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CHAPTER 3 NEGOTIATION
'ethods of Negotiation (
Sec. 30. What constitutes negotiation.
An instrument instrument is negotiated negotiated when it is transferred fro one !erson to another in such such manne mannerr as to const constitu itute te the transferee the ho"der thereof.
Instr Instru uen ents ts !a%a !a%a#" #"e e to orde order r irst& an indorsement by the payee or present holder Second"%& its delivery to the ne"t holder
his his orde orderr or auth author orit ity y is made made by means of indorseent& follo followe wed d by de"i$er% of the instrument to the indorsee. )
If payable to #earer , it is negotiated by de"i$er%.
Instr Instru uen ents ts !a%a !a%a#" #"e e to to #ea #eare rer r It is negotiated by mere delivery alone without indorsement. *#earer+ person in possession of a bill or note which is payable to bearer transf sfer er of poss posses essi sio on, *de"i$er%+ tran actual or constructive, from one person to another
If payab ayable le to order& it is nego negoti tiat ated ed by the the the holde olderr compl omplet eted ed by indorseent of the delivery.
'ethods of transfer (
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Issue Firs Firstt deli deliv very ery of the the inst instru rume ment nt complete in form, to a person who take it as a holder. (first transfer of an instrument to a payee) Negotiation Operates to make the transferee of a nego negoti tiab able le inst instru rume ment nt the the hold holder er thereof. Involves indorsement Assignent Involves a transfer of rights under a contract *transfer+ is also used when referring to *assignent+ O!erati ratio on of of -a -a
Pa% Pa%ent ent of instr nstru uen entt #% dra draee ee not not negotiation
he payment of a check (or other bill) by the drawee bank is not not a negoti negotiat atio ion n and does not make the bank a holder within #ection $%. & he bank is neither the payee nor indorsee. ' rit ritin ing g of the the name name of of the hol holde derr (back (back of the the check check)) befo before re surre surrend nderi ering ng for payment to the drawee bank is not an indo indors rse ement ment.. (sig (signa natu ture re serv serves es as receipt for the money) Effe Effect ct of de" de"i$er i$er% % of orde rder ithout indorseent (
'eaning of Negotiation /
he transfer of a !.I. form one person to another made in such a manner as to cons consti titu tute te the the tran transf sfer eree ee the the hold holder er thereof.
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instr nstru uent ent
Transfer o!erates as an ordinar% assignent he he trans transfer fer oper operate ates s as an ordin ordinary ary assi assign gnme ment nt and and assi assign gnee ee is mere merely ly placed in the position of the assignor, (former, acuiring the instrument sub*ect to all defe defens nses es,, real real and and pers person onal al,, available against the latter) Transf ansfer eree ee does does not not #eco #ecoe e ho"d ho"der er of instruent itho ithout ut indo indorse rsemen ment, t, the the transf transfere eree e would not be the holder of the ins instru trumen ment, not being the the payee ayee,, indorsee, or the bearer thereof.
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Where indorseent su#se1uent"% o#tained he transfer operates as a negotiation only as of the time the indorsement is actually made. Can there #e a negotiation to a !a%ee
'eaning of Assignent
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he transfer of the title to an instrument, with the assignee generally taking only such title or rights as his assignor has, sub*ect to all defenses available against his assignor.
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irst de"i$er% of instruent to !a%ee (not by negotiation but by issue or issuance) Only the holders subseuent to payee can acuire title by negotiation.
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irst de"i$er% of instruent to other than !a%ee #uch as an agent of the maker or drawer, the payee acuires title by negotiation.
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4e"i$er% of instruent to the !a%ee #% "ast ho"der here may also be negotiation he indorsement of the last holder in not necessary because the payee is remitted to his former rights and all intervening parties are discharged from liability.
Negotiation 2 assignent distinguished
!.I. may either be negotiated or assigned !on+!.I. can only be assigned or transferred Negotiation efers to negotiable instruments he transferee is a holder A holder in due course is sub*ect only to real defense A holder in due course may acuire a better title or greater rights under the instrument than those possessed by the transferor or a prior party A general indorser warrants the solvency of prior parties
Assignent efers to an ordinary contracts he transferee is an assignee Assignee is sub*ect to both real and personal defenses An assignee merely steps into the shoes of the assignor
An assignor does not warrant the solvency of prior parties unless e"pressly stipulated or the insolvency is known to him An indorser is not Assignor is liable liable unless there be even without notice presentment and of dishonor notice of dishonor -overned by the -overned by Articles !egotiable &/'0 to &/$1 of the Instruments aw 2ivil 2ode
Sec. 3(. Indorseent5 ho ade. 'eaning of Indorseent /
he writing of the name of the payee on the instrument with the intent either to transfer the title to the same, or to strengthen the security of the holder by assuming a contingent liability for its future payment, or both.
