CHAPTER I – FORM & INTERPRETATION

SECTION 1. Form of negotiable instruments - An instrument to be negotiable must conform to the following requirements:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.

Commercial Paper – written promises or obligations from commercial transactions with the use of promissory notes and bills of exchange.*either negotiable or non-negotiable and should arise from commercial transactions

Negotiable Instrument – Section 1 give the definition of a negotiable instrument. It is also a contractual obligation to pay money.

Formal Requirements of Negotiability in General

*WON an instrument is negotiable or non-negotiable heavily depends on its forms and content.

To determine the negotiability of the instrument:

1. The whole of the instrument2. Only what appears on the face of the instrument3. The provisions of the NIL especially Section I

Applicability of Formal Requirements

*All kinds of NI are either promises to pay or order to pay money which possess a characteristic of negotiability

1. In order for a PROMISSORY NOTE to be negotiable, the requirements in subsections: A, B, C, and D must be present. For a BILL OF EXCHANGE, requirements in subsections: A, B, C, D, and E must be present.

2. Subsection A: Maker – person issuing the promissory note. Drawer- person issuing a bill of exchange.

3. Subsection B: Promissory Note = “unconditional promise”. Bill of exchange = “unconditional order.”

4. Subsections C & D is applicable to both while E is only for BOE.

Formal Requirements Explained.

1. The instrument must be in writing – reduced to a tangible form so that it can be passed from hand to hand.

- Written with a pen/pencil or printed- NO SUCH THING AS AN ORAL

NEGOTIABLE INSTRUMENT. Makes it difficult to determine liability.

2. The instrument must be signed by the maker or drawer – signature may appear anywhere on the paper even though the gen. rule states that it should be place at the lower right hand corner. A signature will be the binding force of the instrument.

- Signature is prima facie evidence (intention to be bound/not) HOWEVER, if the signatory’s capacity is not clear, he will be deemed as an INDORSER & not the maker or the drawer.

- Signature of the maker/drawer is usually WRITTEN. Preferably the full name but initials or any mark will suffice as long as SIGNATURE BE USED AS A SUBSTITUTE

and the maker/drawer intend to be bound by it.

- Signatures are always presumed valid but if it is questioned, the party questioning it must provide evidence/s to prove the invalidity of the signature. Likewise, the party accused must prove its validity.

3. The instrument must contain an unconditional promise/order to pay – NI can either be classified as promises or orders to pay.

4. The instrument must be payable in a sum certain in money – must call for the payment of a sum certain in money.

- Money is the one standard of value in actual business. “a particular kind of current money in which payment is to be made”

- Money = cash. Medium of exchange authorized by domestic and foreign government as part of its currency. Includes all legal tender – “that currency which a debtor can legally compel a creditor to accept in payment of a debt in money when tendered by the debtor in the right amount.”

5. The instrument must be payable at a fixed or determinable future time or in demand.

6. The instrument must be payable at a fixed or determinable future time/on demand.

7. The instrument must be payable to order.8. The instrument must be payable to bearer.9. The drawer must be named.

- Cannot be a bill if not addressed to anyone but acceptable without name as long as the drawee indicated therein with reasonable certainty. (e.g. treasurer of a named corporation)

- For the payee or holder to know to whom he will accept payment

- Promissory note has NO DRAWEE. But the payee must also be named with reasonable certainty

Non-negotiable Instruments defined.

*Not negotiable – instrument that does not meet the requirements for it to be negotiable or was negotiable until it lost its quality of negotiability

a) Check Payable only to a SPECIFIED PERSON. (e.g. “Pay to Lana del Rey”) it ceases to become negotiable if it prohibits further transaction or negotiation of the instrument.

b) NNI may not be negotiated but it may be assigned or transferred, thus, leave an express prohibition against assignment/transfer on the face of the instrument.

c) Transfers are governed by the Civil Code on assignment on contract rights. It also governs when a NI is improperly negotiated to a third person (transferee).

d) Persons who transfer or assigns contractual/non-negotiable rights pass only the rights that they had.

Promissory Note defined.

*NPN 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.

- written promise to pay a sum of money- Referred to as “note”- May be a demand instrument but is normally

a time instrument. - PROMISE PAPER/two-party paper

Original Parties to a Promissory Note

1. Maker – the one who makes and signs the instrument. Payee – to whom the promise is made/to whom the instrument is payable to

2. Payee – may designated by name/office/tittle(e.g. “Treasurer of X Corp)/unspecified (e.g. bearer)

3. May seek for payment or further negotiate the instrument. The maker promises to pay to the payee or to a holder.

4. Maker’s signature must be present for him to be liable. After PN/BOE is issued, additional parties may become involved as well.

Bills of Exchange defined

*NBOE is an unconditional order in writing addressed by one person to another, signed by the person giving it, and requiring the person to whom it is addressed to pay upon the demand or at a fixed or determinable future time a sum certain in money to order or to bearer.

- An order made by one person to another to pay money to a 3rd person.

- Check – drawn on a bank and payable on demand (most common type of order paper)

- Also known as ORDER PAPER

Original Parties to a Bill of Exchange

*3 parties: drawer, drawee, and the payee

1. Drawer – person who issues & draws the order bill. He gives the order to pay money to a 3rd person. Pays indirectly.

2. Drawee – party upon whom the bill is drawn. The bill is addressed to this party and is the one expected to pay the third person in behalf of the drawer.

- Becomes an acceptor when he agrees to pay the bill for the drawee.

- By accepting, he becomes personally liable like the maker of the note, the drawer becoming only a surety.

3. Payee – Whose favor of the bill is originally issued/payable

- May be specifically designated or may an office/title, or unspecified.

