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
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 holders 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/makers
signature or merely of an
indorsement.
a. Drawer/Makers 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 banks
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/depositors
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 when
negligence can be traced on the
part of the
drawer
whose
signature
was
forged, and the need
arises to weigh the comparative
negligence
between the drawer and the
drawee to determine
who should bear the burden of loss.
Still, even if the bank performed
with utmost
diligence,
the
drawer
whose
signature was forged
may still recover from the bank as
long as he or
she is not precluded from setting
up the defense
of forgery. After all, Section 23 of
the Negotiable
Instruments Law plainly states that
no right to
enforce the payment of a check
can arise out of a
forged signature. Since the drawer,
Samsung
Construction, is not precluded by
negligence from
setting up the forgery, the general
rule should
apply.
b. Indorsement:

i. When it is the signature of

the indorser that is forged,
the drawee and drawer CAN
recover vs holder
1) The drawee can recover
the amount paid by him
in cases where only an
indorsement has been
forged . This is because
drawee makes no
warranty as to the
genuineness of any
indorsement.
2) Generally, the drawee
may only recover from
the holder. Should he fail
to do so(for instance due
to insolvency) he cannot
recoup his loss by
charging it to the
drawers account
3) Although a
depositor/drawer owes a
duty to his drawee bank
to examine his cancelled
checks, he has no
similar duty as to forged
indorsements.
4) The drawer, as soon as
he comes to know of the
a forged indorsement
should promptly notify the
drawee bank
REPUBLIC v EBRADA
Drawee can recover. It is not
supposed to be the
duty of the drawee to ascertain
whether the
signatures
of
the
payee
or
indorsers are genuine or
not.
ii. When drawee may recover
from DRAWER
1) Where the instrument is
originally a bearer
instrument, because the

indorsement can be
disregarded as being
unnecessary to the holders
title
2) Indorsement forged by an
employee or agent of the
drawer
3) If due to the drawers
negligence/delay, the
forgery is not discovered
until it is too late for the
bank to recover from the
holder or the forger
GEMPESAW v CA, PBC
While there is no duty resting on
the drawer to look
for forged indorsements on his
cancelled checks, a
depositor is under a duty to set
up an
accounting
system
and
business procedure as
are reasonably calculated to
prevent or render
the forgery of indorsements
difficult, particularly
by the depositors own employees.
As a rule the drawee bank who has
paid the check
with forged indorsement, cannot
charge the drawers
account for the amount of the said
check. An
exception to this rule is where the
drawer is guilty of
such negligence which causes the
bank to honor the
check.
iii. When drawee may not
recover from holder
1) Where the instrument is
originally a bearer
instrument , because the
indorsement can be
disregarded as being
unnecessary to the holders

title
2) If drawee fails to act
promptly , if he delays in
informing the holder whom
he paid
iv. Between Drawee Bank and
Collecting Bank
1) Collecting bank only liable
for forged indorsements
and not forgeries of the
drawer or makers
signature. (PNB v CA,
1968)
2) The collecting bank or
last indorser generally
suffers the loss because
it has the duty to
ascertain the
genuineness of all prior
indorsements considering
that the act of presenting
the check for payment to
the drawee is an
assertion that the party
making the presentment
had done its duty to
ascertain the
genuineness of the
indorsements. (BPI v CA,
1992)
3) In presenting the checks
for clearing the collecting
agent, made an express
guarantee on the validity
of all the prior
endorsements. ( BDO v
Equitable bank)
4) The drawee bank is not
similarly situated as the
collecting bank because
the former makes no
warranty as to the
genuineness of any
indorsement. The drawee
banks duty is but to
verify the genuineness of

the drawers signature

and not of the
indorsement because the
drawer is its client.
5) Where the negligence of
the drawee bank is the
proximate cause of the
collecting banks
payment of a check with
a forged indorsement,
the drawee bank may be
held liable to the
collecting bank .
6) When both are guilty of
negligence, the degree of
negligence of each will be
weighed in considering
the amount of loss which
each should bear. (refer
to BPI v CA, 1992)
GREAT
EASTERN
LIFE
v
HONGKONG &
SHANGHAI BANK (1922)
Where a check is drawn payable
to the order of
one person and is presented to a
bank by another
and purports upon its face to have
been duly
indorsed by the payee of the check
, it is the duty of
the bank to know that the check
was duly indorsed by
the original payee and where the
bank pays the
amount of the check to a 3rd
person , who has forged
the signature of the payee , the
loss falls upon the
bank who cashed the check , and
its remedy is
against the person to whom it paid
the money.
BPI v CA (1992)
Section 23 of the NIL has 2 parts.
The first part states