Indorsement alone ithout de"i$er% conveys no tit"e and creates no ho"der. Indorsement means an indorsement co!"eted #% de"i$er%.
Nature of Indorseent
Indorsement is not only a mode of transfer Involves also a new contract 3 an obligation on the part of the indorser (implied guaranty that the instrument will be duly paid according to terms)
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4ach indorsement generates an additional contract between the indorser and all subseuent holders.
Necessit% of Indorseent
& 4ssential to the e"ecution of an instrument payable to the order of the maker or drawer. ' 4ssential to the negotiation of an order instrument, not of a bearer instrument. $ ithout indorsement of an order instrument he cannot be a holder in due course thereof even though he is entitled to have the indorsement made.
or of Indorseent
Sec. 3). Indorseent ust #e of entire instruent.
-eneral rule7 5 indorseent ust #e of the entire instruent+ eason7 he instrument must be delivered to the indorsee and there cannot be partial delivery of one instrument. Ob*ect of the provision7 o avoid multiplicity of suits or actions in court, divides a single cause of action, ground for the complaint.
5must be written6 or be in writing As 5writing6 includes 5print6 & he word 5assign6 does not make a negotiation a mere assignment. ' he signature of the indorser, without additional words, is a sufficient indorsement. (5blank indorsement6) $ If name of indorsee is specified, it is called 5special Indorsement6. he indorser may add words which prohibit the further negotiation of the instrument.
P"ace of Indorseent
he instrument may be written7 ( / / /
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On the instruent& itse"f atin word indorsa, 5writing on the back6 It may be written on the face he law looks at the intention of the parties rather than to the form as to indorsement. 6!on a !a!er attached thereto Indorsement is on a slip of paper physically attached to the instrument so as to become a part of it, the paper is known as allonge. hen it is not clear in what capacity a person intended to sign, he shall be deemed an indorser.
Indorseent indorsees
to
u"ti!"e
!a%ees
or
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7oint !a%ees An indorsement purporting to transfer the instrument to ' or more persons severally (independently) does not operate as a negotiation. / 8owever, the negotiation is valid where the indorsees are *oint (combined or *oined together) ) /
A"ternati$e !a%ees he negotiation of the instrument may be made by the indorsement of either of the payees.
When !artia" indorseent is a""oed
If part of the amount has already been paid, the unpaid balance may be indorsed as this is e"pressly authori9ed by law.
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One that specifies the person to whom the instrument is to be paid # One that specifies the person to whose order the instrument is to be payable a
Sec. 33. 8inds of Indorseent C"assifications of Indorseent (
As to the ethods of negotiation a Special b Blank
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As to the 9ind of tit"e transferred a Restrictive b Non-restrictive
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As to sco!e of "ia#i"it% of indorser a Qualified b Unqualified or general
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As to !resence "iitations a Conditional b Unconditional
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The other 9inds of indorseents a Joint b Successive c Irregular or anomalous d acultative
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a#sence
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Note: !nce an instrument as issued satisfies all t"e requirements of negotiabilit#$ no indorsement$ even restrictive one$ can negate its negotiable status%
Sec. 3,. S!ecia" Indorseent5 Indorseent in #"an9. S!ecia" Indorseent e;!"ained / / /
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Is one where the name of the payee is specified 5specific indorsement6 or 5indorsement in full6 #pecial and blank indorsements are 5unualified6 indorsements
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$estrictive indorsement % is one so worded that it either restricts or prohibits entirely the further negotiation of an instrument' or modi(es the rights of the holder or the liabilities of the indorser Sec. 35. Blank indorsement; how changed to special indorsement How to convert a blank indorsment into a special indorsement? -By writing over the signature of the indorser in blank any contract consistent with the character of the indorsement
An instrument made payable to order on its face becomes payable to bearer if the only or last indorsement is in blank An instrument made payable to bearer by an indorsement in blank may be convert into an order instrument by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement. But a bearer instrument always remains a bearer instrument negotiable by mere delivery whether the last indorsement is a blank or a special one
Sec. 36. When indorsement restrictive An indorsement is restrictive which either !a" !rohibits the further negotiation of the instrument !b" "onsitutes the indorsee the agent of the indorser !c" #ests the title in the indorsee in trust for or to the use of some other person #ote $here mere absence of words implying power to negotiate does %&$ make an indorsement restrictive
A restrictive indorsement…. !&" 'imits the rights of indorsee ( the indorser noti(es all prospective holders that the indorsee has only the authority to deal with the instrument as thereby directed and that the indorsee has only a restrictive title thereto !)" *estroys negotiability of the instrument % such indorsement destroys negotiability and bars further negotiation to a holder in due course ( all subse)uent indorsees ac)uire +#', the title of the (rst indorsee under the restrictive indorsement
3 -lasses of restrictive indorsement !a" rohibits further negotiation “Pay to A only” * “Pay to A and to no other person” +,ere' A is the only one authoried to receive payment.
