DEFENSES & EQUITIES
1. Defenses in General
1.1. REAL defense – attaches to
instrument on the principle that there
was no contract at all; available against
ALL holders including holders in due
course. They are those which attach to
the instrument itself and generally,
disclose an absence of one of the
essential elements of a contract.
1.2. PERSONAL defense – grows out
of the agreement or conduct of a
particular person in regard to the
instrument which renders it inequitable
FOR HIM, though holding the legal title,
to enforce it against the party sought to
be made liable; not available against a
HDC .can be raised only against holders
not on due course. Here, the true
contract appears , but for some reason ,
the defendant is excused from the
obligation to perform.
1.3. Equities or Claims of
Ownership are of 2 Kinds
1. Legal – one who has legal title to the
instrument may recover possession
thereof even from holder in due course
2. Equitable – may only recover from a
holder not in due course
2. Real Defenses
2.1. Incapacity: REAL defense but
available only to the incapacitated party
(ex. minor or corporation); the
indorsement or assignment of the
instrument by a corp. or by an infant
passes the property therein,
notwithstanding that from want of
capacity, the corp. or infant may incur
no liability thereon.
(Sec.22, NIL)
2.2. Incomplete, Undelivered
Instrument
1. Instrument 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. (Sec.
15, NIL)
2. Who may be estopped from raising
the real defense under Sec 15? A
drawee bank whose negligent custody
of the checks, after partial execution,
contributed to its escape
3. Personal Defenses
3.1. Complete, Undelivered
Instrument
a. CONCLUSIVE presumption of a valid
delivery – where the instrument is in the
hands of a HDC
b. PRIMA FACIE presumption of a valid
delivery – where the instrument is no
longer in the possession of a party
whose sig appears thereon (Sec. 16,
NIL)
3.2. Incomplete, Delivered (sec.14)
1. This is a personal defense only
because provision states that if any
instrument so completed is negotiated
to a holder in due course, it is valid and
effectual for all purposes
2. 2 Kinds of Writings:
i. Where instrument is wanting in any
material particular: person in
possession has prima facie authority to
complete it by filing up blanks therein
ii. Signature on blank paper
delivered by person making the
signature IN ORDER that the paper may
be CONVERTED into a NI à operates as
prima facie authority to fill up as such
for any amount
3. The authority to fill up is limited by
the following:
a. When completed, it may be enforced
upon the parties thereto only if it was
filled strictly in accordance with the
authority given
b. The filling up must be within a
reasonable time
NOTE: If the signature on a paper is
given only for autograph purposes and
the same is converted into a NI, this will
amount to forgery, constituting thus a
valid defense even against a HDC
4. This provision contemplates delivered
instruments, so the person in
possesion cannot be a thief or a finder
but a person in lawful possession- one
to whom the instrument has been
delivered.
5. In order that any such instrument,
when completed, may be enforced
against any person who became a party
thereto prior to its completion:
a. must be filled up strictly in
accordance w/ AUTHORITY given
b. within a REASONABLE TIME – in
determining what is reasonable time,
regard is to be had to the
(1) nature of the instrument, (2) usage
of trade or business (if any) with respect
to such instruments, and 3) the facts of
the particular case
6. BUT if negotiated to HDC, may
enforce
it as if it had been filled up properly
7. What details may be filled up?
a. Amount, as to a signed blank paper
b. Date (Sec 13 “… The insertion of a
wrong date does not void the
instrument in the hands of a
subsequent holder in due course…”)
c. Place of payment
d. Name of payee
3.3. Lack of Consideration (Sec.
28)
1. ABSENCE or failure of consideration is
a matter of defense as against any
person not a HDC.
2. PARTIAL FAILURE of consideration is
a defense pro tanto whether the failure
is an ascertained and liquidated amount
or otherwise.
3.4. Illegality
1. In general, a PERSONAL defense
even if
CC1409 provides that a contract with an
illegal cause is void.
