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  • Notes on Campos Negotiable Instruments Law

    C c,) L L E E N 1

    Introduction

    1. kinds of negotiable instruments

    a. promissory notes a promise to pay in money

    P500.00 October 6, 1979

    For value I received, I promise to pay to the order of

    Carolina Infante the sum of Five Hundred Pesos

    (P500.00), Philippine currency, on or before March 3,

    1982.

    (Sgd.) Vicente Canlas

    Other forms of promissory notes include the certificate

    of deposit and the bond

    Certificate of deposit an instrument issued by a bank reciting a deposit of a certain sum of money, payable

    either at a fixed time or on demand, to the depositor

    named therein.

    Bond an evidence of indebtedness issued by a corporation, public or private, payable at a definite date

    in the future, usually for a long term; a written promise

    of the corporation to pay a definite sum of money on the

    day named

    b. bill of exchange an order made by one person to another to pay money to a third person

    P500.00 October 6, 1979

    Thirty days after date, pay to Carolina Infante or order

    the sum of Five Hundred Pesos (P500.00), Philippine

    currency. Value received.

    (Sgd.) Vicente Canlas

    To: Ferdinand Marcos

    249 Dart, Manila

    Check most commonly used form of bill of exchange, wherein the one who issues it orders his bank to pay the

    person named on the check. A check is always payable

    on demand

    Draft a form of bill of exchange used mainly in transactions between physically remote from each other.

    It is an order made by one person, say the buyer of the

    goods, addressed to a person having in his possession

    funds of such buyer, ordering the addressee to pay the

    purchase price to the seller of the goods

    Bank draft order is made by one bank to another bank

    2. parties and the nature of their liability

    a. promissory note

    2 Parties:

    Maker promissor Payee the person to whom the promise to pay is made

    b. bill of exchange

    3 Parties: Drawer person who gives the order to pay the bill Drawee addressee of the order Payee the person whom the payment is to be made

    When a negotiable instrument is negotiated or indorsed,

    the person so doing is called an indorser. The person to

    whom he negotiates it is the indorsee, who, by such

    negotiation, becomes the holder of the instrument.

    As to the nature of their liability, the parties to a

    negotiable instrument are either primarily or secondarily liable.

    Primary party is the one who is absolutely and unconditionally required to pay the instrument when it

    falls due; e.g. maker of a promissory note, in a bill of

    exchange, there is no person primarily liable to pay until

    and unless the drawee accepts the order of the drawer to

    pay. Before he accepts, such drawee is not liable on the

    instrument and he cannot be compelled by the holder to

    accept or pay it. But if and when the drawee accepts, he

    becomes an acceptor who is absolutely bound to pay on

    the date specified on the bill

    Secondary party held responsible should the primary parties fail to pay; e.g. drawer of the bill of exchange,

    indorsers of either bill or note. Liability is conditioned

    on 2 factors (1) that demand or presentment be duly

    made on the primary party, and (2) should the said party

    dishonor (i.e. fail to pay or accept) such instrument, that

    a notice of such dishonor be given to the secondary party

    sought to be charged

    An indorser by indorsing the bill or note impliedly enters into 2 contracts: (1) he is selling or transferring the

    instrument to the indorsee, thus assuming responsibilities

    similar to that of a seller or transferor of personal

    property; and (2) he warrants that he will pay the

    instrument when the 2 conditions for his liability have

    been fulfilled. The holder can hold any indorser liable

    should the maker or acceptor fail to pay, provided these 2

    conditions are complied

    3. functions of negotiable instruments

    - function 1: as a substitute for money in payment for property or services

  • Notes on Campos Negotiable Instruments Law

    C c,) L L E E N 2

    - function 2: as a means of creating and transferring credit

    - function 3: to facilitate the sale of goods

    Although negotiable instruments do not constitute legal

    tender, they often take the place of money as a means of

    payment (it is more convenient means of paying bills as

    well as of keeping records of such payments)

    Examples for the 3 functions:

    - function 1: as a substitute for money in payment

    for property or services

    Under Article 1249 CC, the delivery of promissory notes payable to order or bills of exchange and other

    mercantile documents shall produce the effect of

    payment only when they have been cashed or when

    through the fault of the creditor they have been impaired.

    In the meantime the action derived from the original

    obligation shall be held in abeyance. Thus, negotiable instruments validity as a means of payment is conditioned on its being honored by the person bound by

    its terms to pay it. There should be payment versus mere

    acceptance. However, if non-payment is caused by the

    plaintiffs negligence, payment will be deemed to have been effected, and the obligation for which it was given

    as conditional payment will be deemed discharged.

    The tender of check is sufficient to compel redemption of

    foreclosed property since such redemption is not an

    obligation but a right. However, such tender is not in

    itself payment that relieves the redemptioner from his

    liability to pay the redemption price

    - function 2: as a means of creating and transferring credit

    If Mia wants to buy a car on installment basis, the seller

    and Mia may agree that Mia make a down payment and

    sign a promissory note for the balance. The car is

    delivered to Mia and she will be free to use it subject

    only to his obligation to pay the note when it falls due.

    In this case, the promissory note is used as a means of

    creating credit

    - function 3: to facilitate the sale of goods

    The conduct of international trade is facilitated by the

    use of a bill of exchange called a draft. If A in Manila

    wants to import a certain machine from B Co. in San

    Francisco, payment thereof in cash would be highly

    impractical. A may not be personally known to B Co. so

    that his personal check may not be acceptable as

    payment. The usual method of payment in transactions

    like this is by the use of a draft, usually covered by a

    letter of credit.

    4. concept of negotiability

    A person who takes a negotiable instrument can rely on

    its face and need not inquire into past events which gave

    rise to its execution. Any inquiry will require delay in

    commercial transactions where profitability depends

    largely on the briskness with which they are

    consummated. The NIL aims to encourage facility,

    convenience, and efficiency in commercial transactions.

    In the study of law, one has to keep in mind that there are usually two contracts involved whenever a negotiable

    instrument is issued a contract of sale and a contract to pay. As far as the original parties are concerned,

    promise to pay is dependent on the validity of the

    contract of sale. But once the negotiable note is

    negotiated to a third person, it becomes completely

    independent of the sale which gave rise to it. As far as

    the third party is concerned, there is only one contract the promise to pay

    5. the origin of negotiable instruments

    from the merchants and traders of the Middle Ages, more specifically among Florentine and Venetian

    merchants along the Adriatic Sea. The bill of exchange

    was devised to facilitate the contract of cambium and to

    avoid the risks of transporting money

    6. history of the Negotiable Instruments Law

    The NIL is a verbatim reproduction of the Uniform

    Negotiable Instruments Law of the United States,

    approved by the National Conference of Commissioners on Uniform States Laws in 1896. This statute was in

    turn patterned after the English Bill of Exchange Act

    passed by Parliament in 1882, the first codification of the

    law on negotiable paper.

    In this country, the NIL has proved to be one of the most

    stable statutes. Since its enactment in 1911, not a single

    amendment to it has been made. However, in the Unites

    States, an amended NIL has been passed otherwise

    known as the Uniform Commercial Code, which has not

    been adopted by the Philippine Laws.