Idea & Purpose of a Bill of Exchange

a) Drawer’s funds in hands of drawee – the fundamental idea of BOE is that the drawer has funds in the custody of the drawee in which the former wants to be paid to the payee.

b) Liability of drawee for non-payment – If the drawer has actual funds with the drawee and the latter refuses to accept, then, he will be liable to the drawee (for resulting damages and harm done to his credit). If the drawer does not have funds with the drawee, it is presumed that the former has made arrangements with the latter. The drawee may then ask for reimbursement.

- Drawee may be liable to drawer, if they have an established agreement obliging the drawee to honor the order of the drawer or a DEBTOR-CREDITOR relationship.

SECTION 2. What constitutes certainty as to sum - The sum payable is a sum certain within the meaning of this Act, although it is to be paid:

(a) With interest; or

(b) By stated installments; or

(c) By stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due; or

(d) With exchange, whether at a fixed rate or at the current rate; or

(e) With costs of collection or an attorney's fee, in case payment shall not be made at maturity.

Certainty of Sum Payable

*requisite for the negotiability of the instrument to assure the clarity and certainty in determining the value of the instrument

1. Payment of fixed amount of money. – as a substitute for money it is essential that it represents A FIXED AMOUNT TO BE PAID WHOLLY IN MONEY.

- The amount to be paid must be stated plainly on the face of the instrument WITHOUT REFERENCE TO ANY OUTSIDE SOURCE.

- “Sum Certain” = the holder can determine the exact amount he will receive from the instrument

Example:

a. “To pay 1,000 or what may be due on my current deposit/which may be due to him/reasonable wage for six days work”

*Not negotiable – if it calls for an act other that the payment of money

2. Permissible clauses or stipulations – certain if a clause in the instrument states that it is to be paid with interest, by installments, with exchange, with costs of collection, or with attorney’s fees.

- The basic test for certainty is WON the holder can determine by calculation/computation the amount payable

Sum to be paid with Interest

1. Interest at fixed rate – makes certain the sum payable and therefore renders the instrument negotiable

Example:

“I promise to pay P2 or order 10,000, with interest at 15% per annum.” *10k is specified and the interest makes it easier to compute

2. Interest at increased or reduced rate – does not affect the negotiability

Sum to be paid by stated installments

*does not affect the negotiability

Stated Installments – a) interest of each statement, b) the due date of each installment must be fixed in the instrument

Sum to be paid by stated installments w/ acceleration clause

1. Acceleration dependent on maker – does not affect the negotiability

- Acceleration clause means that a promise if any installment/interest is not paid, the whole shall become due.

- The payee/holder CANNOT accelerate the note unless the maker fails to pay any installments

Sum to be paid with exchange

*Payable in foreign currency (does not destroy negotiability)

1. Meaning of exchange – the charge for the expense of providing funds at the place where instrument is payable to meet the instrument which is issued at another place.

- May be paid at a fixed/current rate2. Payment in foreign currency – current rate of

exchange at any given time can easily be ascertained. - Deemed by the law as “sum certain”

3. Payment with exchange rate – applicable only to foreign bills

4. Exchange not applicable to inland/domestic bill – no exchange in inland/domestic

- R.A. No. 8183 = every obligation must be paid in Philippine currency but parties may agree that the obligation be settled in any other currency.

Sum to be paid with costs of collection or an attorney’s fee

1. Increase in amount due effective after maturity – until the instrument matures, the amount payable is certain.

2. Liability for attorney’s fee – may be reduced by the courts if unconscionable/unreasonable. Also, it will be in a reasonable amount if not specified

3. Acquisition of instrument after the maturity – would not be a holder in due course as if it were non-negotiable

SECTION 3. When promise is unconditional - An unqualified order or promise to pay is unconditional within the meaning of this Act though coupled with:

(a) 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

(b) 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.

When a promissory note contains promise to pay

1. Implied promise to pay – may not necessarily use the word “promise.” Other words may be used like: payable, to be paid, I agree to pay, obliges to pay, good for, and due on demand etc. on the instrument.

2. Bare acknowledgement of indebtedness – not negotiable if “I.O.U, due P 10000, for value received, etc.” but becomes negotiable if words like “due P or

order, due P or bearer, I.O.U. 1000 to be paid on Sept. 3.”

When bill of exchange contains an order to pay

1. Words equivalent to an order to pay – may use other words like “let the bearer, “W will much oblige R to pay P or order.”

2. Mere request to pay – not a request and merely ask or expects the drawee to pay but DEMANDS it.

- Order is a command/imperative direction. Words like request, wish, hope, and authorize will not suffice for negotiability. The use of please does not convert the order to request.

3. Liability of drawer – negotiability depends on the terms of the order and not whether the drawee obeys to pay or not.

When promise/order to pay unconditional

1. Instrument payable absolutely – the promise or order to pay must not be subject to any condition/contingency

- Except provided by law like implied conditions of presentment, protests, and notice of dishonor.

2. Reason for requisite – enhances the ability of the instrument to circulate freely because people will not accept an instrument if the right to recover is not unconditional or absolute

- Non-negotiable if it contains a condition even if the event will likely to happen or if it happened

3. Terms not affecting unconditional liability – indication of a particular fund out of which reimbursement is to be made or an indication of a particular account to be debited w/ the amount does not render the promise/order conditional.

- Additional terms such as statement of purpose does not affect negotiability as

long as the duty to pay is unaffected by such terms

Indication of a particular fund out of which reimbursement is to be made

*Still negotiable because order to pay is conditional. The fund indicated is not the only source of payment but only the source of reimbursement which is a subsequent act

Indication of a particular fund out of which payment is to be made

*An instrument payable out of a particular/specified fund is non-negotiable because the amount to be paid is dependent on the adequacy or existence of the designated fund.

Reimbursement Payable out as DIRECT SOURCE of payment

Test of Negotiability = the instrument carries the general personal credit of the maker/drawer.