2. REAL when the law expressly
provides for illegality as a real defense
(Statutory declaration of illegality
RODRIGUEZ v MARTINEZ (1905)
Maker cannot be relieved from the
obligation of paying the holder the
amount of the note alleged to have
been executed for an unlawful
consideration.
(Illegality is personal, so defense only
against a holder not in due course)
The holder paid the value of the note to
its former holder. He did so without
being aware of the fact that the note
had an unlawful origin. He accepted
note in good faith, believing the note
was valid and absolutely good. The
maker even assured the holder before
the purchase that the note was good
and that he would pay it at a discount .
3.5. Duress
1. In general, PERSONAL defense.
2. REAL if duress so serious as to give
rise to a real defense for lack of
contractual intent
3. CAMPOS: There may be cases where
the duress employed is so serious that it
will give rise to a real defense because
of the lack of contractual intent.
Although the signer may know what he
is signing, there may be wanting the
intent or willingness to be bound. Then
it becomes a real defense.
4. Sometimes Real, Sometimes
Personal
4.1. Forgery (Sec. 23): made without
authority of person whose signature it
purports to
be
1. In general, a REAL defense: …
Effect
a. signature is wholly inoperative
b. no right to retain instrument, or
give discharge, or enforce payment
against any party thereto, can be
acquired through or under such
signature (unless forged signature
unnecessary to holder’s title)
c. No subsequent party can acquire the
right against any party thereto (prior to
the forgery) to:
i. Retain the instrument
ii. Give a discharge there for
iii. Enforce payment thereof
2. PERSONAL if the party against whom
it
is sought to enforce such right is
PRECLUDED from setting up
forgery/want of authority;
a. Who are PRECLUDED?
i. parties who make certain warranties,
like a general
indorser or acceptor after forgery (Sec.
62, NIL)
ii. estopped / negligent parties
iii. parties who ratify (BUT there are
conflicting views whether “precluded”
includes ratification)
b. One view holds that a forged
signature cannot be ratified
because ratification involves the relation
of agency and a forger does not assume
to act for another.
3. ACCEPTANCE AND PAYMENT of a
forged instrument
When there is acceptance and
payment of a forged instrument, the
rights and liabilities of the parties
depend on whether the forgery pertains
to the drawer/maker’s
signature or merely of an
indorsement.
a. Drawer/Maker’s signature
i. PRICE v NEAL, The drawee
who had paid an accepted bill
as well as a non-accepted bill,
each of which was forged,
could NOT recover the money
paid out on the bill. The
neglect was on the part of the
drawee.
PNB v QUIMPO (1988)
A bank is bound to know the signatures
of its depositors. If bank pays a forged
check it must be considered as making
the payment out of its own funds and
cannot charge the account of the
depositor whose signature was forged.
SAMSUNG CONSTRUCTION CO.,
INC. VS. FAR
EAST BANK AND TRUST CO. AND CA
(2004)
Consequently, if a bank pays a forged
check, it must be considered as paying
out of its funds and cannot charge the
amount so paid to the account of the
depositor. A bank is liable, irrespective
of
its good faith, in paying a forged check.
ii. Extensions Of The Price v
Neal Doctrine: The bar to
recovery (Price v Neal
doctrine) is extended to
overdrafts and stop payment
orders
1) Overdraft occurs when a
check is issued for an
amount more than what
the drawer has in deposit
with the drawee bank.
RULE: The drawee who
pays the holder of the bill
cannot recover from the
holder what he paid under
mistake
2) Stop Payment Order is
one issued by the drawer
of a check countermanding
his first order to the
drawee bank to pay the
check. RULE: The drawee
bank is bound to follow the
order, provided it is
received prior to its
certification or payment of
the check
3) SOME EXCEPTIONS:
o If the payment to holder is
a legitimate debt of the
drawer which the holder in
due course could have
recovered from the drawer
anyway.
o If the stop order comes
after the bank has certified
or accepted the check, the
bank is under the legal
duty to pay the holder and
will not be liable to the
drawer for doing so.
iii. Effect Of Negligence Of
Depositor - If proximate cause
of loss, the bank (drawee) is
not liable
1) It is the duty of the
depositor/drawer to
carefully examine bank’s
statements, cancelled
checks, his check stubs,
and other pertinent records
within a reasonable time
and to report any errors
without unreasonable
delay.
