of HDC, a valid delivery thereof by all parties PRIOR to
him is CONCLUSIVELY PRESUMED.
− A presumption is said to be CONCLUSIVE when it admits of no evidence to the contrary

CONSTRUCTION WHERE INSTRUMENT IS AMBIGUOUS

1. Sum payable expressed both in WORDS and in FIGURES, discrepancy between the two : SUM in
WORDS ; WORDS are AMBIGUOUS/UNCERTAIN : FIGURES may be the reference
2. Instrument w/ interest but NO DATE specifies, interest runs from the date of instrument; if instrument
is UNDATED, from issue thereof.
3. Instrument UNDATED, considered to be dated as of time it was ISSUED.
4. WRITTEN vs PRINTED provisions of instrument, WRITTEN provisions prevail.
> written words are deemed to express the true intention of the MAKER/DRAWER because
they are placed there by himself w/o any particular contract in view.
5. Instrument is AMBIGUOUS whether note or bill, the HOLDER may treat it as EITHER at HIS
ELECTION
6. Signature placed in instrument UNCLEAR what capacity person making the same intended to sign,
he is deemed INDORSER.
Usual placement of signatures:
MAKER - lower right- DRAWEE - lower left- HOLDER - back
hand corner hand corner
7. Instrument contain words “I promise to pay” signed by TWO OR MORE PERSONS, they are deemed
to be JOINTLY AND SEVERALLY LIABLE thereon.
> ”I promise to pay” signed by 2 or more persons – SOLIDARY LIABILITY (anyone of the signers
may be held liable for the whole amount of instrument)
> ”We promise to pay” signed by 2 or more persons – JOINT LIABILITY (there are as many debts
are there are debtors, each debt being considered distinct and separate from each other)

LIABILITY OF PERSON SIGNING IN TRADE OR ASSUMED NAME

GENERALLY only persons whose signatures appear on an instrument ARE LIABLE thereon EXCEPT:
1. Where a person signs in a trade or assumed name.
2. The PRINCIPAL is liable if a duly authorized agent signs on his own behalf.
3. In case of forgery, the FORGER is LIABLE even if his signature does not appear on the
instrument.
4. When the ACCEPTOR makes his acceptance of a bill on a SEPARATE paper.
5. Where a person makes a WRITTEN promise to ACCEPT a BILL BEFORE it is drawn.

SIGNATURE BY AGENT; AUTHORITY; HOW SHOWN

> MAKER/DRAWER may sign instrument PERSONALLY or by another DULY AUTHORIZED by him
> authority of the AGENT may be shown, as in other cases of agency, to have been given ORALLY or in
WRITING subject to the provisions of the STATUTE OF FRAUDS. It has been held competent for the
AGENT to sign simply the PRINCIPAL’S NAME and to show his authority to do so by other evidence

LIABILITY OF PERSON SIGNING AS AGENT, ETC.

When agent MAY ESCAPE personal liability:

1. He is duly authorized;
2. He add words to his signature indicating that he signs AS AN AGENT, that is, for or on behalf of a
principal, or I a representative capacity;
3. He discloses his PRINCIPAL.

> MERE addition of DESCRIPTIVE WORDS w/o DISCLOSING the PRINCIPAL will not relieve signer
from personal liability, although he add to his signature the word AGENT, TRUSTEE,
ADMINISTRATOR, GUARDIAN, or DIRECTOR (words added are but description personae –
describing the person who signed the instrument)

EFFECT OF SIGNATURE BY PROCURATION

PROCURATION – act by w/c a PRINCIPAL gives power to another to act in HIS PLACE as he could
himself.
> has special and technical meaning; gives a WARNING that the AGENT has but a LIMITED
AUTHORITY so that IT IS the duty of the person dealing w/ him to INQUIRE into the extent of his
(AGENT) authority.
> The PRINCIPAL is NOT BOUND if the agent has exceeded the ACTUAL LIMITS of his authority,
although he may acted w/in the general scope of the agency.
> Instead of “per procuration”, “per proc.”, “P.P.”, or “pp” may be used.