!b" -onstitutes indorsee agent of indorser “Pay to A for collection (only)” * “Pay to A for deposit” “Pay to A for collection and remittance” +A does %&$ ac)uire title over the instrument $he indorsements also prohibits the further negotiation of the instrument.
!c" /ests title in indorsee for the bene0t of the indorser or a 3rd party
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“Pay to A in trust for B” * “Pay to A as trustee for P” “Pay to A as agent of P” * “Pay to A for my use” “Pay to A for the use of B” +$he indorsements transfer the legal title to the instrument to A as trustee for B or !' the bene(cial owner $hey give notice that the paper cannot be negotiated by A for his own debt or for his own bene(t.
12ect of absence of words of negotiability $he mere absence of words implying power to negotiate 0& %&$ make an indorsement restrictive
ay to A4 is the same as !ay to order of A or !ay to A or order
7uali0ed indorsement % is one which constitutes the indorser a mere assignor of the title to the instrument How made? 8 An indorsement may be )uali(ed by adding to the indorser:s signature these following words to either a blank or a special indorsement; without recourse4 sans recourse4 at indorsee9s own risk4 indorser not holder4 9amples; !ay to the order of A without recourse on me 6gd7! !ay to A' indorser not holder 6gd7 !
#ecourse % means a resort to a person who is secondarily liable after the default of the person who is primarily liable
Sec. 3. Efect o restrictive indorsement; rights o indorsee A restrictive indorsement confers upon the indorsee the right 6a7to receive payment of the instrument 6b7to bring any action thereon that the indorser could bring 6c7 to transfer his rights as such indorsee' where the form of the indorsement authories him to do so
$ights of indorsee in restrictive indorsement (same as above but in simpler terms 6178eceive payment on the instrument 627ue thereon in his name 637%egotiate the instrument e9cept when it is prohibited in the indorsement
Sec 3. !uali"ed indorsement
12ect of :uali0ed indorsement !&"
;ndorser< a mere assignor
$he purpose of a )uali(ed indorsement is to transfer title <=$,&>$ guaranteeing payment >nlike a special or blank indorsement which transfers title while guaranteeing its payment if the holder is unable to obtain payment from the maker' acceptor' or drawee at maturity
!)" ;ndorser9s liability limited $he e?ect of the indorsement is merely to limit his liability ,e is secondarily laible for breach of his warranties as an indorser under ection /5 $he )uali(ed indorser is not liable to the indorsee if the instrument is dishonoured for some other reason like the insolvency of the person primarily liable
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!3" #egotiability of instrument #+= a2ected =t is a good precaution to indorse without recourse where the instrument has a long period of maturity so that there is danger that the principal debtor might become insolvent
!ay to A if he marries before he reaches the age of 25 647 lank and restrictive Cor collection only 6gd7 A 657 lank and :uali0ed
Sec. 3>. $onditional %ndorsement Absolute indorsement % is one by which the indorser binds himself to pay' upon no other condition than the failure of prior parties to do so' and of due notice to him of such failure
!ayable upon completion of my house in !ateros' Detro Danila 6gd7 A 6@7 Special< unrestrictive< un:uali0ed !ay to B 6gd7 A
-onditional indorsement % is one by which the indorser imposes some other condition to his liability' or on the indorsee:s right to collect the proceeds of the instrument -
0oes %&$ prohibit the further negotiation of the instrument' regarldes' of whether the condition has been ful(lled or not
#ote $ondition appearing… in the indorsement & 0& %&$ destroy negotiability* on the ace o the instrument & renders the instrument %&%-%&$=AB
*i2erent combinations of indorsements All indorsements are either special or in blank* restrictive or non-restrictive' etc $hus' di?erent combinations are possible 9amples; 617 Special and restrictive !ay to A only 6gd7 ! 627 Special and :uali0ed !ay to A without recourse 6gd7 ! 637 Special and conditional
Sec @. %ndorsement o instrument pa'able to bearer 12ct of special indorsement where instrument originally payable to bearer An instrument payable to bearer is %&$ converted into an instrument payable to order by being indorsed specially $herefore' the indorsee may further negotiate the instrument by mere delivery =n such a case' the person indorsing specially is liable &%E to those holders who can trace their title to the
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instrument by a series of unbroken indorsements from such special indorser
9ample; BEARER =%$>D%$ indorsement deliery
issue B ((((((((((((( ((((((((((((((( A (((((((((((((((
tor' D issues a promissory note payable to ! ! indorses the instrument to A A delivers the instrument to B )otes* $o negotiate the note to A' ! has only to deliver it to A 8emember that the instrument is a bearer instrument =t can be transferred by mere delivery because indorsement is %&$ necessary in a bearer instrument for A to become a holder !ero magbuot man ka gi indorse man gyud ni ! kay A o even though nadawatan ni A through indorsement' pwede ra Gapun ma transfer ni A to B through delivery since it is still a bearer instrument Efects* B will have %& right against ! since B did not obtain his title through the indorsement of ! =n other words' ! is %&$ =AB to B but A 6as indorser7 and D 6as maker7 are =AB to B upposing A indorsed the note to B' ! will be liable to both A and B
