Presumption of consideration

Sec. 24. Presumption of consideration - Every negotiable instrument is deemed

prima facie to have been issued for a valuable consideration; and every
person whose signature appears thereon to have become a party thereto for
value.

Because of the presumption, it is immaterial whether or not “for value

received” appears in the instrument. (Mercantile Reviewer, UP 2016)

What constitutes value

Sec. 25. Value, what constitutes. — Value is any consideration sufficient to
support a simple contract. An antecedent or pre-existing debt constitutes
value; and is deemed such whether the instrument is payable on demand or
at a future time.

Sec. 26. What constitutes holder for value. - Where value has at any time been
given for the instrument, the holder is deemed a holder for value in respect to
all parties who become such prior to that time.

Sec. 27. When lien on instrument constitutes holder for value. — Where the
holder has a lien on the instrument arising either from contract or by implication
of law, he is deemed a holder for value to the extent of his lien.

Sec. 28. Effect of want of consideration. - Absence or failure of consideration is

a matter of defense as against any person not a holder in due course; and
partial failure of consideration is a defense pro tanto, whether the failure is an
ascertained and liquidated amount or otherwise.

1) The holder is a holder for value only to the extent that the consideration
agreed upon has been paid, delivered, or performed. Non-performance of
the obligation will give rise to partial or full defense of failure of consideration as
the case may be. (Sundiang and Aquino)
2) Where the transferee receives notice of any infirmity in the instrument or
defect in the title of the person negotiating the same before he has paid the
full amount agreed to be paid therefor, he will be deemed a holder In due
course only to the extent of the amount paid therefor by him.

Example: If the holder took the instrument on the strength of his promise to
deliver P200,000.00, but he had only delivered P I00,000.00, he is a holder in
due course only up to P I00,000.00 if he receives notice of infirmity before he
could fully pay the consideration. (Sundiang and Aquino)

Absence or failure of consideration is a matter of defense as against any

person not a holder in due course, hence, it is a personal defense. Partial
failure of consideration is a defense pro tanto, meaning a defense to the extent
of the failure. (Abad)

Pro tanto - [Latin, For so much; for as much as one is able; as far as it can go.]
A term that refers to a partial payment made on a claim.
(https://legal-dictionary.thefreedictionary.com/Pro+Tanto)

Effect of an illicit or unlawful consideration: Illicit or illegal consideration does

not affect the negotiability of the instrument as validity of consideration is not
one of the requisites of a negotiable instrument. It is merely constitutes a defect
of title hence such illegality of consideration is merely a personal defense
which cannot be raised against a holder in due course. [Sec. 55 and 57, NIL]
[2009 bar question]

“Value" and “consideration" are generally convertible terms. However, they

may have different implications. “Consideration" is the proper term when the
payee of a note sues the maker, or the payee of a bill sues the drawer, or an
indorsee sues his immediate indorser.

“Value” is the proper term when a holder sues any party to the instrument with
whom he himself has not dealt, the term “value" is more appropriate.
An antecedent or pre-existing debt constitutes value; and is deemed such
whether the instrument is payable on demand or at a future time. [Sec. 25, NIL]
Value need not be full and a holder will be one for value even if he gave less
than the face value of the instrument, provided the intention of the transferor is
to transfer the full amount represented by the instrument.

"Holder For Value”

(1) Where value has at any time been given for the instrument, the holder is
deemed a holder for value in respect to all parties who become such prior to
that time [Sec. 26, NIL]; and
(2) Where the holder has a lien on the instrument, he is deemed a HFV to the
extent of his lien [Sec .27, NIL]. The holder is a holder for value only to the extent
that the consideration agreed upon has been paid, delivered, or performed.
(Sundiang and Aquino)

A negotiable instrument may be given as a gift to the indorsee or transferee. In

such cases, whatever defenses can be set up against the transferor can also
be set up against the transferee, but where the holder gave valuable
consideration for the note and the other requisites of Sec. 52 are present, he
will be free from such defenses. Value need not be full and a holder will be one
for value even if he gave less than the face value of the instrument, provided
that intention of the transferor is to transfer the full amount represented by the
instrument. (Campos)

Presumption: Every negotiable instrument is deemed prima facie issued for

valuable consideration; and every person whose signature appears thereon is
deemed to have become a party thereto for value. [Sec. 24, NIL] Such
presumption cannot be overcome by the petitioner's bare denial of receipt of
the consideration. [Bayani v. People, G.R. No. 154947 (2004)] (Mercantile
Reviewer, UP 2016)

Sec. 52. What constitutes a holder in due course.

