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.

1. Modes of Transfer

TRANSFER AND NEGOTIATION

Types of transfers:

1. Assignment - transfer of title to the instrument, with the assignee generally taking only
such title as his assignor has, subject to all defenses available against his assignor;

2. Negotiation - transfer of a negotiable instrument from one person to another made in

such a manner as to constitute the transferee the holder thereof

3. By Operation of Law – such as by succession, by insolvency.

2. Definition of Negotiation 

Sec. 30. What constitutes negotiation. - An instrument is negotiated when it is transferred

from one person to another in such manner as to constitute the transferee the holder
thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is
negotiated by the indorsement of the holder and completed by delivery. (emphasis
supplied)

HOW NEGOTIATION TAKES PLACE

1. Instruments payable to order: two steps are required for negotiation: (a) indorsement
and (b) delivery.

2. Instruments payable to bearer: delivery alone without indorsement.

Indorsement of instrument payable to bearer. - Where an instrument, payable to bearer,

is indorsed specially, it may nevertheless be further negotiated by delivery; but the
Sec. 40
person indorsing specially is liable as indorser to only such holders as make title
through his indorsement.

An instrument payable to bearer is not converted into an instrument payable to order by

being indorsed specially. However, the person who indorsed specially is liable only to
those holders who can trace their title to the instrument by a series of unbroken
indorsements from such special indorser.

Instruments originally payable to order: Sec. 40 does not apply to instruments originally
payable to order which was indorsed in black.

INCOMPLETE NEGOTIATION OF ORDER INSTRUMENT

Sec. 49. Transfer without indorsement; effect of. - Where the holder of an instrument
payable to his order transfers it for value without indorsing it, the transfer vests in the
transferee such title as the transferor had therein, and the transferee acquires in addition,
the right to have the indorsement of the transferor. But for the purpose of determining
whether the transferee is a holder in due course, the negotiation takes effect as of the time
when the indorsement is actually made.

Equitable Assignment – the transfer of an order instrument without indorsement where

the transferee acquires the instrument subject to defenses and equities available among
prior parties.

The transferee acquires the legal title the transferor had and in addition, the right to have
the indorsement of the transferor, without which he cannot be considered a “holder”
within the definition under Sec. 191 and thus cannot negotiate it. He also cannot be
considered a “bearer” since the instrument is not payable to bearer.

WHERE INDORSEMENT SHOULD BE PLACED?

Sec. 31. Indorsement; how made. - The indorsement must be written on the instrument
itself or upon a paper attached thereto. The signature of the indorser, without additional
words, is a sufficient indorsement.
Indorsement is the 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.

Allonge - is a slip of paper sometimes attached to a negotiable instrument for the purpose
of receiving further indorsements when the original paper is filled with indorsements.
Generally, an allonge may not be utilized for indorsement if there is still sufficient space
on the instrument itself.

WHEN PERSON DEEMED INDORSER

Sec. 63. When a person deemed indorser. - A person placing his signature upon an
instrument otherwise than as maker, drawer, or acceptor, is deemed to be indorser unless
he clearly indicates by appropriate words his intention to be bound in some other
capacity.

An indorser cannot show by parol evidence (i.e., outside the instrument itself) his
intention to be bound in some other capacity, as for example, he signed merely as an
agent.

Indorsement - legal transaction effected by the writing of one's own name at the:

a. back of the instrument or 


b. upon a paper (allonge) attached thereto with or 


without additional words specifying the person to whom or to whose order the
instrument is to be payable whereby one not only transfers legal title to the paper
transferred but likewise enters into an implied guaranty that the instrument will be
duly paid. 


General Rule: indorsement must be of the entire instrument.

Exception: where instrument has been paid in part, it may be indorsed as to the residue.

Kinds of indorsement:

a. Special - specifies the person to whom or to whose 


order, the instrument is to be payable (sec. 34)

b. Blank - specifies no indorsee:

 • Instrument is payable to bearer and may be negotiated by delivery (sec. 34)

• May be converted to special indorsement by writing over the signature of

indorser in blank any contract consistent with character of indorsement.

c. Restrictive - when the indorsement either:

i. Prohibits further negotiation of the instrument; or

ii. Constitutes the indorsee the agent of the indorser; or

iii. Vests the title in the indorsee in trust for or to the use of some other
persons. But mere absence of words implying power to negotiate does not make an
indorsement restrictive.

A restrictive indrorsement confers upon the indorsee the right:

a. To receive payment of the instrument

b. To bring any action thereon that the indorser could bring;

c. To transfer his rights as such indorsee, where the form of the indorsement authorizes
him to do so.

But all subsequent indorsees acquire only the title of the first indorsee under the
restrictive indorsement. (sec. 37)

Such indorsement destroys the negotiability of the instrument and bars further negotiation
to a holder in due course.

Qualified - constitutes the indorser a mere assignor of the title to the instrument. (sec. 38)

• made by adding to the indorser's signature words like "sans recourse,” “without
recourse", "indorser not holder", "at the indorser's own risk", etc. 


