CHAPTER 7 – DEFENSES

REAL DEFENSES
1. Minority
Section 22 provides that negotiation by a minor passes title to the instrument.
The minor himself is not liable and the defense is available only to the minor
himself. If the minor negotiates the instrument to other capacitated persons, the
same capacitated person or previous parties cannot raise the defense of
minority.
2. Forgery
Sec. 23. Forged signature; effect of. – When a signature is forged or made
without the authority of the person whose signature it purports to be, it is wholly
inoperative, and 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 such signature, unless the party against whom it is sought to
enforce such right is precluded from setting up the forgery or want of authority.
3. Non-delivery of Incomplete Instrument
Sec 15. – Incomplete not delivered – Where an Incomplete instrument has not
been delivered, 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.

The important circumstances that are present in situations contemplated in this

section are as follows: 1) the instrument is incomplete; and 2) the incomplete
instrument has not been delivered.
4. Material alteration
The alteration must be material before it can be considered a defense. If the
alteration is not material, it is not a defense at all, not even a personal defense.
However, even a material alteration is only a “partial” real defense because the
holder in due course can enforce it according to its original tenor. Thus, sections
124 and 125 of the NIL provide:

Sec. 124. Alteration of instrument; effect of. – Where a negotiable instrument is

materially altered without the assent of all the parties liable thereon, it is
avoided, except as against a party who has himself made, authorized, or assented
to the alteration and subsequent indorsers.
 But when an instrument has been materially altered and is in the hands of a
holder in due course not a party to the alteration, he may enforce payment
thereof according to its original tenor.

Sec. 125. What constitutes a material alteration. – Any alteration which changes:
a) the date; b)the sum payable, either for principal or interest; c) the time or
place of payment; d) the number or the relations of the parties; e) the medium or
currency I which payment is to be made; f) or which adds a place of payment
where no place of payment is specified, or any other change in addition which
alters the effect of the instrument in any respect, is material alteration.
5. Ultra vires act of Corporation
A corporation may raise want of authority as a real defense but the negotiation
of the corporation may pass title to the instrument. The corporation may claim
that the act is an ultra vires act of the corporation and may raise this defense
even against a holder in due course.

An ultra vires act is one committed outside the object for which a corporation is
created as defined by the law of its organization and therefore beyond the power
conferred upon it by law.
6. Fraud in Factum or Esse Contractus
Fraud may either be “fraud in inducement” or “fraud in execution”. “Fraud in
execution” is present when a person is induced to sign an instrument not
knowing its character as a note or a bill. The person who signs the instrument
does not know that he is signing a negotiable instrument. In “fraud in
inducement,” the person who signs the instrument intends to sign the same as
negotiable instrument but was induced to do so only through fraud; his consent
to issue a negotiable instrument was vitiated by fraud. Fraud in factum is a real
defense while fraud in inducement is a personal defense.
7. Illegality – if declared void for any purpose
Generally, illegality of the transaction that gave rise to a particular transaction is
only a personal defense. For example, if a check was issued to another in
payment of marijuana, the transaction involved is illegal but the same cannot be
raised against a holder in due course. The exception to the rule is when the law
which declares the transaction illegal likewise declares that negotiable
instrument or document issued in connection thereto is void against any party. In
this latter case, the illegality is a real defense.
8. Vicious force or violence
 Duress is a real defense if it is vicious or if it is what is referred to as “duress
amounting to forgery.” Hence, duress is a real defense if the person who exerted
the same is practically writing the note itself by holding the hands of another.
9. Want of authority
Sec. 23. Forged signature; effect of. – When a signature is forged or made
without the authority of the person whose signature it purports to be, it is wholly
inoperative, and 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 such signature, unless the party against whom it is sought to
enforce such right is precluded from setting up the forgery or want of authority
10. Prescription
Extinctive prescription is considered a real defense that may be raised even
against a holder in due course. The prescriptive period for the filing of a claim
based on negotiable instruments is ten (10) years from the time the cause of
action accrued.
11. Discharge in insolvency