A holder in due course isa holder who has taken the instrument under the
following conditions: (a) That it is complete and regular upon its face; (b) That
he became the holder of it before it was overdue, and without notice that it
has been previously dishonored, if such was the fact; (c) That he took it in good
faith and for value; (d) 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.

NOTE: READ THE PROBLEMS IN SUNDIANG AND AQUINO BOOK

Accommodation party, its definition, purpose and concept (Read Stelco

Marketing Coro, vs Court of Appeals. G.R. No. 96160. 17June 1992)

Sec. 29. Liability of accommodation party. - An accommodation party is one

who has signed the instrument as maker, drawer, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his name to som other
person. Such a person is liable on the instrument to a holder for value,
notwithstanding such holder, at the time of taking the instrument, knew him to
be only an accommodation party.

As regards an accommodation party, the fourth condition, ie„ lack of notice

of any infirmity in the instrument or defect in title of the persons negotiating it,
has no application (Stelco Manufacturing Corp. v. CA, 210 SCRA

However, the inapplicability of the fourth requisite is limited to notice of

absence of consideration, that is, notice of the fact that the party is a mere
accommodation party who did not receive any consideration on the
instrument. If the holder has notice of other infirmity in the instrument or defect
in title of the persons negotiating the instrument, then the holder is subject to
personal defences. (Sundiang and Aquino)

Accommodation Party
(1) Must be a party to the instrument, signing as maker, drawer, acceptor, or
indorser;
(2) Must not have received value therefor; and
(3) Signed for the purpose of lending his name to some other person.
(Mercantile Reviewer, UP 2016)

NOTE: READ CASE

Liability of an accommodation party

Sec. 29. Liability of accommodation party. - An accommodation party is one

who has signed the instrument as maker, drawer, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his name to some
other person. Such a person is liable on the instrument to a holder for value,
notwithstanding such holder, at the time of taking the instrument, knew him to
be only an accommodation party.

LIABILITY OF AN ACCOMMODATION PARTY

• Whether the liability is primary or secondary will depend on whether he signs
as a maker, acceptor, drawer or indorser.
• The holder for value to whom the instrument thus executed is subsequently
negotiated has a right of recourse against the accommodation party in spite
of the former’s knowledge that no consideration passed between the
accommodation and accommodated parties. [Sec. 28, NIL]
• Does this mean that the accommodation party is liable to a holder even if he
is not a holder in due course, provided he is a holder for value? The Supreme
Court has ruled that an accommodation party is liable ONLY to a HOLDER IN
DUE COURSE. However, the mere fact that the holder knew of the
accommodation does not prevent him from being a holder in due course in
order to recover from the accommodation party. [Stelco Marketing Corp. v.
CA, G.R. No, 96160 (1992)]

ACCOMMODATION PARTY AS SURETY

• An accommodation party is generally regarded as a surety for the party
accommodated. In finance, a surety, surety bond or guaranty involves a promise by one party to
assume responsibility for the debt obligation of a borrower if that borrower
defaults. The person or company providing the promise is also known as a "
surety" or as a "guarantor".
• When the accommodation party makes payment to holder of the note, he
has the right to sue the accommodated party for reimbursement. [Caneda v.
CA, G.R. No. 81322 (1990)]

Note: A corporation cannot act as an accommodation party. The issue or

endorsement of negotiable instruments by a corporation without consideration
and for the accommodation of another is ultra vires [Crisologo v. CA, G.R. No.
Ultra vires acts are any acts that lie beyond the authority of a
80599 (1989)] (Mercantile Reviewer, UP 2016) corporation to perform. Ultra vires acts fall outside the powers
that are specifically listed in a corporate charter or law. This
can also refer to any action that is specifically prohibited by
the corporate charter.
A ccom m od ation Party v. R egular
Party

