VI.

DEFENSES
Kinds:
1. Real/Absolute Defenses - those that attach to the instrument
itself and are available against all holders, whether in due
course or not.
Examples:
a. Alteration;
b. Non-delivery of incomplete instrument;
c. Duress amounting to forgery;
d. Fraud in factum or fraud in esse contractus;
e. Minority;
f.
Marriage in the case of a wife;
g. Insanity where the insane person has a guardian appointed
by the court;
h. Ultra vires acts of a corporation, where the corporation is
absolutely prohibited by its charter or statute from issuing
any commercial paper under any circumstances;
i.
Want of authority of agent;
j.
Execution of instrument between public enemies;
k. Illegality of contract where it is the contract or instrument
itself which is expressly made illegal by statute; and
l.
Forgery.
Personal/Equitable Defenses those which are available only
against a person not a holder in due course or a subsequent
holder who stands in privity with him.
Examples:
a. Absence or failure of consideration, partial or total;
b. Want of delivery of complete instrument;
c. Insertion of wrong date in an instrument, where it is
payable at a fixed period after date and it is issued
undated or where it is payable at a fixed period after sight
and the acceptance is undated;
d. Filling up of blank contrary to authority given or not within
reasonable time, where the instrument is delivered;
e. Fraud in inducement;
f.
Acquisition of instrument by force, duress, or fear;
g. Acquisition of the instrument by unlawful means;
h. Acquisition of the instrument for an illegal consideration;
i.
Negotiation in breach of faith;
j.
Negotiation under circumstances that amount to fraud;
k. Mistake;
l.
Intoxication (according to better authority);
m. Ultra vires acts of corporations where the corporation has
the power to issue negotiable paper but the issuance was
not authorized for the particular purpose for which it was
issued;
n. Want of authority of agent where he has
o. apparent authority;
p. Insanity where there is no notice of insanity on the part of
the one contracting with the insane person; and
q. Illegality of contract where the form or consideration is
illegal.

diligence could have

discovered the nature of
the instrument, the fraud
cannot be considered a real
defense, as where a person,
who can read, signed a note
but failed to read it.
Effects of Defenses:
1.

Complete and undelivered instrument

as between immediate parties and as regards a remote

party other than a holder in due course, the delivery must
be authorized in order to be effectual

where the instrument is in the hands of a holder in due

course, a valid delivery thereof by all parties prior to him
so as to make them liable to him is conclusively presumed

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

2.

Incomplete but delivered instrument

where the instrument is wanting in any material particular,

the person in possession thereof has a prima facie authority
to complete it by filling up the blanks therein.

it must be filled up strictly in accordance with the

authority given and within a reasonable time

if any such instrument, after completion, is negotiated to a

holder in due course, it is valid and effectual for all
purposes in his hands, and he may enforce it as if it had
been filled up strictly in accordance with the authority
given and within a reasonable time.

3.

Incomplete and undelivered instrument

it will not, if completed and negotiated without authority,

be a valid contract in the hands of any holder, as against
any person whose signature was placed thereon before
delivery.

However, subsequent indorsers are liable.

4.

Forgery

counterfeit making or fraudulent alteration of any writing,

which may consist of:
1. signing of anothers name with intent to defraud; or
2. alteration of an instrument in the name, amount,
name of payee, etc. with intent to defraud.

2.

FRAUD IN FACTUM
1. It exists in those cases in
which a person, without
negligence, has signed an
instrument which was in
fact a negotiable
instrument, but was
deceived as to the
character of the instrument
and without knowledge of
its, as where a not was
signed by one under the
belief that he was signing
as a witness to a deed.
2. This kind of fraud is a
real defense because there
is no contract. It implies
that the person did not
know what he was signing.
But where the signer by the
exercise of reasonable

FRAUD IN INDUCEMENT
1. It is that which related
to the quality, quantity,
value or character of the
consideration of the
instrument. In this case,
the signer is led by
deception to execute what
he knows is a negotiable
instrument. It implies that
the signer knew what he
was signing but that he was
induced by fraud to sign.
2. Such type of fraud is only
a personal defense because
it does not prevent a
contract.

Effect: signature is wholly inoperative, and no right to

retain the instrument, or to give a discharge therefore, or
to enforce payment thereof against any party thereto, can
be acquired through or under such signature
Exception: unless the party against whom it is sought to
enforce such right is precluded from setting up the forgery
or want of authority.

