Section 30 What constitutes negotiation

Negotiation to constitute the transferee the HOLDER thereof

2 METHODS OF NEGOTIATION
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 HOLDERs 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
Only to NI
Transferee is HOLDER
HDC - REAL defenses
May acquire BETTER title
than PRIOR party
GENERAL
INDORSER
warrants
SOLVENCY
of
PRIOR parties
INDORSER
NOT
LIABLE
(unless there is PRESENTMENT
and
NOTICE
of
DISHONOR)
Governed by NIL

ASSIGNMENT
All contracts
Transferee is ASSIGNEE
ASSIGNEE PERSONAL and
REAL defenses
Merely steps in shoes of
ASSIGNOR
ASSIGNOR
does
NOT
warrant SOLVENCY of prior
parties (unless stipulated or
INSOLVENCY known to him)
ASSIGNOR IS LIABLE even
w/o NOTICE OF DISHO-NOR
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.)
Section 31 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 indorsers 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 (SIGNIFICANCE) 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 it must be IN WRITING.
Just like signature of maker/drawer, INDORSEMENT may 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 (referred to as 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 codrawer [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.
Section 32 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 P10 000, P2 000 is already paid. Pay
to A P8 000 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.
Section 33 Kinds of Indorsement
5 CLASSIFICATIONS OF INDORSEMENT
1. As to the METHODS OF NEGOTIATION
Special
Blank
2. As to the KIND OF TITLE TRANSFERRED
Restrictive
Non-restrictive
3. As to the SCOPE OF LIABILITY OF INDORSER
Qualified
Unqualified (general)
4. As to the PRESENCE/ABSENCE OF LIMITATIONS
Conditional
Unconditional
5. Other kinds of indorsements
JOINT payable to two or more persons jointly
SUCCESSIVE in succession by several indorsers who are
liable prima facie in ORDER in w/c they indorse
REGULAR Delivery Indorsement
IRREGULAR (ANOMALOUS) (placed signature in blank before
delivery) Indorsement Delivery
FACULTATIVE indorser ENLARGES his liability by writing over
his signature a WAIVER of usual demand (formal protest) and
NOTICE OF NON-PAYMENT (dishonor).
Section 34 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)
Section 35 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
Pay to B

(Sgd.) P

(sgd.) A
Section 36 Restrictive indorsement:
RESTRICTIVE INDORSEMENT RESTRAINS the negotia-bility 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.