PERSONAL DEFENSES
1. Failure or absence of consideration
Absence or failure of consideration is a matter of defense as against any person
not a holder in due course. Partial failure of consideration is a defense pro tanto,
whether the failure is an ascertained and liquidated amount or otherwise. Hence,
the personal defense of failure of consideration is present if the seller who
received the negotiable instrument because of his promise to deliver goods,
failed to comply with such promise.
2. Illegal consideration
Generally, illegality of the transaction that gave rise to a particular transaction is
only a personal defense. For example, if a check was issued to another in
payment of marijuana, the transaction involved is illegal but the same cannot be
raised against a holder in due course. The exception to the rule is when the law
which declares the transaction illegal likewise declares that negotiable
instrument or document issued in connection thereto is void against any party. In
this latter case, the illegality is a real defense.
3. Non-delivery of complete instrument
Sec. 16. Delivery; when effectual; when presumed. – Every contract on a
negotiable instrument is incomplete and revocable until delivery of the
 instrument for the purpose of giving effect thereto. As between immediate
parties and as regards a remote party other than a holder in due course, the
delivery, in order to be effectual, must be made either by or under the authority
of the party making, drawing, accepting, or indorsing, as the case may be; and, in
such case, the delivery may be shown to have been conditional, or for a special
purpose only, and not for the purpose of transferring the property in the
instrument. But 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. And 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.
4. Conditional delivery of complete instrument
Section 16 speaks of immediate parties and remote parties. Immediate parties do
not refer to the position of the parties in the chain of negotiation but
“immediate” refers to persons who are familiar with circumstances regarding the
transfer. With respect to the holder, the most important thing to consider here is
whether or not the holder who is trying to collect based on the negotiable
instrument is a holder in due course or not. The fact that the party is an
immediate party or a remote party is important under Section 16 in order to
determine if it can be established as against them if delivery was conditional of
for special purpose.
5. Fraud in inducement
In “fraud in inducement,” the person who signs the instrument intends to sign
the same as negotiable instrument but was induced to do so only through fraud;
his consent to issue a negotiable instrument was vitiated by fraud.
6. Filling up blank not within authority
Sec. 14. – Blanks; when may be filled. – 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. And a signature on a blank paper
delivered by the person making the signature in order that the paper may be
converted into a negotiable instrument operates as a prima facie authority to fill
it up as such for any amount. In order, however, that any such instrument when
completed may be enforced against any person who became a party thereto
prior to its completion, it must be filled up strictly in accordance with the
authority given and within reasonable time. But 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.
7. Duress or intimidation
To constitute duress, “there must be an actual or threatened exercise or power
possessed by the party benefited thereby, for the purpose of obtaining the note
(or bill), such as to deprive the maker of that quality of mind essential to making
of a contract.” Duress is relative, hence threats to a feeble and old person might
be duress to one while it may not be so to another.
8. Filling up blank beyond reasonable time
Sec. 14. – Blanks; when may be filled. – 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. And a signature on a blank paper
delivered by the person making the signature in order that the paper may be
converted into a negotiable instrument operates as a prima facie authority to fill
it up as such for any amount. In order, however, that any such instrument when
completed may be enforced against any person who became a party thereto
prior to its completion, it must be filled up strictly in accordance with the
authority given and within reasonable time. But 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
9. Transfer in breach of faith
10. Mistake
11. Insertion of wrong date
If a wrong date is inserted, the holder in due course has the right to regard the
wrongfully inserted date as the true date. Section 13 of the law provides that:
“Where an instrument expressed to be payable at a fixed period after date is
issued undated, or where the acceptance of an instrument payable at a fixed
period after sight in undated, any holder may insert therein the true date of issue
or acceptance, and the instrument shall be payable accordingly. The insertion of a
wrong date does not avoid the instrument in the hands of a subsequent holder in
due course; but as to him, the date so inserted is to be regarded as the true
date.”
12. Ante-dating or post-dating for illegal or fraudulent purpose
Section 12 of the NIL provides that “the instrument is not invalid for the reason
only that it is ante-dated or post-dated, provided this is not done for an illegal or
fraudulent purpose.” If the post-dating or ante-dating is for illegal or fraudulent
purpose, a personal defense is available against the holder.
 CHAPTER 8 – ENFORCEMENT OF LIABILITY

PRIMARY LIABILITY
In a promissory note, the maker is liable the moment he makes the instrument.
Section 60 of the NIL provides that the maker by making the promissory note
“engages to pay the instrument according to its tenor.” Similarly, an acceptor’s
liability is fixed the moment he accepts the bill of exchange. Section 62 provides
that the “acceptor, by accepting the instrument, engages that he will pay it
according to the tenor of his acceptance.” Thus, the unconditional promise
attaches the moment the maker makes the instrument while the acceptor’s
assent to the unconditional order attaches the moment he accepts the
instrument. No further act is necessary in order for the liability to accrue. What is
only necessary later is for the holder to enforce such liability by presenting it for
payment.