A c c o m m o d a t io n P a rty | R e g u la r P a rty

P u rp o se
S ig n s I n s tr u m e n t fo r
th e p u r p o s e o f D o e s n o t s ig n t h e
le n d in g h is n a m e o r in s t r u m e n t f o r th e
c r e d it to s o m e o th e r s a m e p u rp o se
p e rs o n
V alu e R e c e iv e d
S ig n s t h e in t r u m e n t S ig n s th e in s t r u m e n t
w it h o u t re ce iv in g f o r v a lu e
v a lu e th e r e fo r
A b s e n c e o r F a ilu r e o f C o n s id e r a tio n as D e fe n se
C a n n o t a v a il o f th e C a n a v a il o f s a id
d e fe n s e o f a b s e n c e o r d e f e n s e a g a in s t a
fa ilu r e o f p e rs o n n o t a h o ld e r in
c o n s id e r a t io n a g a in s t d u e c o u rs e
a h o ld e r n o t in d u e
c o u rs e
R ig h t to S u e
A f t e r p a y in g th e M a y not sue any
h oLder, m a y s u e th e s u b s e q u e n t p a rty for
a c c o m m o d a t e d p a rty r e im b u r s e m e n t
fo r r e im b u r s e m e n t

(Mercantile Reviewer, UP 2016)

Modes of transfer
If the instrument is negotiable, transfer thereof can be effected either through;
(a) negotiation; or
(b) assignment.

If the instrument is merely assigned, the transferee does not become a holder
and he merely steps into the shoes of the transferor. (Salas v. CA, G.R. No.
76788, Jan. 22, 1990). Any defense available against the transferor is available
against the transferee.
Example: Where the instrument that is payable to order was merely delivered
without indorsement. (Sundiang and Aquino)

NEGOTIATION DISTINGUISHED FROM ASSIGNMENT

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 thus includes both an ordinary assignment and a
negotiation. (Campos)

Negotiation- The transfer of the instrument from one person to another so as to

constitute the transferee the holder thereof. [Sec.30, NIL]
Assignment - The transferee does not become a holder, nor can he become a
holder in due course; and he merely steps into the shoes of the transferor. As
such, any defense available against the transferor is available against the
transferee.

MODES OF NEGOTIATION
Sec. 30, NIL. What constitutes negotiation. - An instrument is negotiated when it
is transferred from one person to another in such manner as to constitute the
transferee the holder thereof. If payable to bearer, it is negotiated by delivery;
if payable to order, it is negotiated by the indorsement of the holder and
completed by delivery.
BY DELIVERY - IF PAYABLE TO BEARER
Sec. 191, NIL. Definition and meaning of terms. - In this Act, unless the contract
otherwise requires: x—x "Delivery" means transfer of possession, actual or
constructive, from one person to another; x—x
"Issue" means the first delivery of the instrument, complete in form, to a person
who takes it as a holder; x—x

Delivery means transfer of possession of instrument by the maker or drawer,

with intent to transfer title to the payee and recognize him as holder thereof.
Issuance is the FIRST delivery of the instrument complete in form to a person
who takes it as a holder.

Requisites:
(1) Mechanical act of writing the instrument completely and in accordance
with the requirements of Section 1 of the NIL; and
(2) The delivery of the complete instrument by the maker or drawer, with the
intention of giving effect to it, to the payee or holder.

Presumption of delivery
• Where the instrument is no longer in the possession of a party whose
signature appears thereon, a valid and intentional delivery by him is presumed
until the contrary is proved [Sec. 16, NIL]
• If it is in the hands of a holder in due course, the presumption of a valid
delivery is conclusive [Sec. 16, NIL]
conclusive - (of evidence or argument) serving to prove a case; decisive or convincing.