• The purpose of this kind of indorsement is to transfer title without guaranteeing

payment by the primary party .

• It does not mean, however, that the qualified indorser incurs no liability at all. The
effect is merely to limit his liability. He is secondarily liable for breach of is
warranties as an indorser under Sec. 65. Thus, he is liable if the instrument is
dishonored by NON-ACCEPT ANCE or NON-P A YMENT due to:
 a. forgery;

b. lack of good title to the instrument 


indorsed;

c. lack of capacity to contract on the part of 


prior parties; or

d. the fact that the instrument was valueless or not valid at the time of the indorsement
which fact was known to him.

Conditional - right of the indorsee is made to depend on the happening of a contingent

event • Party required to pay may disregard the conditions.

This kind of indorsement has no effect on the further negotiation of the instrument. The
party required to pay, if he chooses, may make payment, disregarding the condition
without incurring any liability because he is expressly authorized to do so under Sec. 39.
But the person who received payment will hold the proceeds subject to the right of the
conditional indorser.


Absolute - one by which indorser binds himself to pay:

i. upon no other condition than failure of prior parties to do so; and 


ii. upon due notice to him of such failure. 


Joint - indorsement of instrument payable to 2 or more persons; all must indorse in order
for the transaction to operate as a negotiation. 

• Exceptions to the rule requiring joint indorsement:

a. Where the payees or indorsees are partners; and 


b. Where the payee or indorsee indorsing has authority to indorse for the
others. 


Irregular - a person who, not otherwise a party to an instrument, places thereon his
signature in blank before delivery.

Rules on Indorsements:
 • Effect of transfer without indorsement:

a. transfer vests in the transferee such title as 


transferor had therein (assignment), and 


b. the right to have the indorsement of 


transferor . 


 For the purpose of determining whether 


transferee is a holder in due course, negotiation takes effect as of the time
when the indorsement is actually made. 


 Applicable only to order instruments 


• Indorsement of a bearer instrument: where an instrument, payable to bearer, is

indorsed specially, it may nevertheless be further negotiated by delivery; but the
person indorsing specially is liable as indorser to only such holders as make title
through his indorsement. 

Note: The rule only applies to originally bearer instruments. If it is originally a
BEARER instrument, it will always be a BEARER instrument. As opposed to an
original order instrument becoming payable to bearer, if the same is indorsed
specifically, it can NO LONGER be negotiated further by mere delivery, it has to
be indorsed. 


• Striking out indorsements: the holder may at any time strike out any indorsement,
which is not necessary to his title. The indorser whose indorsement is struck out
and all indorsers subsequent to him, are thereby relieved from liability on the
instrument. 


 If the instrument is payable to bearer on its face, then whether or not there are
indorsements on the back of the instrument would be immaterial to the title of the
bearer, who is presumptively the owner and holder by his mere possession of such
instrument. None of the indorsement would be necessary to it’s title since mere
delivery would have been sufficient to transfer title from one holder to another. 

  Where the instrument is payable to order on its face, the situation is different.
First, the indorsement of a special indorsee is necessary for the further negotiation
of the instrument. Second, the last indorsement controls the method of further
negotiation. 


• When prior party (reacquirer) may negotiate: where an instrument is negotiated back to
a prior party, such party may reissue and further negotiate the same. But he is not
entitled to enforce payment thereof against any intervening party to whom he was
personally liable. In the following cases, a prior party cannot further negotiate the
instrument:



1. Where it is payable to the order of a third person, and has been paid by the drawer; 



2. Where it was made or accepted for accommodation and has been paid by the party
accommodated; 



3. In other cases, where the instrument is discharged when acquired by a prior party.

Distinctions between Negotiation and Assignment

NEGOTIATION ASSIGNMENT

1. Refers only to negotiable instruments; 1. Refers generally to an ordinary contract;

2. The transferee is a holder; 2. The transferee is an assignee;

3. A holder in due course is subject only to real 3. An assignee is subject to both real and
defenses; personal defenses;

4. A holder in due course may acquire a better 4. Generally, an assignee merely steps into
right than that of a prior party the shoes of the assignor;

5. A general indorser warrants the solvency of 5.
prior parties;
6. An indorser is not liable unless there be
presentment and notice of dishonor;
6.
7. Negotiation is governed y the NIL.
An assignor does not warrant the
solvency of prior parties unless expressly
stipulated or the insolvency is known to
him;
An assignor is liable even without notice
of dishonor;

7. Governed by Arts. 1624 to 1635 (on

assignment of credits) of the Civil Code. 

DELIVERY OF NEGOTIABLE INSTRUMENTS

Incomplete instrument not delivered. - Where an incomplete instrument has not been
Sec. 15 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.
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
Sec. 16 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.
Definition and meaning of terms. - In this Act, unless the contract otherwise requires:

"Delivery" means transfer of possession, actual or constructive, from one person to

another;
Sec. 191
“Issue" means the first delivery of the instrument, complete in form, to a person
who takes it as a holder

Section 15: Example: M makes a note for P10,000 with the name of the payee in blank
and keeps it in his drawer. P steals the note, names himself as the payee and indorses the
note to A, A to B, B to C, a holder in due course.