EFFECT OF INDORSEMENT BY INFANT OR CORPORATION

Indorsement/assignment of the instrument by a corporation or by an infant PASSES the property therein,

notwithstanding that from want of capacity, the corporation or infant may incur NO LIABILITY thereon

EFFECT OF INDORSEMENT BY INCAPACITATED PERSONS

1. MINORS
> Generally VOIDABLE at his instance or at the instance of his guardian.
> While MINOR NOT BOUND by his indorsement for lack of capacity, he CAN TRANSFER certain
RIGHTS. Minority is a real defense available to MINOR.
> A MINOR may be BOUND where he is guilty of ACTUAL FRAUD committed by specifically
stating that he is of age, when, in fact he is not.
2. OTHER INCAPACITATED PERSONS
> As far as such persons (incapacitated, insane, demented, deaf-mutes, etc) are concerned,
THEIR CAPACITY IS A REAL DEFENSE, that is, available even against HDC.

EFFECT OF INDORSEMENT BY A CORPORATION

> Applies to cases where corporation has committed ultra vires acts(acts beyond its powers).
> NOT LIABLE on notes in a suit thereon by an indorsee, where the corporation is WITHOUT
CAPACITY to make the contract in fulfilment of w/c they are executed.

EFFECT OF FORGED SIGNATURE

FORGERY – counterfeit-making or fraudulent alteration of any writing w/ INTENT TO DEFRAUD (eg.

signing of another’s name; alteration of an instrument in the name, amount, description of person, etc.)
− a REAL DEFENSE even against HDC

SIGNATURE is wholly INOPERATIVE & NO RIGHT can be acquired through FORGED SIGNATURE
1. Where signature on instrument is affixed by one who DOES NOT claim to act as an agent and
who has NO AUTHORITY to bind the person whose signature he has forged; and
2. Where signature is affixed by one who purports to be an AGENT BUT NO AUTHORITY to bind
the ALLEGED principal.

CASES OF FORGERY IN GENERAL

1. Forgery of PROMISSORY NOTES
− indorsement of the note
− MAKER’s signature
2. Forgery of BILLS OF EXCHANGE
− indorsement of the bill
− DRAWER’s signature (either w/ acceptance by DRAWEE; or w/o such acceptance but the bill is
paid by DRAWEE)
> DOES NOT purport to declare the instrument TOTALLY VOID or the GENUINE signatures thereon
INOPERATIVE.
> ONLY THE FORGED/UNAUTHORIZED SIGNATURE that is declared to be INOPERATIVE
> RIGHTS MAY STILL EXIST and be enforced by virtue of such instrument as to those whose signature
thereto are found to be genuine.

2 EXCEPTIONS TO THE GENERAL RULE THAT NO RIGHT/TITLE CAN BE ACQUIRED TO AN NI

THROUGH OR UNDER A FORGED/UNAUTHORIZED SIGNATURE
1. If the party against whom it is sought to enforce such right is PRECLUDED (stopped) from setting
up forgery or want of authority; and
2. Where forged signature is NOT necessary to the HOLDER’S TITLE in w/c case the forgery may
be DISREGARDED.

PERSONS PRECLUDED FROM SETTING UP THE DEFENSE OF FORGERY

1. Those who by their acts, silence, or negligence are estopped from setting up the defense of
forgery; and
2. Those who warrant/admit the genuineness of the signatures in question: indorsers, acceptors,
and persons negotiating by delivery

RIGHTS OF PARTIES IN CASES OF FORGED INSTRUMENTS

1. Where note payable to order
> party whose indorsement (inoperative) is forged IS NOT LIABLE to any holder even HDC
> other parties (including the MAKER) prior to the party whose signature is forged ARE NOT
ALSO LIABLE to ANY HOLDER
− instrument being payable to order, can be negotiated ONLY BY INDORSEMENT
COMPLETED BY DELIVERY
− since the indorsement is forged, it is INOPERATIVE, and therefore, cannot operate to
transfer ANY RIGHT/TITLE over the instrument
2. Where note payable to bearer
> note, mechanically complete, is originally payable to bearer, the party whose indorsement is
forged is LIABLE to HDC but NOT to one who IS NOT HDC
> The other parties (including the MAKER) prior to the party whose signature is forged, MAY
ALSO BE HELD LIABLE by one who is NOT HDC
− instrument being originally payable to bearer, it can be negotiated by MERE
DELIVERY even w/o indorsement
− even if the indorsement is forged, the FORGERY MAY BE DISREGARDED
3. Where bill payable to order
> party whose indorsement (inoperative) is forged IS NOT LIABLE to any holder even HDC.
> If DRAWEE pays under a forged indorsement, DRAWER NOT LIABLE on the bill and
DRAWEE may not debit the DRAWER’s account
> checks received MERELY FOR COLLECTION and deposit, the bank, as agent, CANNOT BE
EXPECTED to know/ascertain the GENUINENESS of all PRIOR indorsements
4. Where bill payable to bearer
> DRAWEE may debit the DRAWER’s account in spite of the forged indorsement. The reason
is that the forged instrument is NOT NECESSARY to the title of the holder. The DRAWEE
cannot recover from the HOLDER.
WHAT CONSTITUTES NEGOTIATION