2) If a drawer/depositor’s
negligence and delay
should cause a bank to
honor a forged check,
drawer cannot later
complain should bank
refuse to recredit his
account.
ILUSORIO vs CA (2002)
True, it is a rule that when a signature
is forged or
made without the authority of the
person whose
signature it purports to be, the check is
wholly
inoperative.
However, the rule does provide for an
exception,
namely: “unless the party against
whom it is
sought to enforce such right is
precluded
from setting up the forgery or want
of
authority.” In the instant case, it is the
exception that applies. Petitioner is
precluded
from setting up the forgery, assuming
there is
forgery, due to his own negligence in
entrusting
to his secretary his credit cards and
checkbook
including the verification of his
statements of
account.
SAMSUNG CONSTRUCTION CO.,
INC. VS. FAR
EAST BANK AND TRUST CO. AND CA
(2004)
The general rule remains that the
drawee who
has paid upon the forged signature
bears the loss.
The exception to this rule arises only genuineness of any
when indorsement.
negligence can be traced on the part of 2) Generally, the drawee
the may only recover from
drawer whose signature was forged, the holder. Should he fail
and the need to do so(for instance due
arises to weigh the comparative to insolvency) he cannot
negligence recoup his loss by
between the drawer and the drawee to charging it to the
determine drawer’s account
who should bear the burden of loss. 3) Although a
Still, even if the bank performed with depositor/drawer owes a
utmost duty to his drawee bank
diligence, the drawer whose signature to examine his cancelled
was forged checks, he has no
may still recover from the bank as long similar duty as to forged
as he or indorsements.
she is not precluded from setting up the 4) The drawer, as soon as
defense he comes to know of the
of forgery. After all, Section 23 of the a forged indorsement
Negotiable should promptly notify the
Instruments Law plainly states that no drawee bank
right to REPUBLIC v EBRADA
enforce the payment of a check can Drawee can recover. It is not supposed
arise out of a to be the
forged signature. Since the drawer, duty of the drawee to ascertain whether
Samsung the
Construction, is not precluded by signatures of the payee or indorsers are
negligence from genuine or
setting up the forgery, the general rule not.
should ii. When drawee may recover
apply. from DRAWER
b. Indorsement: 1) Where the instrument is
i. When it is the signature of originally a bearer
the indorser that is forged, instrument, because the
the drawee and drawer CAN indorsement can be
recover vs holder disregarded as being
1) The drawee can recover unnecessary to the holder’s
the amount paid by him title
in cases where only an 2) Indorsement forged by an
indorsement has been employee or agent of the
forged . This is because drawer
drawee makes no 3) If due to the drawer’s
warranty as to the negligence/delay, the
forgery is not discovered 1) Collecting bank only liable
until it is too late for the for forged indorsements
bank to recover from the and not forgeries of the
holder or the forger drawer or maker’s
GEMPESAW v CA, PBC signature. (PNB v CA,
While there is no duty resting on the 1968)
drawer to look 2) The collecting bank or
for forged indorsements on his cancelled last indorser generally
checks, a suffers the loss because
depositor is under a duty to set up it has the duty to
an ascertain the
accounting system and business genuineness of all prior
procedure as indorsements considering
are reasonably calculated to that the act of presenting
prevent or render the check for payment to
the forgery of indorsements the drawee is an
difficult, particularly assertion that the party
by the depositor’s own employees. making the presentment
As a rule the drawee bank who has paid had done its duty to
the check ascertain the
with forged indorsement, cannot charge genuineness of the
the drawer’s indorsements. (BPI v CA,
account for the amount of the said 1992)
check. An 3) In presenting the checks
exception to this rule is where the for clearing the collecting
drawer is guilty of agent, made an express
such negligence which causes the bank guarantee on the validity
to honor the of “all the prior
check. endorsements”. ( BDO v
iii. When drawee may not Equitable bank)
recover from holder 4) The drawee bank is not
1) Where the instrument is similarly situated as the
originally a bearer collecting bank because
instrument , because the the former makes no
indorsement can be warranty as to the
disregarded as being genuineness of any
unnecessary to the holder’s indorsement. The drawee
title bank’s duty is but to
2) If drawee fails to act verify the genuineness of
promptly , if he delays in the drawer’s signature
informing the holder whom and not of the
he paid indorsement because the
iv. Between Drawee Bank and drawer is its client.