Example:

a) I promise to pay P or order the sum P10000 out of my salary in the government or out of the proceeds of the sale of my shares of stock.

b) Pay the bearer the sum of P10000 out of the dividends which I may receive from X corporation. *drawee is limited to the fund indicated.

*The intention to limit the payment to a particular fund MUST BE MADE PLAIN. Any ambiguous or vague words will render the instrument non-negotiable.

Indication of a particular fun to be debited with the amount

*Negotiable because it is not conditional. The payment does not depend on the existence or adequacy of the fund because payment is made first before the account is debited.

Statement of transaction which give rise to instrument

1. Mere recital of consideration for instrument or origin of transaction – does not render it conditional and non-negotiable

Example:

I promise to pay to the order of P 400000 being the price of a car this day sold and delivered to me or as per our contract.

*Merely identifies the source of transaction and does not qualify the order or promise to pay conditional

2. Terms & Conditions contained in another paper – renders the instrument non-negotiable because this will require an examination of the said contract.

- The negotiability or non-negotiability of the instrument must be determined immediately on what appears on its face alone and not elsewhere.

SECTION 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:

(a) At a fixed period after date or sight; or

(b) On or before a fixed or determinable future time specified therein; or

(c) 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.

Certainty of time of payment

1. Instrument payable at all events – essential requirement for negotiability for the payment of an instrument will certainly become due & demandable on time/other

2. When time of payment certain – if there’s a fixed term/time, the instrument is payable upon maturity or upon the arrival of the time for payment. If payment on demand, the holder may call for payment at any time. Checks must be payable on demand.

3. Reasons why time must be certain – so that the holder may know the when he can ENFORCE the instrument or when will the person liable be required to pay or when will the obligation of the secondary parties arise.

When instrument payable at determinable future time

*Instrument only payable upon contingency is not negotiable because it does not appear on its face WON it will be paid.

Examples:

1. Payable at fixed time – the future date is specified2. At a fixed period after date - “sixty days after date”

maturity may be determined beforehand by counting 60 days from the date of issuance

3. At a fixed period after sight – means after the instrument is seen by the drawee after acceptance

4. On/before a fixed time – “on or before September 19, 2015” has an option to pay on the day or before. The year must be stated in order for it to be determinable.

5. On/before a determinable fixed time – “on or before the school starts”

6. On the occurrence of a specified event – “upon the death of his uncle”

7. After the occurrence of a specified event – “3 days after the death…”

8. Upon Contingency – “pay upon his reaching the age of majority”

- Non-negotiable because the order is CONDITIONAL. The person may die before reaching the age of majority.

- Contingency = uncertain future event or an even which may not happen (e.g. will pay if his cat dies within 3 months)

SECTION 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:

(a) Authorizes the sale of collateral securities in case the instrument be not paid at maturity; or

(b) Authorizes a confession of judgment if the instrument be not paid at maturity; or

(c) Waives the benefit of any law intended for the advantage or protection of the obligor; or

(d) Gives the holder an election to require something to be done in lieu of payment of money.

But nothing in this section shall validate any provision or stipulation otherwise illegal.

Acts in addition to payment of money

*Must be payable in “sum certain in money”

1. General Rule – the instrument is non-negotiable if it orders/promises to do an act aside to the payment of money. Based on the fact that once could be indorsed, the other will have to be assigned.

2. Exceptionsa) Sale of collateral securities – example: “I

promise to pay P or order the sum of 10,000 on Sept. 19, 2015 secured by a ring I delivered to him by way of pledge and which he could sell should I fail to pay him at maturity.”

- The additional act is to be done after the maturity when the instrument becomes

private and non-negotiable. Until the maturity, payment of money is assured.

- Adds to the marketability. NOTE: the additional statement does not subject the promise/order to the terms & conditions of the pledge because it is done after.

b) Confession of judgment – written acknowledgement by the defendant of his liability to the plaintiff.

- Example see page 39- Invalidity of the provision as to the

confession does not render the instrument non-negotiable

- Confession after the action is brought to save expenses in VALID.

c) Waiver of benefit granted by law – example: “pay bearer 10,000. Notice of dishonor waived.”

- Waiver of protest, presentment for payment, or demand does not destroy negotiability

d) Election of holder to require some other act – example: “I promise to pay 10,100 or an air conditioner at the option of the holder”

- Giving the holder an option does not affect negotiability but if it is stated w/o the option then it becomes non-negotiable

SECTION 6. Omissions; seal; particular money - The validity and negotiable character of an instrument are not affected by the fact that:

(a) It is not dated; or

(b) Does not specify the value given, or that any value had been given therefor; or

(c) Does not specify the place where it is drawn or the place where it is payable; or

(d) Bears a seal; or

(e) 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.

Effect of omission of date

1. Date generally not necessary – will not affect the negotiability because a date in a bill or note is not necessary. The instrument will be considered to be dated as of the time of issuance.

2. Date stated not in calendar – the law will consider the nearest date of the month the date intended. (e.g. September 31 will be September 30)

3. When date necessary – cases where date is necessary to determine the date of maturity:

a) Date is tied to the date of issue (e.g. payable thirty days after date)

b) Where interest is stipulated, a date must be present for computation

c) PN – date of issue, BOE – the date of the last negotiation

- May be ante-dated/post-dated

Effect of omission of value

*Does not affect negotiability because consideration is presumed

Effect of omission of place

*Does not affect because it is presumed to be payable at the place of residence/business of the maker or drawer

Effect of presence of seal

*Prohibited in American law & will be governed by contracts under seal but not in the Philippines. It does not destroy negotiability

- It is advisable to have a bill or note appear in a public instrument so that it will be included among the preferred credits

Effect of designation of particular kind of current money payable

*does not require payment should be made in legal tender. Can either be domestic/foreign money which has FIXED VALUE in relation to our money.