the general rule that a forged

signature is wholly
inoperative and payment made
through or under such
signature is ineffectual. The second
part admits of
exception. In this jurisdiction, the
negligence of the
party invoking the forgery is an
exception to the
general rule.
Both drawee and collecting
bank were negligent
in the selection and supervision of
their employees
resulting in the encashment of the
checks by the
impostor. Both banks were not able
to overcome the
presumption of negligence in the
selection and
supervision of their employees
Considering
the
comparative
negligence of the
parties,
the
demands
of
substantive justice are
satisfied by allocating the loss and
the costs on a 6040 ratio.
ASSOCIATED BANK v CA (1996)
By reason of the statutory warranty
of a general
indorser in Section 66 of the
Negotiable Instruments
Law, a collecting bank which
indorses a check bearing
a forged indorsement and presents
it to the drawee
bank
guarantees
all
prior
indorsements, including the
forged indorsement. It warrants
that the instrument
is genuine, and that it is valid and
subsisting at the
time of his indorsement. Because
the indorsement is

a forgery, the collecting bank

commits a breach of
this
warranty
and
will
be
accountable to the drawee
bank.
This
liability
scheme
operates without regard to
fault
on
the
part
of
the
collecting/presenting bank.
Even if the latter bank was not
negligent, it would still
be liable to the drawee bank
because of its
indorsement.
PCIB v. CA (2001)
A bank which cashes a check
drawn upon another
bank, without requiring proof as to
the identity of
persons presenting it, or making
inquiries with regard
to them, cannot hold the proceeds
against the drawee
when the proceeds of the checks
were afterwards
diverted to the hands of a third
party. In such cases
the drawee bank has a right to
believe that the
cashing bank (or the collecting
bank) had, by the
usual proper investigation, satisfied
itself of the
authenticity of the negotiation of
the checks.
Thus, one who encashed a check
which had been
forged or diverted and in turn
received payment
thereon from the drawee, is guilty
of negligence
which proximately contributed to
the success of the
fraud practiced on the drawee
bank.
4.2.
Material
Alteration
(Sec.124)

1. As a DEFENSE:
a. PERSONAL defense when used to
deny liability according to the
tenor of the instrument
b. REAL defense when relied on to
deny liability according to the
altered terms.
2.
What
constitutes
material
alteration?
a. Statutory: Review Sec.125, NIL
i. change date
ii. sum payable, either for
principal or interest
iii. time or place of payment
iv. number/relations of parties
v. medium/currency of
payment,
vi. adds place of payment where
none specified,
vii. other change/addition altering
effect of
viii. instrument in any respect
b. Jurispridence
i. An alteration is said to be
material if it changes the
effect of the instrument. It
means that an unauthorized
change in an instrument that
purports to modify in any
respect the obligation of a
party or an unauthorized
addition of words or numbers
or other change to an
incomplete instrument
relating to the obligation of a
party. (PNB v CA, 1996)
ii. A material alteration is one
which changes the items
which are required to be
stated under Section 1 of the
Negotiable Instruments Law.
(Metrobank v Cabilzo, 2006)
3. IMMATERIAL ALTERATION
a. Campos: Any other alteration
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; Intl 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. DRAWERS NEGLIGENCE
a. The general rule is that the
drawee
cannot charge against the drawers
account the amount of an altered
check.
b. BUT, the drawers 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
records and could thus have
prevented the drawee bank from
subsequently cashing other
altered checks , the drawee can
charge the subsequent check
against the negligent drawers
account.
6.
EFFECT
OF
DRAWEES
ACCEPTANCE
OF ALTERED CHECKS
a. Where the interest rate is
altered,
the HDC can recover the principal
sum with the original rate of
interest.
i. EXCEPT: A subsequent
indorser, because by the
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 (Sec 65 and
66)
b. RECOVERY after acceptance or
payment by the drawee bank
i. FROM HOLDER
1) Prevailing view - Yes,
bec. of (1) payment
under mistake, (2) Sec.
124 and (3) Sec.62 in
relation to Sec. 132
2) Minority view No, bec.
of (1) estoppel, (2)
stability of transactions
and (3) bank is in a
better position to
shoulder the loss.
3) SC:
a. adopted the
minority view
but on a
different basis

