Notes on Negotiable Instruments.

What is a personal defense?

A personal defense is one which involves the relationships of the parties,

between and among themselves, wherein there is a true and valid underlying contract,
but where, for various reasons, such as fraud, duress, mistake, or prior breach of
contract, the defendant is excused from his obligation to perform.

The personal defenses are:

1. Failure or absence of consideration;

2. Illegal consideration;
3. Non-delivery of a complete instrument;
4. Conditional delivery of a complete instrument;
5. Fraud in inducement;
6. Filling up blanks without authority to do so;
7. Duress or intimidation;
8. Filling up blanks beyond a reasonable time;
9. Transfer in breach of faith;
10. Mistake;
11. Ante-dating or post-dating, for illegal or fraudulent purposes.

What is a real defense?

A real defense is one which involves the instrument, or the underlying contract
itself, wherein there is an absence, of one or more of the essential elements of a contract,
or where the admitted contract is vitiated.

The real defenses are:

1. Minority available only to the minor;

2. Forgery;
3. Non-delivery of an incomplete instrument;
4. Material alteration;
5. Ultra vires act of a corporation;
6. Fraud in fact;
7. Illegality;
8. Vicious force or violence;
 9. Lack of authority;
10. Prescription;
11. Discharge in insolvency.

What are the defenses that may be raised against a holder in due course?

Only real defenses, or those which affect the negotiable instrument or the
contract may be raised against the holder in due course.

Does negotiation by a minor, operate to pass title to the holder?

Yes, negotiation by a minor passes title of negotiable instrument. Although the

defense is a real defense, the negotiation still passes title to the holder, the same rule
also applies to corporations with regards to an ultra vires act. The corporation may raise
it as a defense, but the negotiation still transfers title over the negotiable instrument.

What is delivery?

Delivery is the transfer of possession of the negotiable instrument, by one person

to another, with the intention to transfer title to the instrument.

What is the effect, if an instrument which is not complete, was delivered?

Section 15 provides that, the delivery will not affect a valid contract, in the hands
of any holder, as against any person, whose signature was placed thereon, prior to
delivery.

When is delivery valid?

Section 16 provides that, delivery is valid when it is made either by, or under the
authority of the person making, drawing, accepting, or endorsing the negotiable
instrument.

What are the rules involving delivery?

 The rules on delivery are as follows:

1. A negotiable instrument must be delivered.

2. Deliver6y must either be by, or under the authority of the
person making, drawing, accepting, or endorsing the
instrument.
3. Delivery is presumed to have been made, if the instrument is no
longer in the hands of the maker, or drawer, for the purpose of
issuing it, or the endorser for the purpose of transferring title.
4. As between immediate parties, and remote parties who are not
holders in due course, the delivery of a complete instrument,
may be established to be conditional, or for a special purpose,
and not for the purpose of transferring the title.
5. As between immediate parties, and remote parties, who are not
holders in due course, it may be established that there was no
delivery at all of the complete instrument.
6. As to holders in due course, it cannot be established that there
was no delivery, because delivery as to the holder in due course,
is conclusive upon his possession of the instrument.
7. As to a holder in due course, it cannot be established that the
delivery was only conditional, or for a special purpose.

What are the rules with regard to filling up blanks, in a negotiable instrument?

The rules are:

1. A person in possession of such an instrument has prima facie

authority, to complete the negotiable instrument by filling it up strictly
in accordance with the authority given, and within a reasonable time.
2. If a person delivers a blank paper, which contains his signature, and
which he intends to convert into a negotiable instrument, the person to
whom it is delivered, has prima facie authority to fill it up, for any
amount in accordance with the authority given and within a
reasonable time.
3. The holder of negotiable instrument, after it was filled up, is a holder
in due course, that holder may enforce the instrument, as if it were
filled up with the proper authority, and within a reasonable time.
When is fraud a real defense? When is fraud a personal defense?

Fraud is a real defense when the person is induced to sign an instrument,

without its character as a note or bill.

Fraud is a personal defense when the person who signs the same, is aware that
he is signing a negotiable instrument, and intends to sign it, but he was only induced to
do so, through fraud. His consent is vitiated by fraud.

