Chapter III – NEGOTIATION – Flashcards

Negotiation - is the transfer of a NI from one person to another made in such a manner as to constitute the transferee the holder thereof. Payable to Bearer: It is negotiated by delivery. Payable to Order: It is negotiated by Indorsement of the holder and completed by delivery.

Negotiation vs. Assignment: As to application: • Negotiation only applies to NI, but is not applicable to non-negotiable instruments. • Assignment applies to both NI and nonnegotiable instruments. As for the transferee: • In negotiation, the transferee is a holder. • In assignment, the transferee is an assignee. HIDC/Assignee: • In negotiation, a HIDC is subject only to real defenses and may acquire better title or greater rights under the instrument than those possessed by the transferor or a prior party. • In assignment, an assignee subject to both real and personal defenses and merely steps into the shoes of the assignor. Indorser/Assignor: • In negotiation, a general indorser warrants the solvency of prior parties. • In assignment, an assignor does not warrant the solvency of prior parties unless expressly stipulated or the solvency is known to him. As to liability: • In negotiation, an indorser is not liable unless there be presentment and notice of dishonor. • In assignment, an assignor is liable even without notice of dishonor. As to governing articles: • Negotiation is governed by the NIL. • Assignment is governed by Articles 1624 - 1635 of the Civil Code (Assignment of Credits).

Indorsement is the writing of the name of the payee on the instrument with the intent to: • to transfer the title to the same; or • guarantee the instrument; or • acknowledge payment.

Indorsement to be must be: i. written ii. on the instrument itself or upon a piece of paper attached. Notes: • The paper attached with the indorsement is an allonge. • An allonge must be attached so that it becomes a part of the instrument, it cannot be simply pinned or clipped to it.

Necessity of indorsement: 1. It is essential to the execution of an instrument payable to the order of the maker or drawer. 2. Essential to the negotiation of an order instrument, not a bearer instrument. 3. Without an indorsement of an order instrument, one cannot be a HIDC thereof even though he is entitled to have the indorsement made.

Effects of indorsing an instrument originally PAYABLE TO BEARER: (Sec. 40 NIL) • It may further be negotiated by mere delivery. • The person indorsing is liable as indorser to such persons as to make title through his indorsement. This section only applies to instruments originally payable to bearer. Therefore, it cannot apply where the paper is originally made payable to order and indorsed in blank.

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. • This section refers to a joint indorsement. Exceptions: a. Where the payees or indorsees are partners; b. Where the payee or indorsee indorsing has authority to indorse for others. "Pay to A and B" = valid, "Pay to A or B" = invalid

Effect of instrument drawn or indorsed to a person as cashier: (Sec. 42 NIL) 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. • The presumption established in this section may be disproved by sufficient evidence to the contrary. It may be shown that the instrument really belongs to the cashier personally as the real creditor of the maker or drawer.

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. (Counter-sign)

Indorsement in representative capacity: (Sec. 44 NIL) 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 by a person either personally or through an agent. • The authority of the agent need not be in writing.

Time of indorsement; presumption: (Sec. 45 NIL) 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. • This section is important because in order to constitute one a HIDC, he must have taken the instrument before it was due. • If the indorsement is without a date, the presumption is that it was negotiated before maturity. The presumption, however, is rebuttable.

Place of indorsement; presumption: (Sec. 46 NIL) Except where the contrary appears, every indorsement is presumed prima facie to have been made at the place where the instrument is dated.

Continuation of negotiable character: (Sec. 47 NIL) General Rule: An instrument negotiable in origin is always negotiable. This is true even if the NI is already overdue, but any holder who acquires the instrument can no longer be a HIDC. Exceptions: It will not continue to be negotiable when: • It has been RESTRICTIVELY INDORSED; and • It has been DISCHARGED by payment or otherwise.

Striking out indorsement: (Sec. 48 NIL) A holder may strike out any indorsement which is not necessary to his title. Effects: • An indorser whose indorsement is struck out is discharged. • All indorsers subsequent to such indorser who has been discharged are likewise relieved.

Effects of a transfer without endorsement: (Sec. 49) • The transferee acquires such title as the transferor had therein. • The transferee acquires the right to have the indorsement of the transferor. • Negotiation takes effect as of the time the indorsement is actually made.

When prior party may negotiate instrument: (Sec. 50) This section refers to reacquirer or a holder who negotiates an instrument and then subsequently REACQUIRES it. • If a prior party reacquires an instrument before maturity date, he may negotiate the same further. But after paying the holder, he may not claim payment from any of the intervening parties.