    7. applicability of the Negotiable Instruments Law

    NIL only applies to negotiable instruments. If the

    instrument is not a negotiable instrument, applicable law

    is the general law on contracts. Section 196 of the NIL

    provides:

    Sec. 196. CASES NOT PROVIDED FOR IN ACT. Any case not provided for in this Act shall be governed

    by the provisions of existing legislation, or in default

    thereof, by the rules of the Law of Merchant

  • Notes on Campos Negotiable Instruments Law

    C c,) L L E E N 3

    The Law Merchant is a system which consists of certain

    principles of equity and usages of trade which general

    convenience a common sense of justice have established,

    to regulate the dealings of merchants and mariners in all

    the commercial countries of the civilized world

    Chapter 1: Requisites of Negotiability

    Sec. 1. FORM OF NEGOTIABLE INSTRUMENTS. An instrument to be negotiable must conform to the

    following requirements:

    1. it must be in writing and signed by the maker or drawer;

    2. must contain an unconditional promise or order to pay a sum certain in money;

    3. must be payable on demand, or at a fixed or determinable future time;

    4. must be payable to order or to bearer; and 5. where the instrument is addressed to a drawee,

    he must be named or otherwise indicated therein

    with reasonable certainty

    Sec. 184. PROMISSORY NOTE DEFINED. A negotiable promissory note within the meaning of this

    Act 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. Where a note

    is drawn to the makers own order, it is not complete until indorsed by him.

    Sec. 126. BILL OF EXCHANGE DEFINED. A bill of exchange is an unconditional order in writing addressed

    by one person to another, signed by the person giving it,

    requiring the person to whom it is addressed to pay on

    demand or at a fixed or determinable future time a sum

    certain in money to order or to bearer.

    Section 1 gives a definition of a negotiable instrument. Any instrument which has the requisites enumerated

    therein is negotiable and is governed by the NIL. All

    other instruments are non-negotiable

    The fact that an instrument does not meet the foregoing

    requisites will not affect its validity, the only

    consequence being that it will be governed not by the

    NIL but by the general law on contracts

    1. written form and signature

    Sec. 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 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.

    Sec. 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

    In writing includes print and it includes not only what is written with pen or pencil, but also what is typed.

    The signature is binding whether it is in ones handwriting, or printed, engraved, lithographed or

    photographed, so long as it is intended or adopted as the

    signature of the signer or made with his authority. Though the signature of the maker or drawer usually

    appears at the lower right hand corner, it may appear on

    any part of the instrument. It will be valid and binding as

    long as the intention to make the instrument the makers or drawers is shown. However, if the signature is so placed upon the instrument that it is not clear in what

    capacity the person intended to sign, he is deemed an

    indorser, and not a maker or drawer.

    2. unconditional order or promise to pay The instrument must contain a promise or an order to

    pay. Mere acknowledgement of a debt does not

    constitute a promise. However, the word promise is not absolutely necessary. Any expression equivalent to a

    promise is sufficient, i.e. on demand

    In a bill of exchange, words equivalent to an order are

    sufficient. An order is a command or imperative

    direction. A mere request or authority to pay does not

    constitute an order. The instrument is by its nature

    demanding a right. However, although the use of polite

    words like please does not of itself deprive the instrument of its characteristics as an order, its language

    must clearly indicate a demand upon the drawee to pay

    a. when unconditional

    Sec. 3. WHEN PROMISE IS UNCONDITIONAL An unqualified order or promise to pay is unconditional

    within the meaning of this Act though coupled with 1. 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

    2. 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

    An unconditional promise or order greatly enhances its

    ability to pass freely from one person to another

    e.g. of a conditional promise (not negotiable) I promise to pay Andoy or order the sum of P100 if he

    passes the board

  • Notes on Campos Negotiable Instruments Law

    C c,) L L E E N 4

    e.g. of promise to pay out of a particular fund (not

    negotiable) I promise to pay Andoy or order the sum of P100 out of the rent which may be collected from my

    house in Baguio or a Government Treasury warrant which on its face bears the words payable from the appropriation for food administration

    e.g. of promise with an indication of a particular fund out

    of which reimbursement is to be made, or a particular

    account to be debited with the amount (negotiable) Pay to the order of Andoy the sum of P100. Reimburse yourself from the rentals of my house, or xxx debit the same to my account

    e.g. of promise with a statement of the transaction which

    gives rise to the instrument (negotiable) - Pay to the order of Andoy the sum of P100. This note is given in

    payment of the purchase price of a car this day sold and

    delivered to Lori and accepted by Inna in full compliance

    with the contract, or as per contract

    The fact that the condition has been fulfilled will not convert it into a negotiable one

    3. sum payable must be certain

    Sec. 2. CERTAINTY AS TO SUM; WHAT

    CONSTITUTES. The sum payable is a sum certain within the meaning of this Act, although it is to be paid

    1. with interest; or 2. by stated installments; or 3. by stated installments with a provision that upon

    default in payment of any installment or of

    interest, the whole shall become due; or

    4. with exchange, whether at a fixed rate or at the current rate; or

    5. with costs of collection or an attorneys fee, in case payment shall not be made at maturity

    Amount payable must be certain. Thus, P500 or what may be due on my deposit book does not express a sum certain

    An agreement to pay interest does not however render

    the sum uncertain. The exact amount can be computed

    without looking beyond the instrument

    Acceleration or deceleration clause does not render an

    instrument non-negotiable, since it is entirely without

    force until either the maturity or its payment before

    maturity

    If payable in installments, it has to be stated, i.e., the amount of each installment and its due date are fixed in

    the instrument

    An instrument expressed in a foreign currency may

    contain a provision that the same is payable in Philippine

    currency at a fixed rate of exchange or at the rate current

    at the time payment is made. This provision does not

    affect the negotiability of the instrument

    A provision in an instrument for attorneys fees, but leaving the amount thereof blank, amounts to a promise

    to pay a reasonable sum as attorneys fees, and does not make the instrument non-negotiable. Such amount may

    be fixed by the court.

    4. payable in money

    Instrument must be capable of being transformed into

    money if the holder so wishes. Thus, an instrument is

    not negotiable if payable in personal property. Money as used in the law is not necessarily limited to legal tender as defined by law but includes any particular kind of current money. However, if a contract contains a

    stipulation that payment is to be made in a currency other

    than Philippine currency, such stipulation will be

    ineffective and the obligation can be discharged only in

    legal tender. But the negotiability of the instrument will not be affected by said stipulation

    An instrument which contains an order or promise to do

    an act in addition to the payment of money is not

    negotiable (for simplicity in form). Thus a note agreeing

    to pay taxes assessed upon the note or its mortgage

    security is not negotiable.

    But if the order or promise gives the holder an election to

    require something to be done in lieu of payment of

    money, an instrument otherwise negotiable will not be

    affected thereby.

    But if the option to pay money or something in lieu

    thereof is with the maker or the person primarily liable,

    the instrument is not negotiable.

    5. certainty of time of payment

    Instrument must be payable (1) on demand, or (2) at a

    fixed time, or (3) at a determinable future time. This

    requirement as to certainty of time of payment is for the

    purpose of informing the holder of the instrument of the date when he may enforce payment thereof.

    a. when payable on demand

    Sec. 7. WHEN PAYABLE ON DEMAND. An instrument is payable on demand

    1. where it is expressed to be payable on demand, or at sight, or on presentation; or

    2. 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

  • Notes on Campos Negotiable Instruments Law

    C c,) L L E E N 5

    Example:

    I promise to pay Andoy or order the sum of P100 at sight

    I promise to pay Andoy or order the sum of P100

    In both cases, the holder may demand payment at any

    time. On the other hand, it has been held that in a

    demand note, the maker likewise has an option to pay at

    any time, and the refusal of the holder to accept payment will terminate the running of interest, if any is provided

    in the note. However, the obligation to pay the note

    maintains.

    b. payable at a fixed time

    Example:

    I promise to pay Andoy or order the sum of P100 on December 24, 2008 Only on the said date December 24, 2008 and not before, may the holder demand payment, the instrument

    becomes overdue remains valid and negotiable. It is

    merely converted to a demand instrument

    c. payable at a future determinable time

    Sec. 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 1. at a fixed period after date or sight; or 2. on or before a fixed or determinable future time

    specified therein; or

    3. 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

    Sec. 11. DATE, PRESUMPTION AS TO. Where the instrument of 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.

