Law on Negotiable Instruments - Midterm

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

Two ways where a bearer can negotiate

1. through delivery
2. when the only or last indorsement is an indorsement in blank.

If the order instrument is not indorsed, then the title is not validly transferred and only
assignment of title happens.

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
- always in writing
- always signed by the indorser
- like an acceptance
- from the word “indorsa” (written on the back)

In case of a check,
 When the payee goes to the bank for the payment of check, it is called presentment for
payment.
 If dishonored by the bank, the bank will issue Dishonor by Non-Payment
 If the payee issues a notice, it is called Notice of Dishonor by Non-Payment to be given to
the party secondarily liable
 If the payee does not issue a Notice of Dishonor by Non-Payment or does not make a notice
within 24 hours, the drawer is automatically discharged from the liability.

In case of a bill of exchange

If a bill of exchange says “payable after presentment”
 When the day of presentment comes, the payee will present a presentment for
acceptance
 If dishonored by the drawee, the drawee will issue Dishonor by Non-Acceptance
 If the payee issues a notice, it is called Notice of Dishonor by Non-Acceptance to be
given to the drawer.
 If the payee does not issue a Notice of Dishonor by Non-Acceptance or does not make a
notice within 24 hours, the drawer is automatically discharged from the liability.

If a bill of exchange says “payable after acceptance”

 When the payee goes to the drawee for the payment of check, it is called presentment for
payment.
 If dishonored by the drawee, the bank will issue Dishonor by Non-Payment
 If the payee issues a notice, it is called Notice of Dishonor by Non-Payment to be given to
the party secondarily liable
 If the payee does not issue a Notice of Dishonor by Non-Payment or does not make a notice
within 24 hours, the drawer is automatically discharged from the liability.

Encashment in NIL is presentment for payment

Bounced check in NIL is Notice of Dishonor by Non-Payment.

 As a rule, at the back of the instrument is where the indorsement being written.
 If in case the indorsement at the back is full and it is subject to a further indosement, the
paper attached to it is called Allonge.

Can a blank indorsement be converted into special indorsement? Yes.

Sec. 33. Kinds of indorsement. — An indorsement may be either special or in blank;

and it may also be either restrictive or qualified, or conditional.
- Once an instrument as issued satisfies all the requirements of negotiability, no
indorsement, even restrictive, can negotiate its negotiable status.

3 Kinds of Restrictive Indorsement

1. Prohibits the further negotiation of the instrument
2. Constitutes the indorsee the agent of the indorser
Pay to X, agent of Y. The indorsee is Y
3. Vests the title in the indorsee in trust for or to the use of some other person
Pay to X in trust of Y. The indorsee is Y

Sec. 38. Qualified indorsement. —A qualified indorsement constitutes the indorser a

mere assignor of the title to the instrument. It may be made by adding to the indorsees
signature the words "without recourse" or any words of similar import. Such an
indorsement does not impair the negotiable character of the instrument.
- Without recourse
- Sans recourse

Sec. 47. Continuation of negotiable character. — An instrument negotiable in its origin

continues to be negotiable until it has been restrictively indorsed or discharged by
payment or otherwise.
 1. if it is restrictively indorse particularly the 1st indorsement
2. if it is discharged by payment.

Acceptance

- must be in writing
- must be signed

Sec. 137

Two kinds of constructive acceptance

1. if the drawee does not return the instrument within 24 hours.

2. if the drawee intentionally cancels the bill

 if the drawee tears the bill, it is accepted.

 If the payee tears the bill, it is discharge.

Liabilities of a maker

1. He will pay the instrument according to its tenor

2. Admits the existence of the payee, and his capacity to indorse

Liabilities of an acceptor

1. He will pay the instrument according to the tenor of his acceptance

2. Admits the genuiness of the drawer’s signature
3. Admits the existence of the payee, and his capacity to indorse

Liabilities of a drawer

1. Admits the existence of the payee, and his capacity to indorse

2. If presented for payment, it will be paid by the drawee
3. If presented for acceptance, it will be accepted by the drawee
4. If dishonored and the necessary proceedings on dishonor has been duly taken, he will
pay it

Quiz 1

Sec. 40. 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 person indorsing specially is liable as indorser to only such holders as make title
through his indorsement.
- Once a bearer, always a bearer.