SECONDARY LIABILITY
The rule is different in the case of the persons secondarily liable. The indorser
and the drawer are not automatically liable – their liability cannot be immediately
enforced – the moment the indorser affixes his signature on the instrument or
the moment the drawer draws the instrument. There are necessary steps that
should be taken in order to charge the persons secondarily liable. Unless the
holder is excused from taking any of the steps herein, the persons secondarily
liable are discharged.

In a promissory note, the steps that should be taken in order to charge the
indorser are as follows:
1. Presentment for payment must be made within the required period to the
maker.
2. Notice of dishonour should be given, if promissory note is dishonoured by
non-payment by the maker.

The following steps should be taken in order to charge the person secondarily
liable:
1. Presentment for acceptance – or negotiation within a reasonable time after it
was acquired – should be made only in the following instances:
 a) Where the bill is payable after sight, or in any other case, where
presentment for acceptance is necessary in order to fix the maturity of the
instrument; or
b) Where the bill expressly stipulates that it shall be presented for
acceptance; or
c) Where the bill is drawn payable elsewhere than at the residence or place
of business of the drawee.
2. If dishonoured by non-acceptance:
a) Notice of dishonour should be given to the indorsers and drawers;
b) If the bill is a foreign bill, there must be protest for dishonour of
acceptance.
3. If the bill is accepted:
a) Presentment for payment to the acceptor should be made.
b) If the bill is dishonoured upon presentment for payment:
(i) Notice of dishonour must be given to person secondarily liable.
(ii) If the bill is a foreign bill, protest for dishonour by non-acceptance
must be made.

DATE OF PRESENTMENT
Fixed date
If the maturity date is fixed in the instrument, the instrument should be presented for
payment on the said fixed date.
PAYABLE ON DEMAND
If the instrument is payable on demand, presentment must be made within a
reasonable time after its issue, except that in the case of a bill of exchange, presentment
for payment will be sufficient if made within a reasonable time after the last negotiation
thereof. If the instrument is not presented for payment within a reasonable time after
issue or last negotiation as the case may be, the persons secondarily liable are
discharged.
PAYABLE AT A BANK
Where the instrument is payable at a bank, presentment for payment must be made
during banking hours, unless the person to make payment has no funds there to meet it
at any time during the day, in which case presentment at any hour before the bank is
closed on that day is sufficient.
Sec. 87. Rule where instrument payable at bank. – Where the instrument is made
payable at a bank, it is equivalent to an order to the bank to pay the same for the
account of the principal debtor thereon.

TIME OF MATURITY
Sec. 85. Time of maturity. – Every negotiable instrument is payable at the time fixed
therein without grace. When the day of maturity falls upon Sunday or a holiday, the
instrument is payable on the next succeeding business day. Instruments falling due or
becoming payable on Saturday are to be presented for payment on the next succeeding
business day except that instruments payable on demand may, at the option of the
holder, be presented for payment before twelve o’clock noon on Saturday when that
entire day is not a holiday.
Sec 86. Time: how computed. – When the instrument is payable at a fixed period after
date, after sight, or after that happening of a specified event, the time of payment is
determined by excluding the day from which the time is to begin to run, and by
including the date of payment.

PROPER PLACE
Sec. 73. Place of presentment. – Presentment for payment is made at the proper place –
a) Where a place of payment is specified in the instrument and it is there presented;
b) Where no place of payment is specified but the address of the person to make
payment is given in the instrument and it is there presented;
c) Where no place of payment is specified and no address is given and the
instrument is presented at the usual place of business or residence of the person
to make payment;
d) In any other case if presented to the person to make payment wherever he can
be found, or if presented at his last known place of business or residence.

SPECIAL PLACE
Section 70 provides that if the instrument, by its terms, payable at a special place, and
the person primarily liable is able and willing to pay it there at maturity, such ability and
willingness are equivalent to the tender of payment upon his part. If the holder will not
present the instrument for payment at such special place, he loses his right to the
payment of interest.

The instrument must be presented to the person primarily liable on the instrument, or if
he is absent or inaccessible, to any person found at the place where the presentment is
made. Necessarily, the person found at the place of presentment must be a capacitated
person.