    Sec. 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:

    xxx

    3. where the instrument is not dated, it will be considered to be dated as of the time it was

    issued

    Examples under Section 4:

    e.g. 1 - I promise to pay Andoy or order the sum of P100 thirty days after date

    e.g. 2 - I promise to pay Andoy or order the sum of P100on or before December 24, 2008

    e.g. 3 - I promise to pay Andoy or order the sum of P100sixty days after the death of Adoring

    d. effect of acceleration provisions

    Where the option to accelerate the maturity of the

    instrument is on the maker, the negotiability of the

    instrument is not affected, whether such option is

    absolute or conditional. This is the situation covered by

    Sec 4(b) when it allows a negotiable instrument to be

    payable on or before a fixed date. The maker may pay earlier than the date fixed but this option, if exercised,

    would be payment in advance of a legal liability to pay.

    Where the acceleration is at the option of the holder,

    whether such acceleration provision renders the

    instrument non-negotiable depends on the nature of the

    provision. If the option can be exercised by the holder

    only upon the happening of a specified event or act over

    which he has no control, then the negotiable character of

    the instrument is not affected by the option to accelerate.

    But where the holders right to exercise the option is unconditional, the time of payment is rendered uncertain

    and the instrument would not be negotiable.

    However, the option given to the holder to accelerate the maturity of an installment note upon failure of the maker

    to pay any installment when due does not affect the

    negotiability of the instrument. This provision is in fact

    expressly allowed by Sec 2(c) of the law. The rule

    would be the same where the acceleration is automatic

    upon such default. Where the acceleration takes place

    upon the failure of the maker to deposit additional

    collateral security to make good a depreciation in value

    of the original security, the majority view is that such a

    provision does not destroy the negotiability

    Acceleration of the maturity of the instrument by

    operation of law does not affect its negotiability. Should

    the maker die before the maturity, for instance, the due

    date is disregarded because the holder should file his

    claim against the makers estate. A similar situation obtains where the maker is declared an insolvent and the

    holder proves his claims in the insolvency proceedings

    e. provisions extending time of payment

    Instead of acceleration provision, the instrument may contain a provision allowing extension of payment. An

  • Notes on Campos Negotiable Instruments Law

    C c,) L L E E N 6

    instrument is negotiable if the extension is exercised by

    both maker and holder. However, where a note with a

    fixed maturity provides that the maker has the option to

    extend the payment until the happening of the

    contingency, the instrument would be non-negotiable

    under the second paragraph of Sec 4. The time for

    payment may never come at all.

    6. must be payable to order or bearer

    The instrument in order to be considered negotiable must contain the so-called words of negotiability i.e., must be payable to order or to bearer. These words serve as an expression of consent that the instrument may be

    transferred.

    A postal money order is not a negotiable instrument. It

    does not contain words of negotiability and although it

    may be indorsed once, such indorsement does not

    convert it into a negotiable instrument because the words

    of negotiability must appear on the face of the instrument

    as part of the original contract. On the other hand, where the words or bearer printed in a check are cancelled by the drawer, the instrument cannot be considered

    negotiable.

    It is important to distinguish a bearer instrument from an

    order instrument because they vary in their effects on the

    rights of the parties. Furthermore, the former may be

    negotiated by mere delivery, while the latters negotiation requires not only delivery but also the

    indorsement of the transferor.

    a. when instrument is payable to order

    Sec. 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

    Illustrations:

    1. Pay to the order of Andoy, or I promise to pay to the order of Andoy

    2. Pay to Andoy or order, or I promise to pay Andoy or order.

    These are the only 2 ways by which an instrument may

    be made payable to order. There must always be a specified name in the instrument. Without the words to order or to the order of, the instrument is payable only to the person designated therein and is therefore non-

    negotiable. Any subsequent purchaser will not enjoy the

    advantages of being a holder of a negotiable instrument,

    but merely step into the shoes of the person designated in the instrument and will thus be open to all defenses

    available against the latter

    b. when instrument is payable to bearer

    Sec. 9. WHEN PAYABLE TO BEARER. The instrument is payable to bearer

    1. when it is expressed to be so payable; or 2. when it is payable to a person named therein or

    bearer; or

    3. 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

    4. when the name of the payee does not purport to be the name of any person; or

    5. when the only or last indorsement is an indorsement in blank

    Illustrations:

    1. I promise to pay to bearer the sum of P100

    If instrument states bearer, Andoy is not negotiable since the word bearer here is used merely to describe Andoy.

    Payable to holder is payable to bearer because the word holder can be said to be equivalent to the word bearer

    2. Pay to Andoy or bearer 3. Payable to Batman/ John Doe or order

    A name is fictitious when it is feigned or pretended

    A note payable to the order of an estate of a person still

    alive at the time of the execution of the note has been

    held to constitute to valid bearer paper, since it is payable

    to a non-existing person.

    A note payable to the order of the estate of an already

    deceased person, although not an order note, is a bearer

    note because the name of the payee does not purport to

    be the name of any person

    That the payee is a fictitious or non-existing person must

    however be known to the maker or drawer. Theory is

    that maker or drawer intended the instrument to be

    transferred by mere delivery.

    If the maker or drawer is not aware that the person he

    named as payee is a fictitious or non-existent, then the

    instrument is not a bearer instrument but an order one.

    Obviously, there is no one who can indorse it, so in

    effect, it cannot be validly negotiated.

    4. Pay to cash or Pay to sundries 5. when the indorsement is an indorsement in

    blank, the instrument becomes payable to bearer

    even if originally payable to the order of a

    specified person

  • Notes on Campos Negotiable Instruments Law

    C c,) L L E E N 7

    A blank indorsement cannot however convert a non-

    negotiable note to a negotiable one

    It should be noted that only instruments under

    paragraphs a and b of Sec 9 are expressly made payable

    to bearer.

    See case: Ang Tek Lian v. CA 87 Phil 383 (1950)

    7. parties must be designated with certainty a. maker and drawer

    The maker or drawer must sign the instrument and his

    signature is usually written at the lower right-hand corner

    thereof. The drawees name is usually written on the lower left-hand corner, although in checks the banks name sometimes appears across the top. The payee and

    the successive indorsees negotiate the instrument by

    signing on the back. However, if it is not clear from the

    instrument in what capacity he signs, ambiguity arises.

    The law solves this by considering such a person as an indorser, and not as a maker or drawer

    b. payee

    Sec. 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 1. a payee who is not maker, drawer, or drawee; or 2. the drawer or maker; or 3. the drawee; or 4. two or more payees jointly; or 5. one or some of several payees; or 6. 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.

    An instrument may be payable to anyone of the

    following as payees:

    (1) it may be drawn payable to the order of the payee who is not a maker, drawer or drawee

    I promise to pay Inna or order the sum of P100.