Presumption as to date
• Date is not an essential element of negotiability; it is not included in the
requirements for an instrument to be negotiable under Sec. 1 of the NIL.
• An undated instrument is considered to be dated as of the time it was issued
[Sec. 17 (c), NIL]
BY INDORSEMENT COMPLETED BY DELIVERY - IF PAYABLE TO ORDER
Sec. 191, NIL. Definition and meaning of terms. - In this Act, unless the contract
otherwise requires: x—x "Indorsement" means an indorsement completed by
delivery: x—x (Mercantile Reviewer, UP 2016)

What constitutes negotiation

Sec. 30. What constitutes negotiation - An instrument is negotiated when it is
transferred from one person to another in such manner as to constitute the
transferee the holder thereof. If payable to bearer, it is negotiated by delivery;
if payable to order, it is negotiated by the indorsement of the holder and
completed by delivery

BEARER INSURANCE ALWAYS A BEARER INSURANCE

Where an instrument, payable to bearer, is indorsed specially it may
nevertheless be further negotiated by delivery; but any person indorsing
specially is liable as indorser to only such holders as make title through his
indorsement (Sec. 40, NIL)

INCOMPLETE 'NEGOTIATION OF ORDER INSTRUMENT

1) 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 (Sec. 49, NIL).

2) 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 (Sec. 49, NIL) (Sundiang and Aquino)

"Holder For Value"

(1) Where value has at any time been given for the instrument, the holder is
deemed a holder for value in respect to all parties who become such prior to
that time [Sec. 26, NIL]; and
(2) Where the holder has a lien on the instrument, he is deemed a HFV to the
extent of his lien [Sec .27, NIL] The holder is a holder for value only to the extent
that the consideration agreed upon has been paid, delivered, or performed.
(Sundiang and Aquino).

A negotiable instrument may be given as a gift to the indorsee or transferee. In

such cases, whatever defenses can be set up against the transferor can also
be set up against the transferee, buf where fhe holder gave valuable
consideration for the note and the other requisites of Sec. 52 are present, he
will be free from such defenses. Value need nof be full and a holder will be one
for value even if he gave less than the face value of the instrument, provided
that intention of the transferor is to transfer the full amount represented by the
instrument. (Campos)

Presumption: Every negotiable instrument is deemed prima facie issued for

valuable consideration; and every person whose signature appears thereon is
deemed to have become a party thereto for value. [Sec. 24, NIL] Such
presumption cannot be overcome by the petitioner’s bare denial of receipt of
the consideration. [Bayani v. People, G.R. No. 154947 (2004)] person adds to his
signature words indicating that he signs for or on behalf of a principal or in a
representative capacity, he is not liable on the instrument if he was duly
authorized; but the mere addition of words describing him as an agent, or as
filling a representative character, without disclosing his principal, does not
exempt him from personal liability.

(2) Payment in due course to the holder discharges instrument (Mercantile

Reviewer, UP 2016)

NOTE: READ THE PROBLEMS IN SUNDIANG AND AQUINO BOOK

Indorsement, its definition, purpose and concept

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.
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. NOTE: Do not confuse SEVERALLY with SOLIDARILY.
Indorsement to JOINT payees/ indorsees or to SOLIDARY payees/
indorsees is allowed.
Ex: JOINT PAYEES:
INDORSEMENT To A and B
(subsequent indorsement by A or B must be signed by BOTH OF THEM)
a) Where indorsement should be placed: SOLIDARY PAYEES:
To A or B
1) on the instrument itself: or
2) separate piece of paper attached to the instrument called "allonge" (Sec.
An allonge (from French allonger, "to draw out") is a slip of paper affixed to a
31, NIL). negotiable instrument, as a bill of exchange, for the purpose of receiving additional
endorsements for which there may not be sufficient space on the bill itself.

b) Indorsement must be of the entire instrument (Sec. 32, NIL). Example: An

instrument for P5,000.00 cannot be indorsed for less like PL000.00. Exception:
when there was previous partial payment.