SECTION 7. When payable on demand - An instrument is payable on demand:

(a) When it is so expressed to be payable on demand, or at sight, or on presentation; or

(b) 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.

When instrument payable on demand

*Instrument is payable in demand among secondary & immediate parties. No difference between holder in due course and a person not a holder in due course in immediate parties.

Instruments payable on demand is due and payable immediately after delivery. It’s a present debt due at once.

Time Instruments – payable at a definite time

1. Expressed to be payable on demand- On demand, at sight, on presentation, on

call, or anytime called for may be used- PN = on demand, BOE = at sight- Overdue instrument is automatically a

demand paper.

Example:

“Pay to P or order 10,100” – payable on demand because it does not express the time for payment

2. Payable on demand as regards the maker

Example:

A noted date July, 2, 2013 and payable “30 days after the date” is issued on August 4, 2013 (when it is already due).

3. Payable on demand as regards the acceptorExample:A bill payable on Aug. 20, 2013 is accepted by the drawee on Aug. 21, 2013.

4. Payable on demand as regardsExample: A note payable “3o days after” after Aug. 1, 2013 is indorsed on September 2013.

SECTION 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:

(a) A payee who is not maker, drawer, or drawee; or

(b) The drawer or maker; or

(c) The drawee; or

(d) Two or more payees jointly; or

(e) One or some of several payees; or

(f) 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.

When instrument payable to order

*Standardized words of negotiability – to the order of, or order, or bearer, and to bearer. Conveys the consent that the instrument may be transferred and thus, allowing further negotiation.

Instrument is payable to order where it is drawn payable:

1. To the order of a specified person; or2. To him or his order

*Therefore, an instrument payable to a specified person (e.g. Pay to Lana) is not an order instrument and is not negotiable because it is only limited to one person.

Examples:

1. Pay to the order of 10,0002. Pay to P or order 10,000

*other words may be used like “to P and assigns” will do aside from “to the order of” or “or order.”

See page 47 for persons to whose order an instrument may be made payable by the maker/drawer

Effect where payee not named or described

*A name or description with certainty is a must for the instrument to be negotiable otherwise there will be no payee and nobody to give the order to/collect in authority

SECTION 9. When payable to bearer - The instrument is payable to bearer:

(a) When it is expressed to be so payable; or

(b) When it is payable to a person named therein or bearer; or

(c) 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

(d) When the name of the payee does not purport to be the name of any person; or

(e) When the only or last indorsement is an indorsement in blank.

When instrument is payable to bearer

Bearer – person in possession of the bill/note which is payable to bearer/legally qualifies as a bearer instrument.

*Instrument is discharge when an instrument is payable to bearer at/after maturity.

*For added security, the holder may require indorsement of the instrument.

*An instrument fails to qualify as an order instrument is negotiable if it is payable to bearer.

NOTE: Subsections A&B – bearer of instruments o the face. Subsections C, D, &E – order of instruments on the face. Both are bearer instruments.

1. Expressed to be payable to bearer – I promise to pay to bearer 10,000. <- negotiable. “Payable to bearer, P” <- non-negotiable because it only describes “P.”

2. Payable to person named therein or bearer – Pay to P or bearer 10,000

3. Payable to order of a fictitious person – Pay to John Doe or order 10,000. <- payable to order and not to order.

- Fictitious person is meant to be one who has not right to it because the maker/drawer intended it no matter if the name used is true/not.

- Payable to bearer because the drawer knows the payee is not capable of

indorsing thus he intended the same to be transferred by mere delivery.

4. Payable to order of a non-existing person – Payable to the order of the King of Planet Jupiter. <- manifest intention of the drawer is to make the instrument a bearer paper negotiable by delivery.

5. Name of payee not name of person – Pay to cash, Pay to money… <- does not purport to designate a specific payee thus a payable to bearer.

6. Only indorsement in blank – see page 527. Last indorsement in blank – see page 52

*Blank indorsement does not render non-negotiability. It becomes negotiable as a bearer instrument.

SECTION 10. Terms, when sufficient - The instrument need not follow the language of this Act, but any terms are sufficient which clearly indicate an intention to conform to the requirements hereof.

Criterion of Negotiability

*Advisable to use the words prescribed by law but any words will suffice.

1. Clear intention of the parties – substance of the transaction over its form is the criterion.

- As long as the intention to make the instrument negotiable can be determined, it will be enforceable.

2. Mere defect in language or grammatical error – does not affect the negotiability. (e.g. from “himself order” be change to “himself or order.”)

SECTION 11. Date, presumption as to. – Where the instrument or 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.

*An instrument with a date is presumed that the said date is the date when it was made by the maker, drawn by the

drawer, accepted by the drawee, or indorsed by the payee/holder.

- If another person claims otherwise, he shall have the burden to establish such claim.

Date in instrument payable at a fixed future date.

*Date is not required for an instrument to be negotiable.

No need for date if instrument is payable at a: 1) Fixed Future Date w/o stipulation of interest. E.g. “I promise to pay P or bearer P10, 000 on August 10, 2013” **without the interest, there is no need to determine the date of issuance.

Date is necessary to determine MATURITY BUT NOT NEGOTIABILITY.

Examples:

1. Instrument payable at a fixed period after date. (e.g.) “30 days after date, I promise to pay P or order P10, 000.”

2. Instrument payable at a fixed period after sight or presentment. (e.g.) “Pay P or order P10, 000 thirty days after sight.”

Date in instrument payable on demand.

*instrument payable on demand does not need any date since it is demandable any time.

However, it is required under Sec. 71 that a PM must be present for payment WITHIN A REASONABLE TIME AFTER ISSUE and in case of BOE, WITHIN A REASONABLE TIME AFTER LAST NEGOTIATION thereof. Otherwise, persons secondarily liable may be released from their liability.