    (sgd.) Paolo

    The payee, Inna is not the maker

    (2) it may be made payable to the order of the maker or the drawer

    Pay to the order of myself the sum of P100

    (sgd.) Paolo

    To Lori

    Manila

    The payee, Paolo is the drawer. Or a note, thus:

    I promise to pay myself or order the sum of P100

    (sgd.) Paolo

    The payee, Paolo is the maker. However, a note payable

    to the order of the maker is not complete unless indorsed

    by the maker first.

    (3) it may be made payable to the order of the drawee

    Pay to the order of yourself the sum of P100

    (sgd.) Paolo

    To: Lori

    Manila

    The payee, Lori is the drawee and the drawer of the bill,

    Paolo is ordering her to pay herself.

    (4) it may be made payable to 2 or more payees jointly

    Pay to the order of Andoy and Inna the sum of P100

    The payees are 2 and are constituted jointly, not in the

    alternative. Thus, when negotiating the instrument, both

    of them must indorse.

    (5) it may be made payable to one or some of several payees in the alternative. In this case,

    the law does not consider the payee as uncertain

    Pay to the order of Andoy or Inna the sum of P100

    The payees are constituted in the alternative so that only

    one of them may demand payment for the full amount.

  • Notes on Campos Negotiable Instruments Law

    C c,) L L E E N 8

    And only one of them needs to indorse when negotiating

    the instrument. An instrument payable to the order of A

    and/ or B is payable in the alternative and not joint

    payees

    (6) it may be made payable to the holder of an office for the time being

    I promise to pay to the order of the Secretary of X

    Association the sum of P100

    Under this, payee is uncertain. Best interpretation is that

    the payee is the person who happens to be secretary at

    any particular moment thereby making the instrument a floating promise

    Should the name of the payee be misspelled or wrongly

    designated, does the instrument lose its negotiability as

    one wherein the payee is not indicated with reasonable

    certainty?

    Answer: This is impliedly answered in the negative by Sec 43 which provides that where the name of the payee is wrongly designated or misspelled, he may indorse the

    instrument as therein described, adding, if he thinks fit,

    his proper signature. If he may indorse it, then that means that even if his name is misspelled, he can still be

    regarded as having been otherwise indicated with reasonable certainty. Thus, if the payee is designated as Inna Infanti instead of Inna Infante she should indorse

    the instrument by signing Inna Infanti and not Infante but she may add the latter if she wants to

    c. drawee

    Sec. 128. BILL ADDRESSED TO MORE THAN ONE

    DRAWEE. A bill may be addressed to two or more drawees jointly, whether they are partners or not; but not

    to two or more drawees in the alternative or in

    succession

    Sec. 130. WHEN BILL MAY BE TREATED AS A

    PROMISSORY NOTE. Where in a bill the drawer and drawee are the same person, or where the drawee is a

    fictitious person, or person not having the capacity to

    contract, the holder may treat the instrument, at his

    option, either as a bill of exchange or a promissory note.

    Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable

    certainty. Although a bill may be addressed to 2 or more

    drawees jointly, it may not be addressed to 2 or more

    drawees in the alternative or in succession, for otherwise,

    there would be no certainty as the person to whom the

    bill should be presented for payment or acceptance.

    Where the drawer and drawee are the same person, or

    where the drawee is a fictitious person, or a person

    having no capacity to contract, the holder may treat the

    instrument either as a bill or note, because otherwise, no

    one can ever be made primarily liable on the bill. Since

    the drawer is responsible for naming such a drawee, it is

    to be assumed that he intended to be primarily liable

    himself. If the bill names no drawee but is accepted by a

    third party, although the issuer of the bill cannot be held

    as a drawer, the acceptor should be held as a maker. So

    that the instrument in this case is treated as a note instead of a bill

    8. provisions not affecting negotiability

    Sec. 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 1. authorizes the sale of collateral securities in

    case the instrument be not paid at maturity; or 2. authorizes a confession of judgment if the

    instrument be not paid at maturity; or

    3. waives the benefit of any law intended for the advantage or protection of the obligor; or

    4. gives the holder an election to require something to be done in lieu of the payment of

    money

    But nothing in this section shall validate any provision or

    stipulation otherwise illegal.

    The negotiable character of an instrument otherwise

    negotiable is not affected by a provision which

    authorizes the sale of collateral securities in case the instrument be not paid at maturity. Thus, not only may

    the instrument state that the note is secured by the

    pledged or mortgaged property, but also that the

    collateral may be sold for discharging the debt evidenced

    by the instrument, thus discharging the instrument itself.

    An authorization, however, which empowers the holder

    to sell the collateral before the maturity of the note

    renders it non-negotiable, because it would in effect

    grant the holder an option to accelerate the maturity of

    the instrument, thus rendering the time of payment uncertain.

    A clause in the instrument which waives the rights of

    secondary parties to have the instrument duly presented

    for payment, and their right to due notice of dishonor and

    of protest is required, does not destroy its negotiability.

    Likewise, the fact that an instrument bears a seal or

    designates a particular kind of current money in which

    payment is to be made, does not affect its negotiable

    character.

  • Notes on Campos Negotiable Instruments Law

    C c,) L L E E N 9

    See case: PNB v. Manila Oil Refining & By-Products

    Company, Inc. 43 Phil 445 (1922)

    The practice of entering judgments in debt on warrants of

    attorney is of ancient origin. In the course of time a

    warrant of attorney to confess judgment became a

    familiar common law security. At common law, there

    were two kinds of judgments by confession; the one a

    judgment by cognovit actionem, and the other by

    confession relicta verificatione. In the absence of

    statute, there is a conflict of authority as to the validity of a warrant of attorney for the confession of judgment.

    The weight of opinion is that, unless authorized by

    statute, warrants of attorney to confess judgment are

    void, as against public policy

    cognovit actionem a defendants written confession of action against him; impliedly authorizes plaintiffs attorney to sign judgment and issue execution

    relicta verificatione a confession of judgment made after plea pleaded; viz., a cognovit actionem accompanied by a withdrawal of the plea

    9. omissions not affecting negotiability

    Sec. 6. OMISSIONS; SEAL; PARTICULAR MONEY.

    The validity and negotiable character of an instrument are not affected by the fact that

    1. it is not dated; or 2. does not specify the value given, or that any

    value has been given therefore; or

    3. does not specify the place where it is drawn or the place where it is payable; or

    4. bears a seal; or 5. 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

    The seal is considered to be part of a, say a corporations signature.

    The validity and negotiable character of an instrument

    are not affected by the fact that it is not dated. If date is

    necessary to fix the maturity of the instrument, the law fills in the gap and considers date of issue as the date of

    the instrument, and allows any holder to insert the true

    date

    It is not necessary to express in a negotiable bill or note

    that the value was received, because the instrument was

    presumed to have been issued for a valuable

    consideration

    Place is important but not essential. If no place is

    mentioned, the law again fills in the gap by providing

    that presentment should be made at the address of the

    person who is to pay, if such address is stated; if not, at

    the place of business or residence of the person to make

    payment.