Negotiation – to constitute the transferee the HOLDER thereof

1. BEARER – delivery 2. ORDER – indorsement then delivery

> ANY person in possession of BEARER instrument is ALWAYS the bearer thereof, although he may
have NO legal RIGHT thereto. Meaning, if instrument is negotiated to HDC, the latter may acquire
BETTER RIGHT than transferor.
> NO NEGOTIATION if the transfer does NOT make the transferee the HOLDER of instrument.
eg. If M makes a note payable to P or order, then P delivers w/o indorsement to A, negotiation is NOT
affected because A, by such transfer, DOES NOT become the HOLDER. – just an ordinary
ASSIGNMENT because it is ORDER instrument but NOT indorsed.
> *PAYMENT of check (or other bill) by drawee-bank is NOT NEGOTIATION and does NOT make bank
the HOLDER; BANK is not the payee or indorsee; check is EXTINGUISHED and CANNOT be put in
circulation again to bind the drawer or indorser.
> The writing of HOLDER’s name on the back of the check before surrendering for PAYMENT to
drawee-bank is NOT INDORSEMENT. Signature merely serves as RECEIPT OF MONEY. Upon
payment, the CHECK becomes merely a VOUCHER, NOT a transfer of TITLE thereto.

3 BASIC METHODS TO TRANSFER NI

1. ISSUE – 1st DELIVERY of instrument COMPLETE in form to a person who takes it as HOLDER
− 1st TRANSFER of instrument to PAYEE
2. NEGOTIATION - to constitute the transferee the HOLDER thereof
3. ASSIGNMENT – assignee is placed in the position of assignor; assignee acquires instrument
subject to personal and real defenses available against assignor
> *NI can be NEGOTIATED or ASSIGNED; NON-NI can only be ASSIGNED/TRANSFERRED, NOT
negotiated.
> *Indorsement NOT ONLY mode of transfer but also involves NEW CONTRACT and OBLIGATION on
part of INDORSER – an IMPLIED guaranty that instrument be paid according to terms thereof.
>
NEGOTIATION ASSIGNMENT
Only to NI All contracts
Transferee is HOLDER Transferee is ASSIGNEE
HDC - REAL defenses ASSIGNEE – PERSONAL and REAL defenses
May acquire BETTER title than PRIOR party Merely steps in shoes of ASSIGNOR
GENERAL INDORSER warrants SOLVENCY of ASSIGNOR does NOT warrant SOLVENCY of prior
PRIOR parties parties (unless stipulated or INSOLVENCY known
to him)
INDORSER NOT LIABLE (unless there is ASSIGNOR IS LIABLE even w/o NOTICE OF
PRESENT-MENT and NOTICE of DISHONOR) DISHO-NOR
Governed by NIL Governed by CIVIL CODE on assignment of credits

> Can there be negotiation to a PAYEE?

MAKER/DRAWER → PAYEE – payee acquires title by ISSUANCE, NOT negotiation
MAKER/DRAWER → AGENT of MAKER/DRAWER →PAYEE – payee acquires title
by NEGOTIATION
> If negotiation refers to instrument already completely executed/ISSUED, then ONLY HOLDERS
SUBSEQUENT TO PAYEE can acquire title by NEGOTIATION.
> There is NEGOTIATION also to PAYEE when instrument delivered BACK to him by LAST HOLDER.
(In such case, indorsement of LAST HOLDER not necessary because PAYEE is remitted to his
FORMER RIGHTS, and all intervening parties are DISCHARGED from LIABILITY.)