Collecting Bank 5) Where the negligence of
the drawee bank is the inoperative and payment made through
proximate cause of the or under such
collecting bank’s signature is ineffectual. The second part
payment of a check with admits of
a forged indorsement, exception. In this jurisdiction, the
the drawee bank may be negligence of the
held liable to the party invoking the forgery is an
collecting bank . exception to the
6) When both are guilty of general rule.
negligence, the degree of Both drawee and collecting bank
negligence of each will be were negligent
weighed in considering in the selection and supervision of their
the amount of loss which employees
each should bear. (refer resulting in the encashment of the
to BPI v CA, 1992) checks by the
GREAT EASTERN LIFE v impostor. Both banks were not able to
HONGKONG & overcome the
SHANGHAI BANK (1922) presumption of negligence in the
“Where a check is drawn payable to the selection and
order of supervision of their employees
one person and is presented to a bank Considering the comparative negligence
by another of the
and purports upon its face to have been parties, the demands of substantive
duly justice are
indorsed by the payee of the check , it satisfied by allocating the loss and the
is the duty of costs on a 60-
the bank to know that the check was 40 ratio.
duly indorsed by ASSOCIATED BANK v CA (1996)
the original payee and where the bank By reason of the statutory warranty of a
pays the general
amount of the check to a 3rd person , indorser in Section 66 of the Negotiable
who has forged Instruments
the signature of the payee , the loss Law, a collecting bank which indorses a
falls upon the check bearing
bank who cashed the check , and its a forged indorsement and presents it to
remedy is the drawee
against the person to whom it paid the bank guarantees all prior indorsements,
money.” including the
BPI v CA (1992) forged indorsement. It warrants that the
Section 23 of the NIL has 2 parts. The instrument
first part states is genuine, and that it is valid and
the general rule that a forged signature subsisting at the
is wholly time of his indorsement. Because the
indorsement is
a forgery, the collecting bank commits a 1. As a DEFENSE:
breach of a. PERSONAL defense when used to
this warranty and will be accountable to deny liability according to the
the drawee tenor of the instrument
bank. This liability scheme operates b. REAL defense when relied on to
without regard to deny liability according to the
fault on the part of the altered terms.
collecting/presenting bank. 2. What constitutes material alteration?
Even if the latter bank was not a. Statutory: Review Sec.125, NIL
negligent, it would still i. change date
be liable to the drawee bank because of ii. sum payable, either for
its principal or interest
indorsement. iii. time or place of payment
PCIB v. CA (2001) iv. number/relations of parties
… A bank which cashes a check drawn v. medium/currency of
upon another payment,
bank, without requiring proof as to the vi. adds place of payment where
identity of none specified,
persons presenting it, or making vii. other change/addition altering
inquiries with regard effect of
to them, cannot hold the proceeds viii. instrument in any respect
against the drawee b. Jurispridence
when the proceeds of the checks were i. An alteration is said to be
afterwards material if it changes the
diverted to the hands of a third party. In effect of the instrument. It
such cases means that an unauthorized
the drawee bank has a right to believe change in an instrument that
that the purports to modify in any
cashing bank (or the collecting bank) respect the obligation of a
had, by the party or an unauthorized
usual proper investigation, satisfied addition of words or numbers
itself of the or other change to an
authenticity of the negotiation of the incomplete instrument
checks. relating to the obligation of a
Thus, one who encashed a check which party. (PNB v CA, 1996)
had been ii. A material alteration is one
forged or diverted and in turn received which changes the items
payment which are required to be
thereon from the drawee, is guilty of stated under Section 1 of the
negligence Negotiable Instruments Law.