Thus, THE DATE OF ISSUE IS REQUIRED IN THIS CASE to determine WON a party has acted within the reasonable amount of time but not to make the instrument negotiable.

SECTION 12. Ante-dated and post-dated. – The instrument is not invalid for the reason only that it is ante-date or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery.

Ante-dated – date is EARLIER than the true date of issuance.

Post-dated – date is LATER than the true date of issuance.

Effect of ante-dating and post-dating.

1. Generally – ante-dating and post-dating an instrument does not render it invalid or non-negotiable.

- CAN BE NEGOTIATED BUT NOT AFTER MATURITY.

- The person, who received such instrument, acquires the title thereto as the DATE OF DELIVERY.

2. If done for an illegal or fraudulent purpose – The instrument becomes invalid. Example: 1.) ante-dating to conceal the charge of usurious interest; 2.) post-dated check in payment of an obligation because of insufficiency of funds w/o bona fide intention to cover the amount of the check (unless the payee is informed).

SECTION 13. When date may be inserted. – Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight 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 a subsequent holder in due course; but as to him the date is so inserted is to be regarded as the true date.

When date may be inserted.

*this provision authorizes two cases in which insertion of date is allowed.

a) Where an instrument is payable at a fixed period after date but is issued undated

b) Where an instrument is payable at a fixed period after sight but the acceptance is undated

*any holder in this case may insert the true date of issue or acceptance and the instrument shall be payable accordingly. As aforementioned, date is necessary to determine the maturity because one will never know when an instrument may be due or be deemed demandable.

Effect of insertion of wrong date.

1. As to holder with knowledge (holder not in due course) – insertion of wrong date by a person with knowledge acting in bad faith makes the instrument invalid but not to a subsequent holder in due course who may enforce the same notwithstanding the improper date.

2. Subsequent holder in due course – a person without knowledge acting in good faith. The instrument is valid in this case and the wrong date inserted is to be regarded as the true date.

SECTION14. Blanks, when may be filled. – Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for amount. In order, however, that nay such instrument, when completed, may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time. But of any such instrument, after completion, is negotiated to a holder in

due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time.

INCOMPLETE DELIVERED. *personal defense meaning the invalidity of instrument varies. It depends if the holder is in due course. Ergo, a HIDC can raise this rule as personal defense but a NHIDC cannot use this as a defense because he caused the invalidity of the instrument.

Steps in issuance of negotiable instrument.

1. The mechanical writing of the instrument in accordance to the provisions of NIL.

2. The delivery of the instrument with the intention of giving effect to it.

Rules where instrument incomplete but delivered.

1. Authority to fill up the blanks – the holder has the prima facie authority to COMPLETE AN INCOMPLETE INSTRUMENT by filling up the blanks.

- Material Particular: any particular proper that may be inserted in a negotiable instrument to make it complete, and the power to fill in the blanks extends, therefore, to every complete feature of the instrument.

2. Authority to put any amount – a signature on a blank instrument serves as a prima facie authority to fill it up as such for any amount of money.

- the signee must have the intention to convert the signed paper to a negotiable instrument

3. Right against party prior to completion – the instrument may be enforced only against a party prior to the completion (so long the instrument is filled in strict accordance w/ the authority & w/in a reasonable amount of time.

4. Right of holder in due course – the defense that the instrument had not been filled up accordingly and

within reasonable time is not available as against a holder in due course.

*The rule in section 14 simply states that if one or more persons suffer due to the bad faith of another, the one who caused it must hold the liability. Ergo, the rule protects persons who acted in good faith.

SECTION 15. Incomplete instrument not delivered. - Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery.

INCOMPLETE UNDELIVERED. *real defense meaning instrument is really defective and deemed invalid in all circumstances. It is totally ineffective like there is no contract at all.

Rules:

1. The instrument will not be valid in the hands of any holder.

2. The holder, however, can go after the party who caused the invalid delivery and the parties after.

SECTION 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. 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. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where 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.

COMPLETE UNDELIVERED. *personal defense

Rules:

1. Complete instrument but not delivered is still considered REVOCABLE.

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

- Issue meaning the first delivery of the instrument, complete in form, to a person who takes it as holder.

- Holder means the payee or indorsee of a bill/note who possesses it or the bearer.

2. As to immediate parties and remote parties, who are holders in due course, for delivery to be effectual it must be in accordance to the authority given. *there is a prima facie presumption of delivery but subject to rebuttal

- Undelivered instrument is inoperative because delivery is prerequisite to liability.

- However, if it is no longer in the possession of the person who signed it and it is complete in terms, it is assumed that there was a valid and intentional delivery.

a) Immediate parties – parties having the knowledge of the conditions/limitation placed upon the delivery of the instrument.

b) Remote parties – parties who are not in direct contractual relation to each other. No knowledge or notice of any defect in the instrument.

*When delivery is made, it is presumed to be made with the intention to transfer ownership of the instrument to the payee.

3. Instrument if in the hands of HIDC, delivery is conclusively presumed.

*HIDC – instrument is valid and he can collect*NHIDC – instrument is invalid and he cannot collect/demand.

SECTION 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:

(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;

(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.

Rules of construction in case of ambiguity or omission.

*The rules only apply if there is ambiguity or omission. If the instrument is clear, it must be enforced as it reads.

1. Sums expressed in words and in figures different – Words control over figures. Reason: it is easy to change the figures/to commit mistakes on them.

2. Words ambiguous or uncertain – Words outweigh figures. When words are unclear, reference may be made to the figures. Reference should be made ONLY when the words are unclear. Otherwise, words should always be followed.