Cut-Off Rule
General Rule: Parties prior to the forged signature are cutoff from the parties after the forgery in the sense that prior
parties cannot be held liable and can raise the defense of
forgery. The holder can only enforce the instrument against
parties who became such after the forgery.
Exception: When the prior parties are precluded from
setting up the defense of forgery.
Persons precluded from setting up the defense of forgery
are:
1. Those who by their acts, silence, or negligence, are
estopped from setting up the defense of forgery;
2. Those who warrant or admit the genuineness of the
signature in question. These include acts or omissions
that amount to ratification, express or implied.
Note: Persons precluded from setting up the defense of forgery
may still recover damages under the NCC provisions on quasidelicts.

Rules on Forgery:
Promissory Notes
1. Makers signature forged
Order Instrument
a. Maker is not liable because he never became a party
to the instrument.
b. Indorsers subsequent to forgery are liable because of
their warranties.
c. Party who made the forgery is liable.
Bearer Instrument
a. Maker is not liable.
b. Indorsers may be made liable to those persons who
obtain title through their indorsements.
c. Party who made the forgery is liable.
2. Payees signature forged
Order Instrument
a. Maker and payee not liable
b. Indorsers subsequent to the forgery is liable.
c. Party who made the forgery is liable
Bearer Instrument
a. Maker is liable. Indorsement is not necessary to title
and the maker engages to pay holder.
b. Party who made the forgery is liable
3. Indorsers signature forged
Order Instrument
a. Maker, payee, and indorser who signature was forged
is not liable.
b. Indorsers subsequent to forgery are liable because of
their warranties.
c. Party who made the forgery is liable. Bearer
Instrument
a. Maker is liable. Indorsement is not necessary to title
and the maker engages to pay holder.
b. Indorser whose signature was forged is not liable
Party who made the forgery is liable.

A.

c.

B. Bill of Exchange
1. Drawers signature forged
In an Order Instrument
a. Drawer is not liable.
b. Drawee is liable if it paid (nor recourse to drawer)
because he admitted the genuineness of the drawers
signature. Drawee cannot recover from the collecting
bank because there is no privity between the
collecting bank and the drawer. There is no warranty
as to the signature of the drawer. (Associated Bank v.
CA)
c. Indorsers subsequent to forgery are liable.
d. Party who made the forgery is liable
In a Bearer Instrument
a. Drawer is not liable
b. Drawee is liable if it paid. Drawee cannot recover
from the collecting bank because it is bound to known
the drawers signature since the latter is its depositor.
c. Party who made the forgery is liable.
2.

Payees signature forged

Order Instrument
a. Drawer, drawee and payee not liable. Cut-off rule
applies.
b. Indorsers subsequent to forgery are liable.
c. Party who made the forgery is liable
Bearer Instrument
a. Drawer is liable. His indorsement is not necessary
to pass title.
b. Drawee is liable. No privity between drawer and

c.
d.
e.
3.

5.

payee because indorsement of payee is not

necessary (Ang Tek Lian case, 87 SCRA 383)
Payee is not liable
Collecting bank is liable because of warranty.
Party who made the forgery is liable.

Indorsers signature forged

Order Instrument
a. Drawer, payee and indorser whose signature was
forged are not liable.
b. Drawee is liable if it paid.
c. Indorsers subsequent to forgery are liable.
d. Party who made the forgery is liable.
Bearer Instrument
a. Drawer is liable. Indorsement is not necessary to
pass title.
b. Drawee is liable.
c. Indorser whose signature was forged is liable
because indorsement is not necessary to pass
title.
d. Party who made the forgery is liable

Alteration

Effect: the instrument is avoided

Exceptions:
1. against a party who has himself made, authorized, or
assented to the alteration
2. subsequent indorsers
3. holder in due course not a party to the alteration - he
may enforce payment according to its original tenor

Changes constituting material alteration:

1. date;
2. sum payable, either for principal or interest;
3. time or place of payment;
4. number or relations of the parties;
5. medium or currency in which payment is to be made;
6. that which adds a place of payment where no place of
payment is specified; and
7. any other change or addition which alters the effect of
the instrument in any respect.
Note: a material alteration is one that alters the effect of
the instrument; one which changes the items required to be
stated under Sec. 1, NIL.

Spoliation alteration made by a stranger.

The general rule denies the drawee banks right to charge
against the drawers account the amount of an altered
check. However, the latters negligence, before or after the
alteration, may estop him from setting such alteration as
against an innocent drawee bank who has paid the check.
In cases of altered checks and checks with forged
indorsements, the drawee bank must notify and return
them to the collecting bank before 4:00 p.m. of the next
day of clearing, but the drawee bank may still return them
even after such time provided he does so within 24 hours
from its discovery of the alteration or forged instruments so
that recovery of the amount may be had. BUT, in no event
beyond the period fixed or provided by law for filing of a
legal action by the returning bank against the bank sending
the same.
Note: Alteration is only a partial real defense because a
holder in due course can still enforce it according to its
original tenor.