When is alteration a defense?

According to Section 125, alteration is a defense when it is material.

Is material alteration a complete defense?

According to Section 124, material alteration is only a partial defense. A holder in

due course, who is in possession of a materially altered instrument, who is not a party
to the alteration, may enforce payment thereof, according to its original tenor.

What is the effect of ante-dating, or post-dating a negotiable instrument?

Ante-dating, or post-dating does not affect a negotiable instrument per se. a

personal defense only arises, when the ante-dating or the post-dating, was done for a
fraudulent or illegal purpose.

What is the effect of forgery?

Section 23 provides that, a forged signature is wholly inoperative. No right to

retain the instrument, or to give a discharge therefor, or to enforce payment thereof
against any party thereto, can be acquired through or under the signature. The
exception is when the party against whom it is sought to enforced, is precluded from
setting up the defense of forgery, or the want of authority.

What is the effect of the forgery of the makers signature in a promissory note?
 If the signature of the maker is forged in a promissory note, the maker is not
liable on the instrument, to all subsequent parties, whether the instrument is an order or
a bearer instrument.

What is the effect of the forgery of the signature of the endorser in a promissory
note?

If the signature of the endorser is forged in a promissory note, the endorser is

still secondarily liable, because they warrant that the instrument is genuine, and in all
respects what it purports to be.

If the note is payable to bearer, the forged signatures may not be set up as a
defense. The signature of the endorser is unnecessary to pass title to the negotiable
instrument. The maker is still primarily liable on the note.

What is the effect of the forgery of the drawers signature in a bill of exchange?

If the drawers signatures is forged in a bill of exchange, the drawer is not liable
on the instrument, to all subsequent parties, whether the bill is an order or bearer bill of
exchange.

What is the effect of the forgery of the endorsers signature in a bill of exchange?

If the endorsers signature is forged in a bill of exchange, the subsequent holder

cannot enforce payment against the drawer, the drawee or the payee.

Endorsers prior to the forgery, may set up the real defense of forgery. Endorsers
subsequent to the forgery are still liable.

Endorsers precluded from setting up the defense of forgery, are liable,

notwithstanding having endorsed the bill prior to the act of the forgery.

If the bill is a bearer bill of exchange, the holder may still recover from the drawer
because the forged signature is unnecessary for his title.

What is the cut-off rule? How is it applied?

 The cut-off rule states that, parties prior to the forged signature, are cut-off from
the parties after the forgery, and cannot be held liable for the forgery. These parties may
validly set up the defense of forgery, against any holder, including a holder in due
course.

The exceptions to the cut-off rule are those prior parties may still be held liable, if
they are precluded from setting up the defense of forgery, either because of their
warranties or representations of their negligence.

What is the effect of an insertion of a wrong date on an instrument?

The insertion of a wrong date becomes a personal defense, between immediate

and prior parties. The holder in due course has the right to regard the wrongfully
inserted date, as the true date based on Section 13 of the Negotiable Instruments Law.

Suppose Senator C executed a promissory note payable to S, or the latters order, as a

reward for the political support and friendship of S to Senator C. The note was later
negotiated to H, a holder in due course.

May H enforce the note against Senator C? Would your answer remain the same, if it
were S who sought to enforce payment against Senator C?

Yes, H may enforce the note against Senator C. H is a holder in due course. He
possesses the right to enforce the instrument for the full amount stated therein, against
the maker, Senator C. H has taken the instrument free from all personal defenses,
between the prior parties.

Senator C may not set up the defense of want or absence of consideration against
H, because the same is merely a personal defense. Personal defenses have no effect
against holders in due course.

S may not enforce payment against Senator C. The promissory note was given on
the basis of support and friendship. Just as love and affection do not constitute valid
consideration, within the ambit of the Negotiable Instruments Law. The absence or lack
of consideration, is a defense pro tanto, between immediate parties, and against a
holder, who is not a holder in due course.
May lack of consent be ratified?

Yes, ratification by the party whose signature was obtained without valid
consent, for example, precludes that party, from raising the defense of lack or vitiation
of consent. The principles of estoppel and ratification may apply in this case.