c) Section 32 of the NIL disallows negotiation to two or more indorsees

severally. Example: Indorsement of a P20,000.00 note that states "Pay to Jose
Cruz, P I5,000.00 and Pedro Santos P5,000.00" is not considered negotiation
although it may be considered an assignment. (Sundiang and Aquino)

INDORSEMENT; HOW DONE

Sec. 31, NIL. 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.
(1) Where placed - The indorsement must be written [Sec. 31, NIL]:
(a) On the instrument itself [Sec. 31, NIL] , or
(b) On a separate piece of paper attached to the instrument called
"allonge"[Sec. 31, NIL]

(2) Signature of the indorser, without additional words, is a sufficient

indorsement [Sec. 31, NIL]
(3) Must be of the ENTIRE instrument

Sec. 32, NIL. 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.
• CANNOT indorse a part only of the amount payable; BUT if the instrument has
been paid in part, then the instrument may be indorsed as to th residue [Sec.
32, NIL] (2012 Bar Question) JOINT payees or SOLIDARY payees = allowed
• CANNOT transfer the instrument to two or more indorsees severally [Sec. 32,
NIL]
• If not an indorsement of the entire instrument, the transfer remains valid, but
as a mere assignment which subjects the holder to all defenses on the
instrument (Campos)

(4) If name misspelled in indorsement, indorsement will be prima facie deemed

not valid.

Sec. 43, NIL. 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.
• 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 [Sec 43, NIL]

(5) Indorsement where there are joint payees or indorsees

• Where the instrument is payable or indorsed to “A and B,” they are joint
payees and an indorsement by either A or B only will not constitute a valid
negotiation, UNLESS the one indorsing is authorized by the other. (Campos)
 • But where the instrument is payable to “A or B", they payees are merely in
the alternative, and either one may validly negotiate the same. (Campos)
(Mercantile Reviewer, UP 2016)

Kinds of indorsement (Read Metrocol Financing and Investment Coro, vs

Sambok Motors Co. and Na Sambok Sons Motors Co.. Ltd.. G.R. No. L-39641. 28
February 1983)

Sec. 33. Kinds of indorsement. - An indorsement may be either special or in

blank; and it may also be either restrictive or qualified or conditional.

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. 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.

Sec. 36. When indorsement restrictive. - An indorsement is restrictive which

either:
(a) Prohibits the further negotiation of the instrument; or
(b) Constitutes the indorsee the agent of the indorser; or
(c) Vests the title in the indorsee in trust for or to the use of some other persons.
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:
(a) to receive payment of the instrument;
LIMITATION ON TRANSFER OF RIGHT: ILLUSTRATION - But all subsequent indorsees acquire only title of the first indorsee under the restrictive indorsement. Illustrations of this
rule: In the indorsement, “pay to A for collection,” the rights of the subsequent indorsees are subject to the restrictive indorsement—namely, he can collect only for being a restrictive indorsee,
he acquires only the title of the first indorsee whose right is merely to collect.

Suppose the P1000 note is indorsed as “Pay to B for deposit only. (Sgd.) A” and that B owes Y P1000, B cannot transfer the note to Y for said debt. Or suppose B transfers the note to another
person for P1000, B cannot use the P1000 for his own personal expenses. He must safely keep the money for the benefit of A. “Pay to A for account of B”—gives notice that the instrument
cannot be negotiated by A for his own debt or benefit.
(b) to bring any action thereon that the indorser could bring;
(c) to transfer his rights as such indorsee, where the form of the indorsement
authorizes him to do so.
But all subsequent indorsees acquire only the title of the first indorsee under the
restrictive indorsement.

Sec. 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 indorser's signature the words "without recourse" or any word of
similar import. Such an indorsement does not impair the negotiable character
of the instrument.Qualified Indorsement is an indorsement that passes title to a negotiable instrument with certain restrictions. For example,
writing "without recourse" on the back of the check would create a qualified indorsement. It is the most frequently seen
example, means that if the instrument is not honored, the indorser is not responsible.

Sec. 39. Conditional indorsement. - Where an indorsement is conditional, the

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.