    10. rules of construction

    Sec. 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:

    1. 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;

    2. 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 instruments

    is undated, from the issue thereof;

    3. where the instrument is not dated, it will be considered to be dated as of the time it was

    issued;

    4. where there is a conflict between the written and printed provisions of the instrument, the written

    provisions prevail;

    5. 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;

    6. 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 deemed as indorser; 7. where an instrument containing the words I

    promise to pay is signed by two or more persons, they are deemed to be jointly and

    severally liable thereon

    Figure $1200 versus written words twelve dollars note is valid up to $12 only as written words are

    controlling over the figure

    But in case the words are so ambiguous or uncertain,

    reference to the figures is made to determine the true

    amount. Thus, if the check bears the figures $365 and the amount is written as three sixty five dollars, the marginal figures will control

    Typewritten phrase 7 percent from date a circle was drawn around the figure 7 with pen and ink and above it

    the figure 8 was made with pen and ink the court held that there is no uncertainty of the interest and that the

    instrument is negotiable and that the written rate (8%)

    prevails

  • Notes on Campos Negotiable Instruments Law

    C c,) L L E E N 10

    An instrument which begins with I promise to pay but which contains the name of the drawee creates a doubt as

    to whether it is meant to be a note or bill and may this be

    treated by the holder as either. The drawer may be held

    liable as a maker of a note, should the holder choose

    I promise to pay, and I, we, or either of us, promise to pay, when signed by two persons make them solidarity liable

    We promise to pay, signed by two persons make them jointly liable

    Where a person places his signature on the instrument in

    such a manner that his capacity is not clear, he is deemed

    to be an indorser, and not a maker, drawer, or acceptor,

    nor a mere assignor. He therefore assumes all the

    liabilities imposed by Sec 66 on a general indorser.

    Chapter 2: Transfer

    1. delivery and issuance

    Sec. 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

    Delivery of the instrument means transfer of possession,

    actual or constructive, from one person to another.

    Delivery may be accomplished by manual transfer of

    possession or by any other act manifesting intent to

    transfer right of possession. Without the initial delivery

    of the instrument from the maker to the payee, there can

    be no liability on said instrument. Moreover, such

    delivery must be intended to give effect to the instrument. Once the instrument is no longer in the

    possession of the person who has signed it, a valid

    delivery by him is presumed, until the contrary is proved,

    and as to the holder in due course, the presumption is

    conclusive, provided the instrument is complete

    The first delivery of the instrument complete in form, to

    a person who takes it as a holder, is called the issue or

    issuance of the instrument.

    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

    Sec. 191. DEFINITIONS AND MEANINGS OF

    TERMS. . . . . . . . . . . . . . . . . . . . . .

    bearer means the person in possession of a bill or note which is payable to bearer;

    holder means the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof;

    . . . . . . . . . . . . . . . . . . . . .

    A negotiation is a transfer of a negotiable instrument

    made in such manner that the transferee becomes a

    holder and possible a holder in due course capable of

    acquiring a better title to the instrument than that of his transferor. Where an instrument is payable to order, the

    payee or indorsee in possession of it is the holder. If it is

    payable to bearer, the person in possession of it is the

    bearer as well as the holder of the instrument

    Transfer is a broader term than negotiation. If an

    instrument is transferred without negotiation, the transfer

    is a mere assignment which constitutes the transferee as a

    mere assignee, not a holder, subject to all defenses

    existing among prior parties. Transfer includes both an

    ordinary assignment and a negotiation

    A negotiation may be for value as in a sale, or by way of

    gift. In either case, there will be a valid transfer.

    However, the rights acquired by the transferee in each

    case may be different

    3. methods of negotiation

    An instrument payable to order requires for its

    negotiation, first, an indorsement by the payee or present

    holder, and second, its delivery to the transferee or

    indorsee, who now becomes the holder. An indorsement consists of the signature of the indorser usually on the

    back of the instrument. An indorsement has a double

    significance: it constitutes a transfer or sale of the

    instrument to the indorsee or transferee, and it signifies

    the agreement of the indorser to answer for the amount

    represented by the instrument in case of default of the

    maker or the party primarily liable

    An instrument payable to bearer can be negotiated by

    mere delivery. It is a common practice, however, to

    indorse a bearer instrument whenever it is transferred. It does not impair the negotiation but serves as an

    additional security to the transferee, since he can hold the

    indorser liable as such i.e., not only on his warranty that he will pay in case of default of the primary party.

    One who negotiates by delivery, although he assumes the

    liabilities of a seller or transferor of the note or bill, does

    not warrant that he will pay in case the primary party

    fails to pay.

    A transfer of a negotiable instrument is effected

    otherwise than by negotiation when an order instrument

  • Notes on Campos Negotiable Instruments Law

    C c,) L L E E N 11

    is delivered by the payee or special indorsee without his

    indorsement or where the indorsement is not made

    properly as required by law. In this case, the transfer is

    an ordinary assignment of the transferors rights and places the assignee in the place of the assignor, subject to

    the defenses which may be existing between the prior

    parties

    4. how indorsement made a. by signature on instrument or on

    allonge

    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

    The question as to when the indorsement on a separate

    paper called an allonge, may be valid, has given rise to

    much conflict. Although the law makes no distinction,

    the prevailing view follows the common law rule that an

    allonge can be validly used only when there is no longer

    any room on the instrument for further indorsements. He will be subject to defenses such as failure of

    consideration. A contrary rule would open the door to

    fraud

    Note that the law requires the allonge to be attached to

    the instrument. The Uniform Commercial Code is more

    specific and requires that the paper be so firmly attached affixed thereto as to become a part thereof

    b. in case of joint payees

    Where the instrument is payable or indorsed to A and B, they are joint payees and an indorsement by either A or B will not constitute a valid negotiation so as to free

    the instrument from defenses, unless one indorsing is

    authorized by the other. But where the instrument is

    payable to A or B, the payees are merely in the alternative, and either one may validly negotiate the

    same

    c. if name misspelled

    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

    Under the above provision, the indorsement should be

    made by the holder in the manner he was designated,

    otherwise the signature will prima facie not be a valid

    indorsement of the instrument. After such indorsement,

    he may sign his correct name.

    5. indorsement must be of entire instrument

    Sec. 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

    The purpose of this provision is to protect the obligors for more than one action on the instrument. The maker

    and all the prior parties, in assuming liability, took the

    risk of only one cause of action against them.

    Example: If a bill for P100 is indorsed by the payee to A

    for P50 and to B for P50, there is no valid negotiation

    since it purports to transfer the instrument to two or more

    persons severally. Neither of them can be considered a

    holder. At most they are mere assignees, and even so,

    neither of them can sue on the instrument without

    bringing in the other as a party to the action. Neither may an indorsement of the instrument to only one person

    for P50 be valid, for then it would only be partial

    transfer.

    However, where the payees or indorsees are joint, i.e.,

    Pay to A and B the negotiation is valid. In such a case, the instrument is indorsed in its entirety to both A and B,

    who can negotiate the instrument only by both their

    indorsements.

    The provision does not cover a situation where part of

    the amount of the instrument has been paid, in which case, it may be negotiated for the balance. Thus, in a

    note payable by installments, where some installments

    have been paid, the instrument may still be negotiated for

    the remaining unpaid installments

    Neither does the provision prohibit a transaction where

    the indorsee pays the indorser less than the face amount

    of the instrument, title transferring to the indorsee. This

    is what is called a discount of the instrument. The discount is given in consideration of the period during

    which the purchaser has to wait before he can cash the instrument with the maker or acceptor, which can be

    done only at the maturity of the instrument

    When an indorsement does not comply with Sec 32, the

    transfer is not necessarily void. It remains valid, not as a

    negotiation, but as a mere assignment which subjects the

    holder to all defenses on the instrument

  • Notes on Campos Negotiable Instruments Law

    C c,) L L E E N 12

    6. kinds of indorsements

    Sec. 33. KINDS OF INDORSEMENTS. An indorsement may be either special or in blank; and it may

    also be either restrictive or qualified or conditional

    a. basis of classification

    Although the signature of the indorser is sufficient to

    constitute an indorsement, additional words may be

    added which may modify the rights of subsequent

    holders or the liabilities of the indorser

    Blank indorsement Where only the signature of the indorser appears

    Classification Purpose

    Blank or Special For future method of negotiation,

    whether by indorsement and

    delivery or by delivery alone

    Restrictive or Non-

    restrictive

    For the kind of title transferred

    Qualified or

    unqualified

    Lies in the scope of liability

    assumed by the indorser

    Conditional or

    Unconditional

    For the presence or absence of

    express limitations put by the

    indorser upon the primary

    obligors privileges of paying the holder

    b. special and blank indorsements

    Sec. 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

    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.