PARTNERS
In partnership, each partner is, under the law, an agent of the other partners. Thus,
each partner may represent the partnership and may bind the other partners.
Consistently, presentment may be made to any of the partners under section 77.
However, there are two requirements before presentment can be made to either of the
persons primarily liable:
1) The persons primarily liable must be partneres;
2) There is no place of payment that is specified.

JOINT DEBTORS
Sec. 78. Presentment to joint debtors. – Where there are several persons, not partners,
primarily liable on the instrument and no place of payment is specified, presentment
must be made to them all.

WHEN PRESENTMENT NOT NECESSARY OR EXCUSED

Delay in making presentment for payment is excused when delay is caused by
circumstances beyond the control of the holder and not imputable to his default,
misconduct, or negligence. When the cause of delay ceases to operate, presentment
must be made with reasonable diligence.
However, there are cases where the drawers and indorsers can still be charged even if
there is no presentment for payment. Presentment for payment is not necessary or
excused in the following instances:
1) The drawer where he has no right to expect or require that the drawee or
acceptor will pay the instrument (Sec. 79);
2) As to the indorser, where instrument was made or accepted for his
accommodation and he has no reason to expect that the instrument will be paid
if presented (Sec. 80);
3) Where, after the exercise of reasonable diligence, presentment, as required by
this Act, cannot be made (Sec. 82);
4) Where the drawee is a fictitious person (Sec. 82);
5) By waiver of presentment, express or implied (Sec. 82)

It has also been held that non-presentment will not relieve the drawer from his liability
but would only discharge him from liability to the extent of the loss caused by the delay
or non-presentment.

PRESENTMENT FOR ACCEPTANCE

Presentment for acceptance is not indispensable in all cases. Section 143 provides only
three instances when presentment for acceptance is required. Presentment for
acceptance is required in the following cases:
1) Where the bill is payable after sight, or in any other case, where presentment for
acceptance is necessary in order to fix the maturity of the instrument; or
2) Where the bill expressly stipulates that it shall be presented for acceptance; or
3) Where the bill is drawn payable elsewhere that at the residence or place of
business of the drawee.

TIME TO PRESENT FOR ACCEPTANCE

Sec. 146. On what days presentment may be made. – A bill may be presented for
acceptance on any day on which negotiable instruments may be presented for payment
under the provisions of Sections seventy-two and eighty-five of this Act. When Saturday
is not otherwise a holiday, presentment for acceptance may be made before twelve
o’clock noon on that day.

WHEN DELAY OR PRESENTMENT IS EXCUSED

Where the holder of a bill drawn payable elsewhere than at the place of business or the
residence of the drawee has no time, with the exercise of reasonable diligence, to
present the bill for acceptance before presenting it for payment on the day that it falls
due, the delay caused by presenting the bill for acceptance before presenting it for
payment is excused and does not discharge the drawers and indorsers.
On the other hand, presentment for acceptance is excused and a bill may be treated as
dishonoured by non-acceptance in either of the following cases:
1) Where the drawee is dead, or has absconded, or is a fictitious person or a person
not having capacity to contract by bill.
2) Where, after the exercise of reasonable diligence, presentment can not be made.
3) Where, although presentment has been irregular, acceptance has been refused
on some other ground.

DISHONOR
When a bill is dishonoured by non-acceptance, an immediate right or recourse against
the drawer and indorsers accrues to the holder and no presentment for payment is
necessary.
When a negotiable instrument has been dishonoured by non-acceptance or non-
payment, notice of dishonour must be given to the drawer and to each indorser, and
any drawer or indorser to whom such notice is not given is discharged.
Sec. 117. Effect of omission to give notice of non-acceptance. – An omission to give
notice of dishonour by non-acceptance does not prejudice the rights of a holder in due
course subsequent to the omission.

KINDS OF ACCEPTANCE
An acceptance is either general or qualified. A general acceptance assents without
qualification to the order of the drawer. A qualified acceptance in express terms varies
the effect of the bill as drawn. However, an acceptance to pay at a particular place is a
general acceptance unless it expressly states that the bill is to be paid there only and not
elsewhere.