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Application of Section @ $his section applies &%E to instruments &8==%AE payable to bearer $herefore' it cannot apply where the paper is originally made payable to order and indorsed in blank because by ection H' a note or bill which upon its face' is payable to order' becomes payable to bearer only when the last indorsement is in blank Sec. @&. %ndorsement where pa'able to two or more persons ;ndorsement where instrument payable to two or more Coint payees or indorsees
Note: $his sections refers to a I&=%$ indorsement* not severally $his section applies to an instrument payable to the order of two or more payees Gointly* %&$ two or more payees severally =f the instrument is originally payable to the order of two or more payees or indorsees' A'' must indorse in order for the transaction to operate as a negotiation
) eDceptions when Coint indorsement by all payees or indorsees not re:uired 617
;ndorsement of instrument payable to partners An indorsement of an instrument payable to ! and A as partners doing businesss under a (rm name must be in the name of such 0rm and not in the name of ! and A as Goint payees or indorsees
Sec. @). Efect o instrument drawn or indorsed to a person as cashier An instrument drawn or indorsed to a person as cashier or other (scal oJcer of a bank or corporation' it is deemed prima facie to be payable to the bank or corporation of which he is such oJcer' and may be negotiated by either the indorsement of the bank or corporation or the indorsement of the oJcer $his presumption may be disproved by suJcient evidence to the contrary =t may be shown that the instrument really belongs personally to the cashier
Sec. @3. %ndorsement where name is misspelled+ etc.
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described adding' if he thinks (t' his proper signature
Sec. @@. %ndorsement in representative capacit' An instrument may be indorsed by a person either personally or through an agent $he authority of the agent need not be in writing
,#eview- $e:uisites in order that an agent may escape personal liability 617he is duly authoried* 627he adds words to his signature indicating that he signs as an agent' for or on behalf of a principal' or in a representative capacity* 637he discloses his principal
Sec. @5. ime o indorsement; presumption resumption as to time of indorsement very negotiation is deemed prima facie to have been e?ected before the instrument was overdue =f the indorsement bears a date' the presumption is that it is the true date. =f the indorsement is without a date' the presumption is that it was negotiated before maturity
Sec. @6. /lace o indorsement; presumption resumption as to place of indorsement =n the absence of evidence to the contrary' an indorsement is presumed to have been made to the place where the instrument is dated
Sec. @. $ontinuation o negotiable character Eeneral rule An instrument negotiable in origin is always negotiable 1Dceptions
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Sec. @. triking out indorsement $he holder may at any time strike out any indorsement which is %&$ %"A8E to his title $he indorser whose indorsement is struck out' and A indorsers subse)uent to him' are thereby relieved rom liabilit' on the instrument
!see page &36(&3 for eDamplesFcases of striking out for both bearer and order instruments"
Sec. @>. ranser without indorsement; efect o 12ect of transfer without indorsement Situation $he payee or indorsee delivers an instrument payable to order C&8 #A>' without indorsing it! 617$he transaction operates as an K>=$AB A=%D%$ and the transferee ac)uires the instrument subGect to defences and e)uities available among prior parties 627,e cannot negotiate it 637$he transferee ac)uires legal title and the right to have the indorsement of the transferor 6a7$he transferee )uali(es as a holder &%E upon receiving the indorsement and thus is capable of negotiating the instrument further
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6b7Before the indorsement' the transferee is %&$ a holder
)ote $he negotiations takes e?ect as of the time of the indorsement is actually made for the purpose of determining whether or not the transferee is a holder in due course
$ight of prior party to negotiate =f a prior party reac)uires an instrument before maturity' he may negotiate further But after paying the holder' he may not claim payment from any of the intervening parties $his is to avoid multiplicity of suites
G1Dample on page &@& 12ect of indorsement after transfer $he indorsement converts the transfer into a negotiation and makes the transfereeMindorsee the holder
Sec. 5. When prior part' ma' negotiate instrument $eac:uirer % a holder who negotiates an instrument and then subse)uently reac)uires it
'imitations on renegotiation -ases where a prior party cannot further negotiate the instrument !&"