    Sec. 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

    2 forms of special indorsement: Pay X or Pay X or order, followed by the signature of the indorser. An indorsement need not contain words of negotiability as

    long as these appear on the face of the instrument.

    Suppose that an instrument is on its face payable to

    bearer and it is specially indorsed thus: Pay to X (sgd) Y, is Xs signature necessary for the future negotiation of the instrument? Sec 34 taken alone would seem to

    answer this query in the affirmative. Sec 40 however

    offers the opposite result. This apparent conflict can be

    settled by applying Sec 40 only to original bearer

    instruments

    Illustration:

    A-------------------bearer B

    (no indorsement by B)

    C

    Pay to D

    (sgd.) C

    Pay to E

    (sgd.) D

    (no indorsement by E)

    F

    A person who negotiates it by mere delivery is liable

    only to his immediate transferee. A special indorser

    however is liable to subsequent holders, unless the

    instrument is an originally bearer instrument, in which

    case he is liable only to those who takes title through his

    indorsement

    Applying these principles in the illustration:

    B is liable only to C and not to D, E, and F.

    C and D, the special indorsers, are not liable to F who does not take title through their

    indorsements.

    C is however liable to both D and E because they take title through his indorsement.

    D is liable only to E, since E is the only one who take title through his indorsement

    E is of course liable to F

    An indorsement in blank specifies no indorsee, and an

    instrument so indorsed is payable to bearer, and may be

    negotiated by delivery. Thus, where only the signature

    of the indorser appears, with no indication of the person to whom it is payable it is a blank indorsement, and the

    further negotiation of such an instrument may be effected

    by mere delivery regardless of whether the instrument is

    on its face payable to bearer or not. A blank indorsement

    is not as safe as a special indorsement. Being negotiable

    by mere delivery, a thief or finder thereof can give good

    title to a holder in due course

    A blank indorsement may be converted into a special

    indorsement by writing over the signature of the indorser

    in blank any contract consistent with the character of the

  • Notes on Campos Negotiable Instruments Law

    C c,) L L E E N 13

    indorsement. Thus, the holder may write his name above

    the signature of the indorser in blank, thus converting the

    indorsement into a special one, rendering it negotiable by

    indorsement and delivery, unless it is upon an originally

    bearer instrument

    If a blank indorsement is followed by a special

    indorsement and the instrument is one which is payable

    to order on its face, the special indorsement controls,

    since under Sec 34 its further negotiation may be

    effected only by indorsement of the special indorsee. And as previously stated, Sec 40 will not apply,

    otherwise inconsistency between the two provisions will

    result. Furthermore, under Sec 9(e) it is no longer a

    bearer instrument because the last indorsement is not a

    blank indorsement.

    In short, an instrument payable to order on its face may

    be converted into a bearer instrument by means of a

    blank indorsement, and may later be reconverted into an

    order instrument by a subsequent special indorsement,

    the last indorsement always controlling the means of further negotiation.

    On the other hand, and instrument payable to bearer on

    its face always remain a bearer instrument, i.e., may be

    further negotiated by delivery alone, whether the last

    indorsement is a blank or special one. An indorsement

    of a bearer instrument does not convert it to an

    instrument payable to order.

    c. qualified indorsements

    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 indorsers signature the words without recourse or any words of similar import. Such an indorsement does

    not impair the negotiable character of the instrument.

    An indorser by his indorsement impliedly enters into two

    contracts: (1) a contract of sale or assignment of the

    instrument, and (2) a contract to pay the instrument if the

    maker is unable to pay on maturity. If he wants to

    relieve himself of either contract he must do so in clear

    and express terms. By adding the words without recourse above his signature, he expressly rids himself of the second implied contract. Words of similar import

    would include sans recourse, or at indorsees own risk.

    A qualified indorser becomes a mere assignor of the title

    of the instrument. But a qualified indorsement does not

    affect the negotiability of the instrument. The transfer

    would still be a negotiation and the transferee would still

    be a holder capable of acquiring a title free from

    defenses of prior parties.. the only effect of the qualified

    indorsement is to relieve the qualified indorser of his

    liability to pay the instrument should the maker be

    unable to pay at maturity. He does not guarantee the

    solvency of the maker, but merely his legal title to the

    instrument.

    In the absence of clear and unmistakable language

    qualifying liability, an indorser will be liable on both his

    contracts. His liability cannot be limited by implication.

    Thus, words expressing assignment of title to the

    instrument cannot by implication exclude his second

    contract. Similarly, words guaranteeing the makers payment on maturity will not impliedly exclude the

    contract of sale or assignment

    d. conditional indorsement

    An indorser is liable to pay the instrument on two

    conditions: that due demand or presentment be made on

    the party primarily liable on the date of maturity, and that

    the latter fails to pay or, such presentment, a notice of

    dishonor be promptly sent to the indorser. Implied in all

    indorsements.

    A conditional indorsement is one where an additional

    condition is annexed to the indorsers liability. Necessarily, the condition must be express. Such an

    indorsement does not affect the negotiability of the

    instrument because the original promise or order remains

    unconditional. It is only the liability of the particular

    indorser which is conditional. But all holders subsequent

    to the conditional indorsement take subject to the

    condition

    Sec. 39. CONDITIONAL INDORSEMENT. Where an indorsement is conditional, a party required to pay the instrument may disregard the condition, and make

    payment to the indorsee or his transferee, whether the

    condition has been fulfilled or not. But any person to

    whom an instrument so indorsed is negotiated, will hold

    the same, or the proceeds thereof, subject to the rights of

    the person indorsing conditionally.

    If an instrument on its face payable on December 1,

    1995, is indorsed by the payee to A if he marries before he is 25, there is a valid but conditional indorsement. Should A not fulfill the condition, he or any holder after

    him cannot compel the maker to pay him on that date. However, the maker, if he chooses, may disregard the

    condition and pay the holder. Should he pay, A or the

    holder who received payment will hold the money

    subject to the rights of the conditional indorser.

    Thus, if A does not marry before hes 25, then A will have to deliver the money to the conditional indorser. If

    A should fail to deliver, the latter would have no right of

    action against the maker who paid before the fulfillment

    of the condition, because the maker is expressly

  • Notes on Campos Negotiable Instruments Law

    C c,) L L E E N 14

    authorized to do so under Sec 39. His payment

    discharged him from liability on the instrument

    e. restrictive indorsement

    Sec. 36. WHEN INDORSEMENT RESTRICTIVE. An indorsement is restrictive, which either:

    1. prohibits the further negotiation of the instrument; or

    2. constitutes the indorsee the agent of the indorser; or

    3. vests the title in the indorsee in trust for or to the use of some other person

    But the mere absence of words implying power to

    negotiate does not make an indorsement restrictive

    Sec. 37. EFFECT OF RESTRICTIVE INDORSEMENT;

    RIGHTS OF INDORSEE. A restrictive indorsement confers upon the indorsee the right:

    1. to receive payment of the instrument; 2. to bring any action thereon that the indorser

    could bring;

    3. 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

    A restrictive indorsement either restricts the right of the

    indorsee to further negotiate the instrument or reserves

    beneficial interest therein in the indorser or in the third

    person. In the latter case, although the instrument may

    be further negotiated, all subsequent indorsees take

    subject to the rights of the restrictive indorser or the third

    person, as the case may be.