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. 41. Indorsement where payable to two or more persons. - Where an

instrument is payable to the order of two or more payees or indorsees who are
not partners, all must indorse unless the one indorsing has authority to indorse
for the others.

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.
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.

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.

Kinds of Indorsement
1) Blank indorsement- no indorsee is specified and it is done by affixing the
indorser's signature.

2) Special indorsement- designates the indorsee. "Pay to X."

Note: 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 (Sec. 35, NIL).

3) Qualified Indorsement- qualified indorsement constitutes the indorser a mere

assignor of the title to the instrument. It may be made by adding to the
indorser's signature the words "without recourse" or any words of similar import.
Such an indorsement does not impair the negotiable character of the
instrument.

4) Conditional Indorsement (Sec. 39, NIL) — the 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.

5) Restrictive Indorsement (Sec. 36, NIL)

(i) Prohibits the further negotiation of the instrument ("Pay to X only"): or
(ii) Constitutes the indorsee the agent of the indorser ("Pay to X for collection");
Or
(iii) Vest the title in the indorsee in trust for or to the use of some other persons
("Pay to X in trust for Y")
6) Rights of Restrictive Indorsee (Sec. 37, NIL)
(i) To receive payment of the instrument;
(ii) To bring any action thereon that the indorser could bring;
(iii) To transfer, his rights as such indorsee, where the form of the indorsement
authorizes him to do so. In case of transfer, all subsequent indorsees acquire
only the title of the first indorsee under the restrictive indorsement. (Sundiang
and Aquino)

NOTE: READ CASE

Four bases of classification of indorsements under the NIL:

(1) Special or in blank
(2) Restrictive or Non-Restrictive
(3) Qualified or unqualified
(4) Conditional or unconditional

All of the four bases of classification coexist with each other; thus, an
indorsement may be special and qualified at the same time. It may also be
special and unqualified, special and restrictive, special, unrestrictive and
unqualified and so on. (Campos)

AS TO MANNER OF FUTURE METHOD OF NEGOTIATION

Sec. 34, NIL. 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, NIL. 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, NIL Blank indorsement; how changed to special indorsement. - The
holder ma 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.

SPECIAL
• Specifies the person to whom/to whose order the instrument is to be
payable; and the indorsement of such indorsee is necessary to further
negotiation.
• A special indorser is liable to all subsequent holders, unless the instrument is
an originally bearer instrument, in which case he is liable only to those who
take title through his indorsement. [Sec. 40, NIL]
• An instrument, payable to bearer, and indorsed specially, may nevertheless
be further negotiated by delivery. [Sec 40, NIL]
• Originally bearer instrument always remains a bearer instrument. (Sundian
and Aquino)

Blank
• Specifies no indorsee, instrument so indorsed is payable to bearer, and may
be negotiated by delivery
• 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. [Sec 35, NIL]
• An order instrument may be converted into a bearer instrument by means of
a blank indorsement, and may be later reconverted into an order instrument
by a subsequent special indorsement

AS TO TITLE TRANSFERRED
Sec. 36, NIL. When indorsement restrictive. -
An indorsement is restrictive which either:
(a) Prohibits the further negotiation of the instrument; or
(b) Constitutes the indorsee the agent of the indorser; or
(c) Vests the title in the indorsee in trust for or to the use of some other persons.
But the mere absence of words implying power to negotiate does not make
an indorsement restrictive.

Sec. 37, NIL. Effect of restrictive indorsement; rights of indorsee. - A restrictive

indorsement confers upon the indorsee the right:
(a) to receive payment of the instrument;
(b) to bring any action thereon that the indorser could bring;
(c) to transfer his rights as such indorsee, where the form of the indorsement
authorizes him to do so. But all subsequent indorsees acquire only the title of
the first indorsee under the restrictive indorsement.
(1) Restrictive - Such indorsement either:
(a) Prohibits further negotiation of instrument
(b) Constitutes indorsee as agent of indorser
Vests title in indorsee in trust for another [Sec 36, NIL]

RIGHTS OF RESTRICTIVE INDORSEE

• Receive payment
• Bring any action thereon that the indorser could bring.
• Transfer his rights as such indorsee, but all subsequent indorsees acquire only
the title of first indorsee under restrictive indorsement. [Sec 37, NIL]

(2) Non-restrictive

AS TO KIND OF LIABILITY ASSUMED BY INDORSER

Sec. 38, NIL. 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 indorser's signature the words "without recourse" or any words of
similar import. Such an indorsement does not impair the negotiable character
of the instrument.