PROTEST
In a strict sense, protest means the formal declaration, drawn and signed by a notary,
that he has presented the instrument for acceptance or payment and that acceptance
or payment was refused. It normally involves three steps: 1) presentment; 2) noting;
and 3) the extending of the noting with a formal certificate. Protest may be made by: 1)
a notary public; or 2) by any respectable resident of the place where the bill is
dishonoured; in the presence of two or more credible witnesses.
Sec. 152. In what cases protest necessary. – Where a foreign bill appearing on its face to
be such is dishonoured by non-acceptance, it must be duly protested for non-
acceptance, and where such a bill which has not previously been dishonoured by non-
acceptance, is dishonoured by non-payment, it must be duly protested by non-payment.
If it is not so protested, the drawer and indorsers are discharged. Where a bill does not
appear on its face to be a foreign bill, protest thereof in case of dishonour is
unnecessary.

NOTICE OF DISHONOR vs. PROTEST

NOTICE OF DISHONOR
 Apply to inland bills.
 May be verbal or written.
 Made by a holder or any person who may be compelled to pay.
 Required to be made usually within one day after dishonour.
 Not made or given in the place of dishonour but in the residence of the parties
and other places mentioned in Section 103.
PROTEST
 Does not apply to inland bills but only to foreign bills.
 Always in writing.
 Made by a notary public or a respectable resident.
 Protest or noting thereof should be made on the day of dishonour.
 As a rule to be made in the place of dishonour.
ACCEPTANCE FOR HONOR
Sec. 162. Acceptance of honor; how made. – An acceptance for honor supra protest
must be in writing and indicate that it is an acceptance for honor and must be signed by
the acceptor for honor.
Sec. 163. When deemed to be an acceptance for honor of the drawer. – Where an
acceptance for honor does not expressly state for whose honor it is made, it is deemed
to be an acceptance for the honor of the drawer.
Sec. 164. Liability of the acceptor for honor. – The acceptor for honor is liable to the
holder and to all parties to the bill subsequent to the party for whose honor he has
accepted.

ACCEPTANCE FOR HONOR vs. ORDINARY ACCPETANCE

ACCEPTANCE FOR HONOR
 Protest is a prerequisite.
 The person who accepts is a stranger.
 There must be an express statement that it is for honor.
 Consent of the holder is necessary.
 The liability of the acceptor for honor is secondary.
 Payment of the acceptor for honor will not discharge the bill.
 Acceptance for honor may be in favor of only one or some of the parties.

ORDINARY ACCEPTANCE
 Protest is not necessary.
 The person who accepts is a party – the drawee.
 Any word indicating an acceptance is enough.
 Consent of the holder is not necessary.
 The acceptor is primarily liable.
 Payment by the acceptor in due course discharges the bill.
 Acceptance involves the entire instrument.
PAYMENT FOR HONOR
Sec. 171. Who may make payment for honor. – Where a bill has been protested for non-
payment, any person may intervene and pay it supra protest for the honor of any
person liable thereon or for the honor of the person for whose account it was drawn.
Sec. 172. Payment for honor; how made. – The payment for honor supra protest, in
order to operate as such and not as a mere voluntary payment, must be attested by a
notarial act of honor which may be appended to the protest or form an extension to it.
Sec. 173. Declaration before payment for honor. – The notarial act of honor must be
founded on a declaration made by the prayer for honor or by his agent in that behalf
declaring his intention to pay the bill for honor and for whose honor he pays.

ACCEPTANCE FOR HONOR vs. PAYMENT FOR HONOR

ACCEPTANCE FOR HONOR
 There must be prior protest for non-acceptance or for better security.
 The bill is not yet overdue.
 The acceptor must be a stranger.
 The consent of the holder is a requisite.

PAYMENT FOR HONOR

 There must be protest for non-payment.
 The bill is already overdue.
 The person who will pay may be a stranger or may be a party.
 The consent of the holder is not necessary and the holder who refuses to accept
payment loses his right of recourse against any party who may be discharged by
such payment.

PAYMENT BY PERSON PRIMARILY LIABLE vs. PAYMENT FOR HONOR

PAYMENT BY PERSON PRIMARILY LIABLE
 There is no need to protest for non-payment or non-acceptance.
  A notarial act is not necessary.
 The person who will pay is a party – the maker or the drawee-acceptor.
 Payment in due course discharges the instrument.
 Payment is not favor of specific parties.
PAYMENT FOR HONOR
 There must be protest for non-payment.
 A notarial act is necessary.
 The person who will pay may be a stranger or may be a party.
 It cannot be payment in due course and payment discharges only the parties
after the party in whose favor payment for honor is made.
 Payment for honor is in favor of a specified person and the law requires that
there is a statement of the person for whose honor payment is made.

CHAPTER 9 – DISCHARGE