3. Date when stipulated interest to run not specified – the interest will run from the DATE OF ISSUANCE.

4. Instrument undated – considered to be dated as of the date of issuance.

5. Written and printed words in conflict – Written words prevail over printed ones. Reason: written words are deemed to express the TRUE INTENTION of the maker or drawer because he placed them there by himself.

6. Whether instrument bill/note in doubt – the holder of the instrument may decide whether it is a bill or note

7. Capacity in which person signed in doubt – the person who signed with doubt as to capacity becomes an indorser. (because it assumes least liability)

- the placement of signature in the instrument is not in accordance to the norm or the law

8. Instrument signed by two/more persons – liability may either be solidary/joint.

- “I promise to pay” and signed by two or more persons gives rise to solidary liability. Meaning, the parties involved will pay the WHOLE AMOUNT. If the amount is 5k, each will pay 5k to the payee.

- “We promise to pay” and signed by two or more persons gives rise to joint liability. Meaning, the parties involved will pay the amount EQUALLY. If the amount is 5k, it will be divided among the parties.

SECTION 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 expressly 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.

Persons liable on an instrument.

1. General rule – only persons whose signatures appear on an instrument are liable.

2. Exceptions:a) Person signs in a trade or assumed nameb) Principal is liable if the duly authorized agent

signs on his own behalfc) In case of forgery, the forger is liable even if his

signature does not appear on the instrumentd) When acceptor makes his acceptance of a bill

on a separate papere) When a person makes a written promise to

accept a bill before it is drawn

Signing in trade or assumed name.

*One who signs in a trade/assumed name is liable AS IF HE SIGNED HIS OWN NAME.

SECTION 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.

Signature by an authorized agent.

*Giving authority to an agent may be given orally or in writing subject to the provisions of the Statute of Frauds. It will suffice, however, if the agent signs along with the name of the principal. Then, it will clearly show that the agent the authority to sign in the principal’s behalf.

SECTION 20. Liability of person signing as agent, and so forth. - Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him from personal liability.

When agent may escape personal liability.

1. He is duly authorized2. He adds words to this signature indicating that he is

an agent, signing in behalf of a principal3. He discloses his principal

Use of descriptive words w/o disclosure of principal.

*Descriptive words are not sufficient to relieve the agent from personal liability. There is a need to disclose the principal in order for the agent to be free from any liabilities. Words like “agent”, “trustee”, or “guardian”, etc. are but descriptive personae (i.e. describing the person who signed the instrument.) As between immediate parties, evidence may be presented to show that the signer acted as mere agent to a principal and the payee knew this fact. (In case the agent is being sued by the payee)

SECTION 21. Signature by procuration; effect of. - A signature by "procuration" operates as notice that the agent has but a limited authority to sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his authority.

Procuration – act by which a principal gives power to another to act in his place as he could himself (i.e. proxy)

*Procuration gives a warning that the agent has limited authority. Ergo, the person dealing with him must know the agent’s limitations. The agent will be liable if he exceeds his

actualy limits of authority.

SECTION 22. Effect of indorsement by infant or corporation.- The indorsement or 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 – contracts entered into a minor are voidable at his instance or his guardian.

- Minors are NOT BOUND by his indorsement but it does not mean that the transfer is invalid. INDORSEMENT BY MINORS IS VALID. Minority is a real defense.

- However, a minor may be held liable if he is guilty of fraud. (e.g. pretending to be of age even if he is not)

2. Other incapacitated persons – their capacity is a real defense.

Effect of indorsement by a corporation.

*Section 22 applies only when a corporation commits ultra vires acts or acts beyond its power.

*Corporation is not liable in suit thereon by an indorsee, where the corporation is w/o capacity to make the contract in fulfillment of which they were executed.

SECTION 23. Forged signature; effect of. - When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority.

Forgery – counterfeit-making or fraudulent alteration of any writing, and may consist in the signing of another’s name or the alteration of an instrument in the name, amount, description of the person and the like, with the intent to defraud.

Application of Section 23.

Two cases:

1. Signature on the instrument affixed by one who is not an agent/has no authority to bind the person whose signature he has forged

2. Signature affixed by one who pretends to be an agents but has actually no authority to bind the alleged principal

*Effect: signature will be wholly inoperative and no right can be acquired through the forged signature. Forgery is a REAL DEFENSE even against a holder in due course.

*Forgery is not presumed. It must be proven with clear and convincing evidence.

Rules on forgery.

1. In case of forgery, the instrument is not totally void. Only the forged signature/indorsement is inoperative.

2. General Rule: no right can be acquired through forged signature or indorsement.

3. Exceptions:a) Preclusion

- Estoppel: persons who act in silence or negligence will be estopped from waving the defense of forgery

- Those who warrant the genuineness of the instrument

b) Forged signature is not necessary to acquire title

c) Four possible situation- PN payable to order- PN payable to bearer

- BOE payable to order- BOE payable to bearer

Promissory Note

Payable to order Payable to bearer

1. Parties prior to forgery are not liable even to holder in due course

1. Prior parties may be held liable but only to a HIDC. (Because it is already negotiated when it is delivered. Mere delivery can pass on title, indorsement is not required.) Remedy of prior parties: go after the forger

2. Subsequent parties are liable

Bill of Exchange

Payable to order Payable to bearer

1. The drawee may not debit the drawer’s account in case of forged instrument. If he debits, he is liable. Remedy: go after the one who indorsed

1. The drawee may debit the drawer’s account in spite the forged signature (Indorsement is not necessary to vest title. Delivery is sufficient.) Remedy of the drawer: go after the forger.

2. Prior parties are not liable.

CHAPTER II – CONSIDERATION

SECTION 24. Presumption of consideration. - Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value. 

Consideration/Cause – immediate, direct, or essential reason which induces a party to enter into a contract.