INDORSEMENT; HOW MADE

> Indorsement be written on INSTRUMENT itself or upon paper attached (allonge) thereto.
> Signature of INDORSER, w/o additional words, is SUFFICIENT INDORSEMENT.
> INDORSEMENT (from Latin in dorsa – writing on the back) – writing of indorser’s name on the
instrument w/ the intent EITHER 1.) to transfer TITLE to the same, or 2.) to STRENGTHEN security of
HOLDER by assuming contingent liability for its future payment, OR BOTH.
> Indorsement w/o delivery conveys NO TITLE and NO HOLDER.

NECESSITY OF INDORSEMENTS
1. Essential to the execution and for FURTHER NEGOTATION of ORDER instrument.
eg. Note payable: “to the order of P”, P must indorse it BEFORE it can be further negotiated
2. Not necessary to a mere ASSIGNMENT.
− Thus, one can acquire title w/o indorsement of ORDER instrument but he CANNOT be HDC
thereof although entitled to indorsement made.
3. Determines SUBSEQUENT negotiations or transfer of instrument.
− Indorsement may determine whether another indorsement can be further negotiated [special
indorsement] – w/ indorsee name;
− or NO further indorsement required for negotiation because it is converted into a BEARER
instrument negotiated by DELIVERY [blank instrument] – w/ indorsee signature only;
− or RESTRICTED for further negotiation [restrictive indorsement] – w/ additional words w/c
prohibit/limit further negotiation)

FORM OF INDORSEMENT
> Law does NOT require EXCLUSIVE FORM by w/c indorsement be accomplished but must be
WRITTEN, in ink, printed, (rubber) stamped, typewritten, or any means that will create a mark.

LOCATION OF INSTRUMENT
1. On instrument itself
− As a matter of practice, indorsement is WRITTEN AT THE BACK of instrument (dorsal portion
of instrument) but it may be written on the face (although it would entail risk of being held liable
as co-maker [PN] or co-drawer [BofE].
2. Upon paper attached thereto (allonge)
− A paper that is merely clipped/pinned to an instrument is NOT an ALLONGE, and anything
written on it CANNOT be considered as INDORSEMENT. Accordingly, person in possession
of instrument is NOT the HOLDER.
− If there is still space for indorsements, the use of ALLONGE should be avoided so as not to
cause CONFUSION on ORDER OF LIABILITY of indorsers.

INDORSEMENT MUST BE OF ENTIRE INSTRUMENT

Object of provision: to avoid multiplicity of suits/actions in court

> NO NEGOTIATION if indorsement transfer ONLY PART of AMOUNT payable (not HOLDER but
merely is an ASSIGNEE; renders instrument NON-NEGOTIABLE, NOT PAYEE/BEARER of note,
NOT INDORSEE.
eg. The total payable is P10 000, “Pay to A P8 000” – NOT VALID NEGOTIATION
− Exception to entirety: Where instrument has been paid in part, it may be indorsed as to the
RESIDUE.
eg. The total payable is P10000, P2000 is already paid. “Pay to A P8000” – VALID
NEGOTIATION
> NO NEGOTIATION if indorsement transfer instrument to 2 or more indorsees severally.
eg. Pay to A P8 000 and pay to B P2 000 – NOT VALID NEGOTIATION
> However, there is VALID NEGOTIATION if indorsees are JOINT.
eg. Pay to A and B P10 00 – VALID NEGOTIATION) – A and B must BOTH indorse UNLESS they are
PARTNERS, or one is authorized to indorse for both of them, in w/c case, only one may indorse.

KINDS OF INDORSEMENT

1. As to the METHODS OF 5. Other kinds of indorsements

NEGOTIATION • JOINT – payable to two or more
• Special persons jointly
• Blank • SUCCESSIVE – in succession by
2. As to the KIND OF TITLE several indorsers who are liable
TRANSFERRED prima facie in ORDER in w/c they
• Restrictive indorse
• Non-restrictive • REGULAR – Delivery→ Indorsement
3. As to the SCOPE OF LIABILITY OF • IRREGULAR (ANOMALOUS) –
INDORSER (placed signature in blank before
• Qualified delivery) Indorsement → Delivery
• Unqualified (general) • FACULTATIVE – indorser
4. As to the PRESENCE/ABSENCE OF ENLARGES his liability by writing
LIMITATIONS over his signature a WAIVER of
• Conditional usual demand (formal protest) and
• Unconditional NOTICE OF NON-PAYMENT
(dishonor).