which proximately contributed to the (Metrobank v Cabilzo, 2006)
success of the 3. IMMATERIAL ALTERATION
fraud practiced on the drawee bank. a. Campos: Any other alteration
4.2. Material Alteration (Sec.124) would be non-material and would
not affect the liability of any prior
party . Note that #7 is a catch-all
provision such that sec 125 may
still have broad applicability.
b. Alterations of the serial numbers
do not constitute material
alterations on the checks... [It] is
not an essential requisite for
negotiability under Section 1 of
the Negotiable Instruments Law.
The aforementioned alteration did
not change the relations between
the parties. The name of the
drawer and the drawee were not
altered. The intended payee was
the same. The sum of money due
to the payee remained the same.
(PNB v CA, 1996; Int’l Corporate
Bank v CA, 2006)
c. EFFECT: an innocent alteration
(generally, changes on items other
than those required to be stated
under Sec. 1, N. I. L.) and
spoliation (alterations done by a
stranger) will not avoid the
instrument, but the holder may
enforce it only according to its
original tenor. (PNB v CA, citing J.
Vitug)
4. EFFECT OF MATERIAL ALTERATION
a. General Rule: Where NI materially
altered w/o the assent of all parties
liable thereon it is AVOIDED,
except as against:
i. party who has himself made,
authorized or assented to
alteration
ii. subsequent indorser because
by indorsement he warrants
that the instrument is in all
respects what it purports to be
and that it was valid and
subsisting at the time of his
indorsement (Secs. 65 and
66, NIL)
b. As to a HOLDER in DUE COURSE
i. When an instrument that has
been materially altered is in the
hands of a HDC not a party to
the alteration, HDC may
enforce payment thereof
according to orig. tenor
ii. Alteration must NOT be
apparent on the face of the
instrument for the holder then
would not be a holder in due
course
iii. Where the interest rate is
altered , the holder in due
course can recover the principal
sum with the original rate of
interest
c. When alteration is of the amount or
the interest rate is altered, the
holder can recover the ORIGINAL
AMOUNT/interest rate.
5. DRAWER’S NEGLIGENCE
a. The general rule is that the drawee
cannot charge against the drawer’s
account the amount of an altered
check.
b. BUT, the drawer’s negligence,
before or after the alteration, may
estop him from setting up alteration
as a defense.
c. However, the drawer is not bound
to so prepare the check that nobody
else can successfully tamper with it
(ex. a drawer cannot be expected
to foresee that his clerk will use
acid to alter his checks, Critten v.
Chemical Natl Bank)
d. Where the negligence of the
drawer consists in failing to
discover alterations previously
made which he could have
discovered by a comparison of the
cancelled checks and check stubs
or by diligent observation of his regulating
records and could thus have clearing of
prevented the drawee bank from checks and
subsequently cashing other limiting the
altered checks , the drawee can period within
charge the subsequent check which a drawee
against the negligent drawer’s bank may return
account. a spurious check
6. EFFECT OF DRAWEE’S ACCEPTANCE b. but if holder is
OF ALTERED CHECKS guilty of
a. Where the interest rate is altered, negligence which
the HDC can recover the principal proximately
sum with the original rate of contributed to the
interest. erroneous
i. EXCEPT: A subsequent payment by
indorser, because by the drawee, holder
indorsement he warrants liable (PCIB v CA,
that the instrument is in all 2001)
respects what it purports to MONTINOLA v PNB (1951)
be and that it was valid and The insertion of the words “Agent
subsisting at the time of his Philippine
indorsement (Sec 65 and National Bank” converted the bank from
66) a mere
b. RECOVERY after acceptance or drawee to a drawer and therefore
payment by the drawee bank changes its
i. FROM HOLDER liability, constitutes material alteration of
1) Prevailing view - Yes, the
bec. of (1) payment instrument without consent of the
under mistake, (2) Sec. parties liable
124 and (3) Sec.62 in thereon and so discharges the
relation to Sec. 132 instrument. Drawee
2) Minority view – No, bec. bank is not liable.