NOTE: C, even though a holder in due course, cannot enforce said note against M by
virtue of Sec. 15, but C can go after P, A and B.

Section 16: As regards immediate parties and a remote party other than a holder in due
course, delivery is a rebuttable presumption, as such can either be conditional or for a
special purpose (without intention of transferring title).

As regards a holder in due course, valid delivery, of a complete instrument (as opposed to
an incomplete instrument under Sec. 15), by all parties prior to him is conclusively
presumed (admission of evidence to the contrary is not allowed).
SALAS VS. CA (G.R. No. 76788 January 22, 1990) -

Juanita Salas (Petitioner) bought a motor vehicle from the Violago Motor Sales
Corporation (VMS) as evidenced by a promissory note. This note was subsequently
endorsed to Filinvest Finance & Leasing Corporation (private respondent) which financed
the purchase. Petitioner defaulted in her installments allegedly due to a discrepancy in the
engine and chassis numbers of the vehicle delivered to her and those indicated in the
sales invoice, certificate of registration and deed of chattel mortgage, which fact she
discovered when the vehicle figured in an accident. This failure to pay prompted private
respondent to initiate an action for a sum of money against petitioner before the Regional
Trial Court.

ISSUE: WON private respondent is a holder in due course?

HELD: YES. The Promissory Note was negotiated by indorsement in writing on the
instrument itself payable to the Order of Filinvest Finance and Leasing Corporation and it
is an indorsement of the entire instrument. Under the circumstances, there appears to be
no question that Filinvest is a holder in due course, having taken the instrument under the
following conditions: [a] it is complete and regular upon its face; [b] it became the holder
thereof before it was overdue, and without notice that it had previously been dishonored;
[c] it took the same in good faith and for value; and [d] when it was negotiated to
Filinvest, the latter had no notice of any infirmity in the instrument or defect in the title of
VMS Corporation. Accordingly, respondent corporation holds the instrument free from
any defect of title of prior parties, and free from defenses available to prior parties among
themselves, and may enforce payment of the instrument for the full amount thereof. This
being so, petitioner cannot set up against respondent the defense of nullity of the contract
of sale between her and VMS. 

SESBRENO VS. CA (GR No. 89252, May 24, 1993)

- Petitioner Sesbreno made a money market placement in the amount of P300,000 with
the Philippine Underwriters Finance Corporation (PhilFinance), with a term of 32
days. PhilFinance issued to Sesbreno (1) the Certificate of Confirmation of Sale of a
Delta Motor Corporation Promissory Note, (2) the Certificate of Securities Delivery
Receipt indicating the sale of the note with notation that said security was in the
custody of Pilipinas Bank, and (3) post-dated checks drawn against the Insular Bank of
Asia and America for P304,533.33 payable on March 13, 1981. The checks were
dishonored for having been drawn against insufficient funds. Pilipinas Bank never
released the note, nor any instrument related thereto, to Sesbreno; but Sesbreno learned
that the Delta Promissory Note maturing on 6 April 1981, has a face value of
P2,300,833.33 with PhilFinance as payee and Delta Motors as maker; and was
stamped “non-negotiable” on its face. PhilFrance was later on placed under the
custody of the Securities and Exchange Commission. As Sesbreno was unable to
collect his investment and interest thereon, he filed an action for damages against Delta
Motors and Pilipinas Bank. Delta Motors contends that said promissory note was not
intended to be negotiated or otherwise transferred by Philfinance as manifested by the
word "non-negotiable" stamped across the face of the Note. The trial court and the CA
dismissed petitioner’s complaint and appeal, respectively, for lack of cause of action. If
anything, petitioner has a cause of action against Philfrance, which, however, was not
impleaded.

- ISSUE: WON the non-negotiability of a promissory note prevents its assignment?

- HELD: No. A negotiable instrument, instead of being negotiated, may also be assigned
or transferred. The legal consequences of negotiation and assignment of the instrument
are different. A non- negotiable instrument may not be negotiated but may be assigned
or transferred, absent an express prohibition against assignment or transfer written in
the face of the instrument. The subject promissory note, while marked "non-
negotiable," was not at the same time stamped "non-transferable" or "non-assignable."
It contained no stipulation which prohibited Philfinance from assigning or transferring
such note, in whole or in part.

NEGOTIATION BY PRIOR PARTY

Sec. 50 When prior party may negotiate instrument. - Where an instrument is negotiated
back to a prior party, such party may, subject to the provisions of this Act, reissue and
further negotiable the same. But he is not entitled to enforce payment thereof against any
intervening party to whom he was personally liable. (emphasis supplied)

Sec. 121 Right of party who discharges instrument. - Where the instrument is paid by a
party secondarily liable thereon, it is not discharged; but the party so paying it is remitted
to his former rights as regard all prior parties, and he may strike out his own and all
subsequent indorsements and against negotiate the instrument, except:

(a) Where it is payable to the order of a third person and has been paid by the drawer;
and
(b) Where it was made or accepted for accommodation and has been paid by the party
accommodated.