    Illustration of the 3 cases:

    (1) Pay to X only. This prohibits entirely the further negotiation of the instrument. Full title however passes to X who can receive payment

    of the instrument and bring any action thereon

    which the indorser could bring

    Pay to X without any words, is not a restrictive indorsement

    (2) Pay to X for collection constitutes the indorsee an agent to collect in behalf of the

    indorser. X may receive payment on the

    instrument and may sue thereon in his own name. Such indorsement does not pass title, nor

    deprive the maker of any defense he may have

    otherwise on the note. The restrictive indorsee

    may negotiate. However, no subsequent holder

    can acquire any right in the instrument

    antagonistic to the right of the first restrictive

    indorser for subsequent indorsees acquire only the title of the first indorsee under a restrictive

    indorsement. They merely become sub-agents

    to collect. Other forms of this kind of restrictive

    indorsement are: Pay to X for my use, or Pay X for my account.

    (3) Pay to X for Ys use is a restrictive indorsement which vests the title of the indorsee

    in trust for or to the use of some other person.

    X may receive payment on the instrument and

    may sue thereon but whatever he collects he

    holds in trust or for the use of Y. He may also

    further negotiate the instrument but subsequent holders cannot acquire rights which will defeat

    the rights of Y.

    7. indorsement to or by collecting agent

    A holder of a check may either cash it with the drawee

    bank, or may deposit to his credit wether in the drawee

    bank or in another bank. Should he cash or deposit it

    with the drawee bank, then payment or credit to him by

    the latter would discharge the instrument and terminate

    all rights and liabilities of the parties thereto. Where the holder deposits the check with a bank other than the

    drawee bank, he would in effect be negotiating the check

    to such bank, since he would have to indorse the check

    before the bank will accept it for deposit.

    If the indorsement is for collection, we have seen that this is a restrictive indorsement where the bank is merely

    an agent for collection. If the indorsement states for deposit, what is in effect on the indorsers relationship with the bank? There has been much controversy about

    this matter. Some courts have held this to be a restrictive

    indorsement because it merely makes the bank an agent to collect the funds and credit them as deposit to the

    customers account from the moment of collection. Other courts have considered the indorsement as non-

    restrictive, treating the transaction as a purchase of the

    check by the bank in cash and a deposit of such cash to

    the credit of the depositor.

    In most cases, whatever kind of indorsement is made by

    the holder, the bank is in fact a collecting agent. As a

    rule, the indorsement made by the depositor of a check

    would be in blank, just his signature without any other words, thus no restrictions whatsoever. However, the

    deposit slip which the depositor fills up in making the

    deposit will usually state that the bank is a mere

    collecting agent, thus its effect on a for deposit indorsement would be the same.

    In forwarding negotiable instruments for collection,

    banks customarily use the indorsement Prior indorsements and/ or lack of indorsements guaranteed. According to one view, this type of indorsement is non-

    restrictive and does not prevent the holder from

    acquiring an unlimited title. But if in a deposit slip filled up by the holder, a provision similar to the one quoted

  • Notes on Campos Negotiable Instruments Law

    C c,) L L E E N 15

    above appears, the bank would still be only a collecting

    agent. However, with respect to the drawee bank to

    which it has forwarded the check for payment, it has

    guaranteed the validity of all prior indorsements as well

    as the lack of any necessary indorsement. Thus, if the

    collecting bank received the check from a forger, it has

    to return to the drawee bank whatever collected from the

    latter.

    In some cases, the words For Payees account only are written on the left-hand corner of the face of the check. This means that the check should be deposited in a bank

    in which the payee has an account. The payee will have

    to indorse the check, and although his indorsement may

    not necessarily state that it is for collection, again, here,

    the bank would in effect be a mere collecting agent.

    8. negotiation by joint or alternative payees or indorsees

    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 for the others

    Under Sec 8(d), an instrument is negotiable which is

    payable to the order of two or more payees jointly. Under Sec 8(e), an instrument is negotiable which is

    payable to the order of one or some several payees.

    If an instrument is payable to the order of A and B, either

    as payees or indorsees, both must indorse in order for the

    transaction to operate as a negotiation. A and B will then

    be jointly and severally liable and action will lie against

    any of them individually. If only one of them indorses, his indorsee can have no right of action on the instrument

    because this would be violating the rule against splitting

    of actions

    Under Sec 41, if the joint payees or joint indorsees are

    partners, then the indorsement by one of the partners of

    his own name and that of his partner, who is a co-payee

    or joint indorsee with him, may constitute an

    indorsement by each of them, and thus effect a valid

    negotiation. Unlike common law concept, our civil law

    concept of partnership as a juridical person which has personality distinct and separate from the partners

    composing it. Thus, if an instrument is intended to be

    negotiated to A and B as partners doing business under

    the firm name Manila Book Co., then the indorsement must name such firm and not A and B as joint payees or

    indorsees. Otherwise, if the latter is done, then the

    proceeds belong to A and B and not to the partnership,

    and any further negotiation, must be signed by both A

    and B, even if they are partners, unless of course one

    authorizes the other to sign for him. But if indorsement

    is made as it should be, i.e., Pay to Manila Book Co.,

    then should the instrument be further negotiated, it

    should be indorsed in the following manner:

    Pay to X Manila Book Co.

    By A

    assuming that A has implied or express authority to sign

    for the partnership

    if one of several joint payees or joint indorsees indorses his own name and, without authority from his co-obligee,

    indorses the latters name and delivers the instrument to a purchaser, such transaction does not constitute a

    negotiation of the instrument. But it has been held that

    one of two joint payees, by indorsement and delivery of

    the instrument to his co-payee, may transfer full title to

    the latter.

    Where the instrument is payable to the alternative

    payees, i.e., A or B, either one in possession of the instrument is the holder. The ultimate ownership of the fund as between the parties is not controlled by the form

    of the indorsement

    9. unindorsed instruments

    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

    If his predecessor had legal title, the transferee of

    unendorsed instrument acquires as such, subject however

    to the defenses and equities available among prior

    parties. This, he has the right to sue in his own name,

    but he cannot be considered a holder of the instrument since he is neither a payee nor indorsee, nor is he a

    bearer because the instrument is not payable to bearer. Presumption of ownership does not vest, hence, he has to

    prove that he is the owner of the instrument as a condition precedent to his right to introduce the

    instrument in evidence to recover thereon. It is an

    exception rather than the rule for payee of an order

    instrument or a special indorsee to transfer the

    instrument without indorsement, and since the situation

    is abnormal, it is only fair for the holder to prove

    ownership

    But the transferee of an unendorsed instrument may

    become a holder obtaining the indorsement of his

  • Notes on Campos Negotiable Instruments Law

    C c,) L L E E N 16

    transferor. It is only at this time that the instrument can

    be considered as having been negotiated.