(1) Qualified
• Constitutes indorser as mere assignor of title
• Made by adding the words "without recourse", "sans recourse," "indorser not
holder,” "at the indorser's own risk," and other terms of similar import. [Sec. 38,
NIL],
• But this does not mean that the transferee only has fhe rights of an assignee;
transfer remains a negotiation and transferee can sfill be a holder capable of
acquiring a fifle free from defenses of prior parties.

Effects:
1. Relieves the qualified indorser of his liability to pay the instrument should the
maker be unable to pay
2. The qualified indorser does not guarantee the solvency of the maker, but
merely his legal title to the instrument
3. A qualified indorsement does not impair the negotiable character of the
instrument

(2) Non-qualified

AS TO PRESENCE/ABSENCE OF EXPRESS LIMITATIONS

Sec. 39, NIL. Conditional indorsement. - Where an indorsement is conditional,
the 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.

(1) Conditional
• Additional condition annexed to indorser’s liability; such condition must be
expressed
• 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 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. [Sec. 39, NIL]
(2) Unconditional

OTHER KINDS OF INDORSEMENT

(1) Absolute - 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

(2) Joint - All must indorse when an instrument is payable to the order of two or
more payees or indorsees who are not partners. [Sec. 41, NIL]
Exceptions:
• Where the payee or indorsee are partners; and
• Where the payee or indorsee indorsing has authority to indorse for the others.

(3) Irregular - A person who, not otherwise a party to an instrument, places

thereon his signature in blank before delivery. [Sec. 64, NIL]

Liability of Irregular Indorser:

• If the instrument is payable to the order of a third person, he is liable to the
payee and to all subsequent parties.
• If the instrument is payable to the order of the maker or drawer, or is payable
to bearer, he is liable to all parties subsequent to the maker or drawer.
• If he signs for the accommodation of the payee, he is liable to all parties
subsequent to the payee. [NIL, Sec. 64]

Time and place of indorsement

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

Sec. 46. Place of indorsement; presumption. - Except where the contrary

appears, every indorsement is presumed prima facie to have been made at
the place where the instrument is dated.
Sec. 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.

Striking out indorsement

Sec. 48. Striking out indorsement. - 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.

Negotiation by Prior Party

Where an instrument is negotiated back to a prior party, such party may
reissue and further negotiate the same. But he is not entitled to enforce
payment thereof against any intervening party to whom he was personally
liable (Sec. 50, NIL). However, he may strike out the intervening indorsements
because they are not necessary for his title and he is liable to them because of
his initial indorsement (Sec. 48, NIL).
Example: "A" payee indorsed the instrument to B, then B indorsed it to C, C to
D, then D to B. B can further negotiate the instrument. He may also strike out
the indorsements of C and D. (Sundiang and Aquino)

Transfer without indorsement

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.

When prior party may negotiate instrument

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

When negotiability end

When negotiability ends. Section 47 of the NIL provides that "an instrument
negotiable in its origin continues to be negotiable until:
(1) it has been restrictively indorsed; or
(2) discharged by payment or otherwise.

Note however, that restrictive indorsement makes the instrument non­

negotiable only if it is the first type- it prevents further negotiation of the
instrument- and not the two other types (constitute the indorsee the agent or
trustee). (Sundiang and Aquino)

Restrictive Indorsement (Sec. 36, NIL)

(i) Prohibits the further negotiation of the instrument ("Pay to X only");or
(ii) Constitutes the indorsee the agent of the indorser ("Pay to X for collection");
or
(iii) Vest the title in the indorsee in trust for or to the use of some other persons
("Pay to X in trust for Y")