Examples:
 1. The maker makes a bearer instrument to payee. The payee makes a special
indorsement and delivers it to A. Can A negotiate it to B by mere deliver? Yes because
once a bearer, always a bearer.
2. The maker makes an order instrument to payee. The payee makes a blank indorsement
and delivers it to A. if A negotiate it to B by special indorsement plus delivery, can B
negotiate it to C by mere delivery?

Sec. 41. Indorsement where payable to two or more persons. — Where an instrument is
payable to the order of two or more payees or indorsees who are not partners, all must
indorse unless the one indorsing has authority to indorse for the others.

I promise to pay to the order of A and B and they want to indorse it to C. A and B must both sign
the instrument when they indorse it to C unless one has a written authority to sign.

Sec. 42. Effect of Instrument drawn or indorsed to a person as cashier. — Where an

instrument is drawn or indorsed to a person as "cashier" or other fiscal officer of a bank
or corporation, it is deemed prima facie to be payable to the bank of corporation, of
which he is such officer; and may be negotiated by either the indorsement of the bank or
corporation, or the indorsement of the officer.

Sec. 43. Indorsement where name is misspelled, and so forth. — Where the name of a
payee or Indorsee is wrongly designated or misspelled, he may indorse the instrument
as therein described, adding, if he thinks fit, his proper signature.

It can be indorsed using the misspelled name or write the real name followed by the misspelled
name

Sec. 44. Indorsement in representative capacity. — Where any person is under obligation
to indorse in a representative capacity, he may indorse in such terms as to negative
personal liability.

Must state that he is an agent to not be held liable

Sec. 45. Time of indorsement; presumption. — Except where an indorsement bears date
after the maturity of the instrument, every negotiation is deemed prima facie to have
been effected before the instrument was overdue.

If there is no date of indorsement, it is presumed to be made before the instrument was overdue
Sec. 46. Place of Indorsement; presumption. — Except where the contrary appears, every
indorsement is presumed prima facie to have been made at the place where the
instrument is dated.

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 negotiate the same. But he is not entitled to enforce payment thereof against any
intervening party to whom he was personally liable.

If the instrument is not yet due, can a prior party negotiate it to another party? Yes

Sec. 51. Right of holder to sue; payment. — The holder of a negotiable instrument may
sue thereon in his own name; and payment to him in due course discharges the
instrument.

Incidents in the Life of Negotiable Instrument

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

2. 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 completed by
delivery.

3. Presentment for Acceptance

o an act which the bill was presented for acceptance of the acceptor(drawee) since
the drawee is not the regular part of the instrument.. he will be only liable if he
accepted the instrument.
o If the drawee assent it, it must be in writing and signed on the instrument itself.
However, just like an allonge where there is a separate paper for further
indorsement, the acceptance can be written on a separate paper and must be
attached permanently to the instrument.
Sec. 141. Qualified acceptance. — An acceptance is qualified, which is —
(a) Conditional; that Is to say, which makes payment by the acceptor dependent on
the fulfillment of a condition therein stated;
(b) Partial; that is to say, an acceptance to pay part only of the amount for which the
bill is drawn;
(c) Local; that is to say, an acceptance to pay only at a particular place;
 (d) Qualified as to time;
(e) The acceptance of someone or more of the drawees, but not of all.

4. Acceptance
Sec. 132. Acceptance; how made, etc. — The acceptance of a bill is the signification by
the drawee of his assent to the order of the drawer. The acceptance must be in
writing and signed by the drawee. It must not express that the drawee will perform
his promise by any other means than the payment of money.
o Always in writing and signed

5. Dishonor by Non-Acceptance
o If the drawee refuse to accept the presentment for acceptance, it is called
Dishonor by Non-Acceptance.