    Note that this section applies only to an instrument

    payable to the order of the transferor, i.e., where he is

    either the specified payee or a special indorsee of an

    order instrument. It cannot apply to bearer instruments

    Some cases have held that a gratuitous transferee of an

    unindorsed instrument does not acquire title to the

    instrument because Sec 49 speaks of a transferee for value. Most authorities however have the contrary view, since, according to them, a negotiable instrument

    being a species of property is a proper subject of gift by

    negotiation. There can be no apparent reason therefore

    why an unendorsed instrument should not also be the

    subject of gift passing title to the donee. However, such

    a donee, although he has a right to sue on an instrument

    as a legal owner thereof, does not have a right to compel

    the indorsement of his donor. This is the only difference

    in the effect which Sec 49 should have on a gratuitous

    transfer as contrasted with the transfer for value

    10. cancellation of indorsements

    Sec. 48. 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

    A holder must be able to trace his title to the instrument

    back to the original owner, the payee. 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 indorsements

    would be necessary to his title since mere delivery would

    have been sufficient to transfer title from one holder to

    another. The holder would thus have the right to cancel

    any or all indorsements. Should he do so, then any

    indorser whose signature is cancelled and all indorsers

    subsequent to him would be discharged from liability on

    the instrument

    Where the instrument is payable to order on its face, the situation is different. If all the indorsements appearing

    on the back of the instrument are special, then all of them

    would be necessary to the holders title. Suppose that the indorsements are as follows:

    Pay to B

    (sgd.) A

    (sgd.) B

    C is the holder of the instrument to whom B negotiated it

    by means of his blank indorsement. May C cancel Bs

    indorsement? Obviously not because it is necessary to

    his title. Suppose the instrument is further negotiated

    and the following indorsements follow the former ones:

    Pay to D

    (sgd.) C

    Pay to E

    (sgd.) D

    May E, the holder, cancel the indorsements of C and D?

    It has been held that in such cases the last indorsee may strike out all indorsements subsequent to the blank

    indorsement and sue as holder under the blank

    indorsement. It is however submitted that this ruling is

    inconsistent with the NIL. First of, the indorsement of a

    special indorsee is necessary for future negotiation of the

    instrument. Ds indorsement is necessary for a valid negotiation to E. he can therefore not strike out Ds indorsement, Second of, in an order instrument the last

    indorsement controls the method of future negotiation.

    Although in the hands of C it was payable to bearer

    because of Bs blank indorsement, Cs special indorsement to D converted the paper to an order one,

    making Ds indorsement necessary to Es title.

    Suppose the instrument is still in Ds hands after Cs indorsement to him, may D cancel Cs indorsement? It is submitted that he may because it is not necessary to his

    title. He is in a different situation from E as a holder

    after Ds special indorsement, following Cs special indorsement.

    Cancellation of indorsements would be proper in order

    instruments where the instrument, after several negotiations, is indorsed back to a previous indorser. To

    illustrate

    Pay to B

    (sgd.) A

    Pay to C

    (sgd.) B

    Pay to D

    (sgd.) C

    Pay to E

    (sgd.) D Pay to C

    (sgd.) E

    C, the reacquirer, may strike out his own indorsement as

    well as those of D and E. As a prior party, he cannot

    have any rights against those to whom he is liable under

    his indorsement to D. Their indorsements are therefore

    not necessary to his title.

  • Notes on Campos Negotiable Instruments Law

    C c,) L L E E N 17

    11. indorsement by agent

    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

    An instrument may be indorsed either personally or

    through an agent. And the authority of the agent need

    not be in writing. In so signing, an agent should make it

    plain that he is merely signing in behalf of the principal,

    otherwise he may be held personally liable. The most

    common form of indorsement by an agent is Annabelle San Roque by Pedro Rodriguez, agent

    12. presumption as to indorsements

    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 is

    overdue

    Sec. 46. PLACE OF INDORSEMENT;

    PRESUMPTION. Except where the contrary appears, every instrument is presumed prima facie to have been

    made at a place where the instrument is dated

    Although indorsements after maturity are good to

    transfer title, they prevent a holder from becoming a

    holder in due course, thus subjecting him to defenses, if

    any. The presumption that every negotiation was

    effected before the instrument was overdue is therefore

    significant, since indorsements are usually not dated

    The law of the place of dating will govern any

    controversy should there be a conflict of laws

    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 or

    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

    When an instrument is intended for a corporation, it is

    usually issued or indorsed in its name, i.e., Pay to ABC Corporation. Sometimes, the indorsement or designation of payee is made to the fiscal officer of the

    corporation, thus, Pay to Cashier, ABC Corporation or ABC Corporation, by Pedro Rodriguez, Cashier. Assuming the authority of Pedro Rodriguez to indorse

    for the Corporation, such indorsement would bind it.

    Pedro Rodriguez may however prove that the instrument

    was intended for him personally and not for the

    corporation, in which case his personal indorsement

    would be the proper one.

    The word corporation in Sec 42 does not include cities and towns and confers no authority upon the town

    treasurer to impose upon his town the liability of an

    indorser, although an instrument payable to the

    Treasurer of the town of X in legal aspects stands on the same footing as if payable to the town which is the

    real payee

    13. continuation of negotiable character

    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.

    A negotiable instrument, although overdue, retains its

    negotiability unless it has been paid or restrictively

    indorsed so as to prohibit further negotiation. Other

    forms of restrictive indorsements do not destroy

    negotiability, for Sec 37 recognizes the right of the

    restrictive indorsee to further negotiate the instrument.

    The fact that the instrument is overdue does not affect

    the right of the holder to further it if he wishes to, but

    merely prejudices the status of subsequent holders as

    they cannot be considered holders in due course

    Chapter 3: Holder in Due Course

    Sec. 52. WHAT CONSTITUTES A HOLDER IN DUE

    COURSE. A holder in due course is a holder who has taken the instrument under the following conditions:

    1. that it is complete and regular upon its face; 2. that he became a holder of it before it was

    overdue, and without notice that it had been

    previously dishonored, if such was the fact;

    3. that he took it in good faith and for value; 4. that at the time it was negotiated to him he had

    no notice of any infirmity in the instrument or

    defect in the title of the person negotiating it,

    These four requisites must concur for a holder to be a

    holder in due course

    1. rights of a holder in due course

    Sec. 57. RIGHTS OF A HOLDER IN DUE COURSE. A holder in due course 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 against all parties liable thereon

  • Notes on Campos Negotiable Instruments Law

    C c,) L L E E N 18

    Sec. 58. WHEN SUBJECT TO ORIGINAL DEFENSES.

    In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same

    defenses as if it were non-negotiable

    These provisions indicate the significance of due course

    holding. A holder in due course can acquire a better title

    than his predecessors because he takes the instrument

    free from any defect of title of prior parties. He is

    furthermore free from defenses available to prior parties

    among themselves. A holder not in due course, on the

    other hand, operates as a transferee or assignee subject to

    defenses. Real defenses, however, which attach to the instrument itself would be available even against a

    holder in due course

    Real defenses are the following: F2EU ADM2 WIWI

    forgery

    fraud in factum

    between public enemies

    ultra vires acts of a corporation

    alteration (material)

    duress amounting to forgery

    minority

    marriage

    want of authority

    incapacity of parties

    want of delivery of an incomplete instrument

    illegality of contract

    The fact that a holder is not in due course will in no way

    affect the negotiability of the instrument. It only affects

    such holders rights, and does not necessarily prevent subsequent holders from acquiring the status of due course holders.

    It should be kept in mind that the question of whether a

    holder is a holder in due course or not is significant only

    when there is an existing defense between prior parties.

    If there is no such defense and the instrument is

    completely valid, then it will not matter whether the

    holder lacks one or mo