the Central Bank

Circular
regulating
clearing of
checks and
limiting the
period within
which a drawee
bank may return
a spurious check
b. but if holder is
guilty of
negligence which
proximately
contributed to the
erroneous
payment by
drawee, holder
liable (PCIB v CA,
2001)
MONTINOLA v PNB (1951)
The insertion of the words Agent
Philippine
National Bank converted the bank
from a mere
drawee to a drawer and therefore
changes its
liability,
constitutes
material
alteration of the
instrument without consent of the
parties liable
thereon and so discharges the
instrument. Drawee
bank is not liable.
HONGKONG & SHANGHAI BANK
v PEOPLES
BANK (1970)5
The failure of the drawee bank to
call the attention
of the collecting bank as to such
alteration until
after the lapse of 27 days would
negate whatever
right it might have had. The
remedy of the drawee

bank
is
against
the
party
responsible for the forgery
or alteration.
REPUBLIC BANK v CA (1991)
The collecting bank is protected by
the24-hour
clearing house rule from the
liability to refund the
amount paid by the drawee bank.
[Note: A much
recent Circular changed the point
of reckoning for
the return of the altered check
from within 24
hours from the clearing to within
24 hours from the
discovery of the alteration]
ASSOCIATED BANK v CA (1996)
The rule mandates that the checks
be returned
within twenty-four hours after
discovery of the
forgery but in no event beyond the
period fixed by
law for filing a legal action. The
rationale of the rule
is to give the collecting bank
(which indorsed the
check) adequate opportunity to
proceed against the
forger. If prompt notice is not
given, the collecting
bankmaybe prejudiced and lose the
opportunity to
go after its depositor.
ii. FROM DRAWER: drawee has no
right to seek reimbursement
from drawer for its erroneous
payment
METROBANK v CABILZO (2006)
In addition, the bank on which the
check is drawn,
known as the drawee bank, is
under strict liability to
pay to the order of the payee in
accordance with the

drawers instructions as reflected

on the face and by
5 Affirmed the minority view that
drawee cannot recover
the terms of the check. Payment
made under
materially altered instrument is not
payment done
in accordance with the instruction
of the drawer.
When the drawee bank pays a
materially altered
check, it violates the terms of the
check, as well as
its duty to charge its clients
account only for bona
fide disbursements he had made.
Since the drawee
bank, in the instant case, did not
pay according to
the
original
tenor
of
the
instrument, as directed by
the drawer, then it has no right to
claim
reimbursement from the drawer,
much less, the
right to deduct the erroneous
payment it made from
the drawers account which it was
expected to treat
with utmost fidelity.
BPI v BUENAVENTURA (2005)
It [the bank] should be able to
detect alterations,
erasures,
superimpositions
or
intercalations
thereon, for these instruments are
prepared,
printed and issued by itself, it has
control of the
drawer's
account,
and
it
is
supposed to be familiar
with the drawer's signature. It
should possess
appropriate detecting devices
for uncovering

forgeries and/or alterations on

these
instruments
There is nothing inequitable in such
a rule for if in
the regular course of business the
check comes to
the drawee bank which, having the
opportunity to
ascertain its character, pronounces
it to be valid
and pays it, as in this case, it is not
only a question
of payment under mistake, but
payment in neglect
of duty which the commercial law
places upon it,
and the result of its negligence
must 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
b. Fraud in factum accompanied by
NEGLIGENCE of maker or signer
i. Where the signor does not
know the nature of the
instrument he signs, but
where, by the exercise of
ordinary care, he could have
discovered it.
ii. Three factors are typically used
in determining the existence of
negligence:
1) legal character of the
instrument which the
signer thinks he is signing
2) the physical condition of
the signer and his ability to
read
3) whether the signer had the
opportunity at the time of
signing, to ascertain the
legal nature of the paper
he is executing