SPECIAL, AND BLANK INDORSEMENT

SPECIAL indorsement – w/ indorsee name; can be further negotiated.

eg. Pay to A; Pay to the order of A; Pay to A or order (Sgd.) B

> If instrument originally payable to ORDER, INDORSEMENT NECESSARY for FURTHER negotiation
of instrument.
> If instrument originally payable to BEARER, it may be further negotiated by indorsement or even by
mere delivery but REMAINS a BEARER instrument even if specially indorsed. (BEARER ALWAYS A
BEARER.)

BLANK indorsement – specifies no indorsee; can be negotiated by DELIVERY because it becomes a

BEARER instrument.
[eg. “I promise to pay A or order P10 000” (Sgd.) B
A (payee) may indorse the instrument in blank by SIMPLY writing his signature at BACK of instrument:
(Sgd.) A

> If instrument is payable to ORDER on its face and the ONLY or LAST indorsement is in BLANK, it is
CONVERTED into BEARER instrument.
> If instrument is payable to BEARER on its face, ANY indorsement, whether SPECIAL or BLANK, does
NOT change as BEARER instrument. (BEARER ALWAYS A BEARER.)
> A BLANK INDORSEMENT may be negotiated by delivery, or by indorsement and delivery.
> However, ORDER instrument SPECIALLY INDORSED AFTER BLANK INDORSEMENT reacquires
status as ORDER INSTRUMENT.
eg. ORDER instrument indorsed: SPECIAL → SPECIAL → BLANK (becomes a BEARER instrument)
→ SPECIAL (becomes ORDER instrument, again) → SPECIAL

BLANK → SPECIAL

- Done by writing APPROPRIATE words OVER the signature of indorser in blank.

- The INDORSEE CANNOT add to the indorsement ANY contract INCONSISTENT w/ character of
indorsement. (eg. Adding “protest waived”; “Demand and notice waived”; “Without recourse”; if such was
NOT THE INTENTION of parties. Also, adding “I hereby guaranty payment” will make INDORSER
LIABLE as GUARANTOR and thus NOT ENTITLED to NOTICE in case of DISHONOR.)

*The INSERTION of UNATHORIZED contracts constitutes MATERIAL ALTERATION and AVOIDS

INDORSEMENT.

[eg. BLANK → SPECIAL

M – P (special) – A (blank) – B (beomes BEARER) (if indorse specially, negotiation will be effected only
indorsement) – C (special indorsee)
In example, the indorsement by P – A and A – B may appear:
Pay to A
(Sgd.) P
(sgd.) A

B, as HOLDER of instrument w/ BLANK indorsement, may PROTECT himself by converting it into

SPECIAL indorsement, as for example, by writing “Pay to B”, thereby indorsing it to himself. Thus, the ff
will appear:

Pay to A
(Sgd.) P
Pay to B
(sgd.) A
RESTRICTIVE INDORSEMENT

RESTRICTIVE INDORSEMENT – RESTRAINS the negotiability of instrument for purpose or to the

person stated therein.

a. Prohibits further negotiation of instrument.

(becomes NON-NEGOTIABLE)
“Pay to A only”
“Pay to A and to no other person”
Here, A is the only one authorized to receive payment.

b. Constitutes INDORSEE the AGENT OF INDORSER (AGENCY type: AGENT NO TITLE to instrument;
holds instrument as AGENT of principal, the restrictive indorser subject to restrictive indorsement.)
“Pay to B for collection”
“Pay to B for collection and remittance”
“Pay to B for collection only”
“Pay to B for deposit”

c. Vests title in INDORSEE in TRUST for or use of some other person

(TRUST type: transfers TITLE to INDORSEE NOT FOR HIMSELF but in trust of for BENEFIT of another
person including INDORSER. The INDORSEE CANNOT NEGOTIATE instrument for OWN BENEFIT
BUT FOR BENEFICIAL OWNER.)
“Pay to C in trust for D”
“Pay to C as trustee for D”
“Pay to A for my use”
“Pay to C for the use of D”

Mere absence of words of negotiability does NOT make the indorsement restrictive.

*BUT if there are restrictive words stated like “only”, it prevents further negotiation, become restrictive
indorsement, and NON-NEGOTIABLE.