Contract of Sale (Consideration)

BuyerObject Sold

SellerPrice

*Negotiable Instrument must have a consideration/cause. There is presumption that an instrument is issued for a valuable consideration. Thus, it is not necessary that the cause be expressly stated in the instrument. Presumption is only prima facie and is still revocable.

1. Distinguished from Motive which is personal or private reason of a party which is usually unknown and does not affect the validity of the contract.

SECTION 25. Value, what constitutes. — Value is any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time. 

Adequacy of consideration.Need not to be adequate as long as it is a valuable one.

Antecedent/pre-existing debt.It is a valuable consideration. May be that of a 3rd person and the payment of such debt is a valuable consideration for an instrument.

*basically the reason for the issuance of a negotiable instrument is to pay off an existing debt.

SECTION 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. 

What constitutes a holder for value.

Holder for value – one who has given a valuable consideration for the instrument issued/negotiated to him.

1. The holder is deemed as such not only by immediate parties but as well as parties prior to the time when value was given.

2. Holder of a negotiable instrument = holder for value. Unless otherwise proven.

3.

SECTION 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. 

Where a holder has lien on instrument.

*one who has taken a negotiable instrument as COLLATERAL SECURITY FOR A DEBT.

Lien - a right to keep possession of property belonging to another person until a debt owed by that person is discharged.

1. Amount of instrument more than debt secured – the payment for an instrument is more than the actual debt, the one who pledge the instrument becomes a holder for value to the extent of his lien. Pledgee can collect the full value of instrument and deliver the surplus to the pledgor.

- A pledge is a bailment that conveys possessory title to property owned by a debtor (the pledgor) to a creditor (the pledgee) to secure repayment for some debt or obligation and to the mutual benefit of both parties. A pledge is type of security interest. (is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt.)

2. Amount of instrument less than/the same as the debt secured – Pledgee becomes holder for value for the full payment and recover all.

3. Party Liable has defenses –

Party Liable

Personal Defense Real Defense (forgery)

Pledgee can collect only to the extent of the amount of the debt.

Pledgee cannot recover anything.

SECTION. 28. Effect of want of consideration. - 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 a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise.

Meaning of absence or want of consideration. - a total lack of any valid consideration for the contract, in consequence the alleged contract must fail. *PERSONAL DEFENSE

As between parties Against holder in due course

No recovery from the note

HIDC can recover from the maker of the note.

Example: A issued a note to B in payment of a parcel of land but it is non-existent. Ergo, between A and B, there will be no recovery because of absence of consideration. But it the note is indorsed to a HIDC, then, the HIDC can recover from A.

Meaning of failure of consideration. - failure/refusal of one of the parties to do, perform or comply with the consideration agreed upon. *DEFENSE PRO TANTO. (I.e. liable only to that extent***)

Example: The land of B is existent but failed to deliver it to A because B sold it to a HIDC who, in return, registered the sale. There is now a failure of consideration. But if only half of the land was delivered to the other party, B can recover the half of it only because A is not liable for the other half.

SECTION. 29. Liability of accommodation party. - An

accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party. 

a) Accommodation note/bill – loan of one’s credit. Accommodation party puts his name without consideration for the purpose of accommodating other party who will use and pay for it.

b) Accommodation party – one who signed the instrument as maker, drawer, acceptor, or indorser who does not receive anything but only to lend his name to another party.

- Expects that the accommodated party will pay and not him. ONLY LENDS HIS CREDIT.

- Classified according to the accommodated party’s status. If the accommodated party is the maker he will be liable to subsequent parties as the maker and not just the accommodated party.

c) Accommodated party – the party lending the credit of the accommodation party. He will raise money upon the instrument using the other party’s credit.

Liability of accommodation party to a holder.

1. Absence of a consideration is not a defense – accommodation party is liable to a holder even if the holder knows he is just an accommodation party or not.

2. Accommodation party, in effect, a surety – accommodation party will go after the accommodated party for reimbursement. (surety - one who provides a warrant or guarantee to another)

Meaning of “without receiving value therefor.”

Accommodation Party Receiving Value

In consideration for lending his

nameValid

From the instrument Invalid

Kinds of accommodation party.

a) Accommodation Maker – M, as accom party, issues a PM payable to P who may then negotiate it to A.

b) Accommodation Drawer –M, as accom party, signs a BOE with P as payee, and P may indorse the same to A.

c) Accommodation Indorser – M, as accom party, signs as an indorser in blank, the bill/note made by P in favor of A, before it is delivered to A.

Accommodation Party versus Regular Party

Signs w/o receiving value therefor

Sign for value

Signs for the purpose of lending his credit

Does not sign for that purpose

May always show by parol evidence that he is only such

Cannot disclaim or limit his personal liability

Cannot avail the defense of absence/failure of consideration against a nHIDC

May avail the defense against nHIDC

May sue for reimbursement after paying the holder

May not sue any subsequent party for reimbursement

CHAPTER III - NEGOTIATION

SECTION 30. What constitutes negotiation. - An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by

delivery; if payable to order, it is negotiated by the indorsement of the holder and completed by delivery. 

Negotiation – transfer of negotiable instrument from one person to another so as to make the transferee the holder of the instrument

- No negotiation if the transfer does not make the transferee the holder

Methods of transfer of a negotiable instrument.

1. Issue – Where the legal life of an instrument begins. The first transfer of an instrument to a payee.

2. Negotiation – involves indorsement. It operates to make the transferee the holder.

3. Assignment –It is the transfer of the title to an instrument with the assignee taking only such title or right as his assignor has.

- Involves a transfer of rights under contract. Does not involve indorsement.

- Transfer for non-negotiable instrument is always an assignment.

Methods of Negotiation.

Payable to Order Payable to Bearer

1. Indorsement by the payee/presentment holder

1. Negotiated by mere delivery

2. Delivery to the next holder

Payment of instrument by drawee not negotiation.

