NIL: Negotiation and Indorsement Phase

Atty. Desiree Von D. Enriquez

OBJECTIVES:
Understand how order instrument or bearer instrument is
negotiated or indorsed
Differentiate kinds of Indorsements
Effect of the different manner of indorsements
Understand and apply concepts to problems
NEGOTIATION
 MANNER:
Payable TO BEARER Payable TO ORDER
INDORSEMENT
Sec. 31-32
Written on the instrument itself
Usually at the back thereof
Allonge
GR: Indorsement must be of the entire instrument,
otherwise, non-negotiable.
Raison d etre: avoid multiplicity of suits
XPN: Where instrument has been paid in part, the
instrument may be indorsed as to the residue.
KINDS OF INDORSEMENT (sec. 33)
SPECIAL vs BLANK

SPECIAL INDORSEMENT
Payable to: ORDER vs BEARER (SPECIAL indorsment)
Payable to ORDER:
Indorsement is NECESSARY,
whether it be first
indorsement or subsequent
one.
No indorsement renders the
Negotiable Instrument
invalid. The holder thereof
is a mere assignee only.
In this instance, Madam A.
is a mere assignee.
Payment or Discharge of
the instrument may be
avoided in her hands.
Payable to BEARER:
RULE: Once payable to BEARER Special Indorsement on a
always payable to BEARER. BEARER INSTRUMENT- the
DELIVERY only to effectuate special indorser is liable to
indorsement. only such holders as make
Special Indorsement does not title through his
transform it to a BEARER indorsement (sec 40)
INSTRUMENT.
PARTIES LIABLE to holders:
maker and direct/immediate
indorser (PN); drawer, drawee
and immediate indorser (BOE)
BLANK INDORSEMENT
 Specifies no particular indorsee.
Negotiated by mere delivery only

Payable to ORDER Payable to BEARER

When indorsed in blank (last Delivery only to effectuate

indorsement), it converts to a further NEGOTIATION.
BEARER INSTRUMENT= Special indorsement does not
DELIVERY only for subsequent convert the instrument to
negotiation ORDER INSTRUMENT.
RESTRICITVE vs. NON-RESTRICTIVE (sec 36-37)
TWO KINDS OF RESTRICTIVE
INDORSEMENT:
1. Prohibits negotiability
2. Modify the rights of the holder of the
instrument (e.i constitutes indorsee
agent of indorser; vest title in the
indorsee in trust for another)
PROHIBITS FURTHER NEGOTIATION
CONSTITUTE INDORSEE AGENT OF INDORSER

VINNY is only a COLLECTION AGENT or

REPRESENTATIVE of Angela.
VESTS TITLE IN THE INDORSEE IN TRUST FOR
ANOTHER

The difference is that this kind of indorsement does not

necessarily destroy the further negotiability of the
instrument. Vinny CANNOT negotiate it for his OWN BENEFIT.
Vinny may, however, negotiate the instrument and the
proceeds thereof should be used in favour of Erika.
 EFFECTS OF RESTRICTIVE INDORSEMENT (sec37)
RIGHTS OF INDORSEE:
a) Receive payment
b) Bring actions which the indorser could bring (in
indorsees own name)
c) To transfer his right as such indorsee, where the form
of the indorsement authorizes him to do so
LIABILITY OF INDORSER: Qualified vs General
(sec 38)

Uses the words: sans recourse; without recourse;

or at indorsees own risk or of similar tenor
In effect, the indorser is telling the indorsee that, in
case the party primarily liable on the instrument, like
the maker, defaults, he or she cannot resort to the
indorser.
Does not affect negotiability of the instrument
 Qualified indorsers are mere assignors and not
indorsers of the instrument.
Difference is that indorser guarantees that he or she
will pay in case the person primarily liable will not
pay (Sec. 65 to be further discussed in Chapter V)
ACCORDING TO CONDITION: Conditional vs
Absolute (sec 39)
Attaches condition on the payment to the indorsee.
NEGOTIABLE vs Sec 1 (NON-NEGOTIABLE)
The party required to pay the instrument may
disregard the condition and pay the obligation.
Holder or indorsee holds in trust for the indorser, the
payment not until the condition is fulfilled. However,
as regards to the maker, his obligation has already
been extinguished.
JOINT INDORSEMENT
INDORSEMENT TO A CASHIER
 INDORSEMENT IN
REPRESENTATIVE CAPACITY
STRIKING OUT INDORSEMENTS
In case payable to BEARER:
The tenor of an instrument payable to bearer is that
whoever holds the instrument is entitled to payment.
Special Indorsements may be stricken out since what
is needed to further negotiation is only DELIVERY.

In case payable to ORDER:

The person asking for payment must be able to trace
his or her right over the instrument payable to order
to the payee thereof. Therefore, striking out
indorsement is not advisable.
In case instrument payable to ORDER BECOMES PAYABLE TO
BEARER:
Sec 9(e)
If the succeeding indorsement (after the blank
indorsement) is SPECIAL, the holder may strike out that
indorsement since it is not necessary to his title.
The indorsement which converts the order instrument to
a bearer instrument (blank indorsement) should not be
striken out.

EFFECT OF STRIKING OUT INDORSEMENTS:

relieves the indorsers from liability.
EFFECTS: TRANSFER WITHOUT INDORSEMENT
 Only affects instruments payable to order
EFFECTS:
a. Transaction operates equitable
assignment (transferee acquires the
instrument subject to the defenses
and equities available among prior
parties)
b. Cannot further negotiate it
c. If the transferor had legal title, the transferee
acquires such title and, in addition, the right to
have the indorsement of the transferor.
I. The transferee qualifies as a holder upon
receiving the indorsement and thus is capable of
negotiating he instrument further
II. Before the indorsement is made, the transferee
is not a holder. The negotiation takes effect as of
the time the indorsement is actually made for the
purpose of determining whether or not the
transferee is a holder in due course.
PRIOR PARTY NEGOTIATES

PRIOR PARTY- refers to a holder of an

instrument who has negotiated the instrument
and later reacquires the same instrument.
 If a prior party reacquires an instrument before the
maturity, he may negotiate the same further.
After paying the holder he may NOT CLAIM payment
from any of the intervening parties.
RAISON D ETRE: avoid multiplicity
of suits
Limitations on Renegotiation:
1. Where it is payable to the order of a third person,
and has been paid by the drawer (sec 121 (a))
2. Where it was made or accepted for accommodation
and has been paid by the party accommodated
(ibid. (b))
3. In other cases, where the instrument is discharged
when acquired by a prior party (sec 119)
Sec 121: DSICHARGE OF NEGOTIABLE
INSTRUMENTS
Sec 119: DSICHARGE OF NEGOTIABLE
INSTRUMENTS