Sec. 149. When dishonored by non-acceptance. — A bill is dishonored by non-

acceptance —
(a) When it is duly presented for acceptance and such an acceptance as is
prescribed by this Act is refused or can not be obtained; or
(b) When presentment for acceptance is excused, and the bill is not accepted.

6. Presentment for Payment

Sec. 70. Effect of want of demand on the principal debtor. — Presentment for payment
is not necessary in order to charge the person primarily liable on the instrument; but
if the instrument is, by its terms, payable at a special place, and he is able and willing
to pay it there at maturity, such ability and willingness are equivalent to a tender of
payment upon his part. But, except as herein otherwise provided, presentment for
payment is necessary in order to charge the drawer and indorsers.

7. Dishonor by Non-Payment
Sec. 83. When instrument dishonored by non-payment — The instrument is dishonored
by non-payment when —
(a) It is duly presented for payment and payment is refused or can not be obtained;
or
(b) Presentment is excused and the instrument is overdue and unpaid.

8. Notice of Dishonor
o if not given by the payee, the maker will be discharged from the liability.
o Can be in oral or writing or with or without signature.
o The payee must make sure that he will give it to the party secondarily liable.
o If in case it is the secretary who will issue the notice, even if he does not state
that he is an agent, he will not be held liable since he is just informing the party
secondarily liable describing the information about the refusal of payment of the
instrument.
 Sec. 89. To whom notice of dishonor must be given. — Except as herein otherwise
provided, when a negotiable instrument has been dishonored by non-acceptance orif
non-payment, notice of dishonor must be given to the drawer and each indorser, and
any drawer or indorser to whom such notice is not given is discharged.
Example: he payee indorsed the instrument to A, then A to B, and B to C. When C
presents it for payment to maker, the maker refused to pay. Then C gave the notice of
dishonor to B. the effect is A and payee are discharged from the liability. If B learned that
the maker refused to pay and C did not issue Notice of dishonor to A and Payee, B can
issue notice of dishonor to the parties not yet given within 24 hours.

9. Protest
 Just like a notice of dishonor
 Must be in writing
 Must be notarized
 Only the foreign Bill of Exchange is protested

Sec. 152. In what cases protest necessary. — Where a foreign bill appearing on its face
to be such is dishonored by non-acceptance, it must be duly protested for non-
acceptance, and where such a bill which has not been previously been dishonored
by non-acceptance is dishonored by non-payment, it must be duly protested for non-
payment. If it is not so protested, the drawer and indorsers are discharged. Where a
bill does not appear on its face to be a foreign bill, protest thereof in case of dishonor
is unnecessary.

Sec. 129. Inland and foreign bills of exchange. — An inland bill of exchange is a
bill which is, or on its face purports to be, both drawn and payable within the
Philippines. Any other bill is a foreign bill. Unless the contrary appears on the
face of the bill, the holder may treat it as an inland bill.

10. Discharge
Sec. 119. Instrument; how discharged. — A negotiable instrument is discharged —
(a) By payment in due course by or on behalf of the principal debtor;
(b) By payment in due course by the party accommodated, where the instrument is
made or accepted for accommodation;
(c) By the intentional cancellation thereof by the holder;
(d) By any other act which will discharge simple contract for the payment of money;
(e) When the principal debtor becomes the holder of the instrument at or after
maturity in his own right.
Instruments which are not negotiable Negotiable Instrument

a. Treasury Warrants a. Certificate of Deposit

b. Postal Money Orders b. Draft – Bill of Exchange payable on
c. Certificate of Stock Demand
d. Letter of Credit c. Bank Draft
e. Warehouse Receipt d. Due Bill
f. Documents Title e. Bank Notes
1. Bill of Lading f. Trade Acceptance – Bill of
2. Dock Warrant Exchange
3. Quedon g. Coupon Bond – Promissory Note