*payment of a check or other bill by the drawee is not a negotiation and does not make the bank a holder.

1. Bank – neither payee nor indorsee. Check cannot be circulated because it is already extinguished upon payment.

2. Writing the name of the holder on the back of the check before payment does not constitute indorsement.

Effect of delivery of order instrument w/o indorsement.

1. Transfer operates as an ordinary assignment – assignee is merely placed in the position of the assignor. Assignee acquiring the instrument subject to all defenses available against the assignor.

2. Transferee does not become holder of instrument – Transferee would not be the holder of the instrument w/o indorsement.

3. Where indorsement subsequently obtained – transfer operates as a negotiation only as of the time the indorsement is actually made. However, assignee requires the right to have the indorsement of the assignor.

Negotiation and assignment distinguished.

*Only negotiable instruments can be negotiated. Non-negotiable instruments can only be transferred or assigned.

Negotiation Assignment

Only refers to negotiable instruments

Only refers generally to an ordinary contract

Transferee is a holder Transferee is an assignee

HIDC is subject to real defenses

Assignee is subject to both real and personal defenses

HIDC may acquire better title/greater rights under the instrument than those possessed by the

Assignee merely steps into the shoes of the assignor

transferor or a prior party

General indorser warrants the solvency of prior parties

Assignor does not warrant the solvency of prior parties unless expressly stipulated or the insolvency is known to him

Indorser is not liable unless there be presentment of dishonor

Assignor is liable even w/o notice of dishonor

Negotiation is governed by NIL

Governed by Articles 1624 – 1635 of the Civil Code

Can there be a negotiation to a payee?

1. 1st delivery of instrument to payee – payee, as the first holder, acquires title through issuance not by negotiation.

2. 1st delivery of the instrument to other payee – acquires title through negotiation if delivery is made through an agent of the maker/drawer.

3. Delivery of the instrument by the payee by last holder – there is negotiation. Indorsement of the last holder is not necessary because payee is remitted to this former rights and all intervening parties are discharged from their liability.

SECTION 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 – writing of the name of the payee on the instrument with the intent either to transfer the title to the same or to strengthen the security of the holder by assuming a contingent liability for its future payment or both.

1. Indorser – payee signing the instrument and delivering it to another person. Indorsee – the person who receives the indorsed instrument.

2. Indorsement is completed by delivery.

Nature of Indorsement.

*Not only a mode of transfer. It involves a new contract and obligation on the part of the indorser – an implied guaranty that the instrument will be paid.

Necessity of indorsement.

1. Essential to the execution of an instrument payable to the order of the maker/drawer

2. Essential to the negotiation of an order instrument (not bearer)

3. Without indorsement, one may acquire the title of such instrument but one cannot be a holder in due course

Form of indorsement.

*Must be written or be in writing and in print. (Rubber stamp or typewritten on the instrument is valid)

1. Use of the word “assign” does not automatically make the instrument and assignment.

2. Signature of the indorser w/o words will suffice and shall be called as “blank indorsement.”

3. “Special Indorsement” is the name of the indorsee is specified. May also add words prohibiting or limiting further negotiation of the instrument.

Place of indorsement.

1. Indorsa, latin. – writing on the back. But the PLACE IS NOT ESSENTIAL. May write either on the face or on the back of the instrument. Intention over form.

2. Indorsment is on a slip paper physically attached to the instrument is known as allonge.

SECTION 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. 

Indorsement must be of entire instrument.

- General Rule.- Bill or note divided into different parts

divides a single cause of action, i.e., ground for complaint

Indorsement to multiple payees or indorsees.

1. Joint payees – valid because it is combined or joined together. Indorsement of all the indorsees is required for further negotiation.

2. Alternative payees – indorsement may be made by either of the payees

When partial indorsement is allowed.

*Only when a part of the amount has already been paid. Ergo, the other part will be indorsed.

SECTION 33. Kinds of indorsement. - An indorsement may be either special or in blank; and it may also be either restrictive or qualified or conditional. 

Classification of indorsement1. As to the methods of negotiation:

a) Specialb) Blank

2. As to the kind of title transferred:a) Restrictive

b) Non-restrictive3. As to scope of liability of indorser:

a) Qualifiedb) Unqualified or general

4. As to presence or absence of limitations:a) Conditionalb) Unconditional

5. The other kinds of indorsements:a) Jointb) Successivec) Irregular/anomalousd) Facultative

*if negotiable, no indorsement, even restrictive one, can negate its negotiability.

SECTION 34. Special indorsement; indorsement in blank. - A special indorsement specifies the person to whom, or to whose order, the instrument is to be payable, and the indorsement of such indorsee is necessary to the further negotiation of the instrument. An indorsement in blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be negotiated by delivery. 

Special Indorsement (specific indorsement or indorsement in full) - where the name of the payee is specified. Unqualified indorsements are special and blank.

1. Forms a) Specifies the person to what the instrument is

payable. (i.e. Pay to F)b) Specifies the person to whose order is payable.

(i.e. Pay to the order of F)2. Negotiation of order and bearer instruments

a) PTO – negotiated by special indorsementb) PTB – mere delivery will suffice

Blank indorsement explained.

*specifies no particular indorsee1. Consists only with the signature

2. If payable to bearer, mere delivery will suffice w/o need for further indorsements regardless if it is originally payable to bearer or not

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

SECTION 35. Blank indorsement; how changed to special indorsement. - The holder may convert a blank indorsement into a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement.

Conversion of blank indorsement to special indorsement.

*payable to order becomes payable to bearer if indorsement is in blank.

Payable to bearer through blank indorsement may be converted to order by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement. But bearer instrument always remains as is negotiable by mere delivery WON last indorsement is a blank or special one.