of (1) estoppel, (2) HONGKONG & SHANGHAI BANK v
stability of transactions PEOPLES
and (3) bank is in a BANK (1970)5
better position to The failure of the drawee bank to call
shoulder the loss. the attention
3) SC: of the collecting bank as to such
a. adopted the alteration until
minority view after the lapse of 27 days would negate
but on a whatever
different basis— right it might have had. The remedy of
the Central Bank the drawee
Circular
bank is against the party responsible for pay to the order of the payee in
the forgery accordance with the
or alteration. drawer’s instructions as reflected on the
REPUBLIC BANK v CA (1991) face and by
The collecting bank is protected by 5 Affirmed the minority view that
the24-hour drawee cannot recover
clearing house rule from the liability to the terms of the check. Payment made
refund the under
amount paid by the drawee bank. materially altered instrument is not
[Note: A much payment done
recent Circular changed the point of in accordance with the instruction of the
reckoning for drawer.
the return of the altered check from When the drawee bank pays a
within 24 materially altered
hours from the clearing to within 24 check, it violates the terms of the check,
hours from the as well as
discovery of the alteration] its duty to charge its client’s account
ASSOCIATED BANK v CA (1996) only for bona
The rule mandates that the checks be fide disbursements he had made. Since
returned the drawee
within twenty-four hours after discovery bank, in the instant case, did not pay
of the according to
forgery but in no event beyond the the original tenor of the instrument, as
period fixed by directed by
law for filing a legal action. The the drawer, then it has no right to claim
rationale of the rule reimbursement from the drawer, much
is to give the collecting bank (which less, the
indorsed the right to deduct the erroneous payment
check) adequate opportunity to proceed it made from
against the the drawer’s account which it was
forger. If prompt notice is not given, the expected to treat
collecting with utmost fidelity.
bankmaybe prejudiced and lose the BPI v BUENAVENTURA (2005)
opportunity to …It [the bank] should be able to detect
go after its depositor. alterations,
ii. FROM DRAWER: drawee has no erasures, superimpositions or
right to seek reimbursement intercalations
from drawer for its erroneous thereon, for these instruments are
payment prepared,
METROBANK v CABILZO (2006) printed and issued by itself, it has
In addition, the bank on which the control of the
check is drawn, drawer's account, and it is supposed to
known as the drawee bank, is under be familiar
strict liability to
with the drawer's signature. It should b. Fraud in factum accompanied by
possess NEGLIGENCE of maker or signer
appropriate detecting devices for i. Where the signor does not
uncovering know the nature of the
forgeries and/or alterations on instrument he signs, but
these where, by the exercise of
instruments… ordinary care, he could have
There is nothing inequitable in such a discovered it.
rule for if in ii. Three factors are typically used
the regular course of business the check in determining the existence of
comes to negligence:
the drawee bank which, having the 1) legal character of the
opportunity to instrument which the
ascertain its character, pronounces it to signer thinks he is signing
be valid 2) the physical condition of
and pays it, as in this case, it is not only the signer and his ability to
a question read
of payment under mistake, but payment 3) whether the signer had the
in neglect opportunity at the time of
of duty which the commercial law places signing, to ascertain the
upon it, legal nature of the paper
and the result of its negligence must he is executing
rest upon it.
c. REMEDY: Unless a forgery or
alteration is attributable to the
fault or negligence of the drawer
himself, the remedy of the drawee
bank that negligently clears a
forged and/or altered check for
payment is against the party
responsible for the forgery or
alteration, otherwise, it bears the
loss. (BPI v Buenaventura, 2005)
4.3. Fraud
1. REAL DEFENSE
a. fraud in execution / fraud in
factum: did not know that paper
was a NI when it was signed
b. not liable to ANY holder
2. PERSONAL DEFENSE
a. Fraud in inducement: knows it is
NI but deceived as to value/terms
i. Available as a defense against
non-HDC