NEGOTIABLE

 INSTRUMENTS  LAW  
Rules  as  to  Forgery  
 
General  Rules:    
 
Divide  the  parties  as  those  parties  prior  and  subsequent  to  the  forgery.  Prior  parties  can  raise  the  defense  of  forgery  while  subsequent  
parties  cannot.  
 
In  forgery  of  an  indorsement,  all  parties  prior  to  the  forgery  are  never  liable  because  they  can  always  raise  the  defense  of  forgery.  (Attn:  
case  of  an  acceptor)  
 
Steps:  
1. Determine  whether  the  holder  is  a  holder  in  due  course  or  not.  
2. Determine  whether  the  instrument  is  a  PN  or  BE.  
3. Determine  whether  it  is  a  bearer  or  order  instrument.  
4. Determine  whether  it  is  a  forgery  on  the  maker/drawer’s  signature  or  forgery  on  indorsement.  
5. Apply  the  following  rules:  
 
Promissory     Holder  in  Due  Course   Not  Holder  in  Due  Course  
Note   1.  Payable  to  Bearer  
Indorsement  of  a  note  payable  to  bearer  is  not  necessary  to  the  title  of  the  holder.  Documents  payable  to  bearer  are  
negotiated  by  mere  delivery  (Sec.  30,  NIL).  
 
A.  Forgery  of  the   All   parties   –   the   party   whose   signature   was   However,   if   the   holder   is   not   a   holder   in   due  
signature  of  the   forged,  parties  prior  to  him  including  the  maker   course,   he   cannot   enforce   payment   against   the  
person   and   all   subsequent   parties,   are   liable   to   a   party   whose   signature   was   forged   and   all   parties  
negotiating  by   holder   in   due   course.     The   forged   signature   is   prior   to   him,   because   as   to   them,   want   of   delivery  
delivery     not  necessary  to  the  holder’s  title  in  which  case,   is,   under   sec.   16,   a   valid   defense   against   a   holder  
  the  forgery  may  be  disregarded.     not  in  due  course.    
     
  (Relate  to  complete  but  undelivered  –   In  other  words,  the  party  whose  signature  was  
conclusive  presumption  of  valid  delivery)   forged  as  well  as  the  parties  prior  to  him  are  not  
  liable  because  they  can  raise  the  defense  of  want  of  
The   defense   of   non-­‐delivery   is   not   available   delivery.  
 against   a   holder   in   due   course   because   as   to    
him,   there   is   a   conclusive   presumption   of   valid   If   the   holder   is   not   a   holder   in   due   course,   the  
delivery.     issue   changes   from   forgery   to   non-­‐delivery.   The  
  rules  on  non-­‐delivery  of  a  complete  instrument  are  
as  follows:  
-­‐In   the   hands   of   a   holder   in   due   course,   there   is   a  
conclusive   presumption   of   a   valid   delivery   by   all  
prior  parties.  
-­‐In   the   hands   of   a   holder   not   in   due   course,   there   is  
a   rebuttable   presumption   of   delivery;   thus,   the  
party   whose   signature   is   forged   as   well   as   prior  
parties   can   raise   the   defense   of   non-­‐delivery   by  
proving  that  1)there  is  no  delivery;  2)  no  authority  
to  deliver;  or  that  3)  the  delivery  is  conditional  or  
for  a  special  purpose.  
 
The  forger  is  liable  because  he  was  the  one  who  perpetrated  the  forgery  and  it  is  a  crime  not  tolerated  
in  all  commercial  transactions.  He,  by  negotiating  through  delivery,  also  warrants  that  the  instrument  
is  genuine  and  in  all  respects  what  it  purports  to  be.    
 
As  to  subsequent  parties,  they  are  liable  because  by  negotiating  by  delivery,  they  warrant  that  the  
instrument  is  genuine  and  in  all  respects  what  it  purports  to  be.  
B. Forgery  of   Forgery  of  the  maker’s  signature  is  a  real  defense  to  him  even  as  against  a  holder  in  due  course.  He  is  
Maker’s   never  a  party  to  the  instrument.  The  signature  is  wholly  inoperative  so  the  holder  cannot  retain  the  
signature   instrument,  cannot  give  discharge  therefor,  and  cannot  enforce  payment  thereof  as  against  parties  
thereto.  
 
Sec.  1  clearly  provides  that  the  maker  should  sign  the  instrument  such  that  without  his  signature,  the  
instrument  may  not  be  negotiable.    
 
However,if  the  instrument  has  already  been  delivered  to  persons  other  than  the  maker,  there  could  
be  a  presumption  that  there  is  delivery  depending  on  whether  the  holder  is  a  holder  in  due  course  or  
not.  Thus,  the  following  rules  (if  issue  is  delivery):  
 
 Parties  other  than  the  maker  are  liable  because   Parties  other  than  the  maker  are  not  liable  because  
there  is  a  conclusive  presumption  of  delivery  in   there  is  only  a  rebuttable  presumption  of  valid  
the  hands  of  a  holder  in  due  course.   delivery.  They  can  rebut  such  presumption  by  
  proving  want  of  delivery:  that  1)there  is  no  delivery;  
  2)  no  authority  to  deliver;  or  that  3)  the  delivery  is  
conditional  or  for  a  special  purpose.  
 
The  forger  is  liable  because  he  perpetrated  the  forgery  and  the  law  condemns  criminal  acts  in  
commercial  transactions.  He  also  warrants  the  instrument  to  be  genuine  and  in  all  respects  what  it  
purports  to  be  because  he  negotiated  it  by  delivery.  
 
Parties  other  than  the  maker  are  liable  because  by  negotiating  the  instrument  by  delivery,  they  
warrant  that  the  instrument  is  genuine  and  in  all  respects  what  it  purports  to  be.  Hence,  they  are  
precluded  from  raising  the  defense  of  forgery.  (Issue  here  is  forgery,  as  contrasted  to  the  issue  on  
delivery  in  the  preceding  columns.)  
2.  Payable  to  Order  
The  holder  of  a  negotiable  instrument  payable  to  order,  must  trace  his  title  through  a  genuine  indorsement,  including  that  of  the  
payee,  and  one  who  acts  upon  the  indorsement  of  negotiable  instrument  must  ascertain  its  genuineness  at  his  peril.  
 
Thus,  the  party  whose  name  is  forged  and  all  parties  prior  to  him  including  the  maker  cannot  be  held  liable  even  by  a  holder  in  due  
course.  However,  indorsers  subsequent  to  the  forgery  cannot  allege  the  forgery  of  the  signature  of  a  prior  indorser  because  of  
their  warranty  that  the  note  is  genuine  and  in  all  respects  what  it  purports  to  be.    
 
A. Forgery  of  an   The  party  whose  indorsement  is  forged  as  well  as  the  other  parties,  including  the  maker,  prior  to  the  
indorsement  on   party  whose  signature  is  forged  are  not  liable  to  any  holder.    The  instrument  being  payable  to  order,  
the  note   it  can  be  negotiated  only  by  indorsement  completed  by  delivery.  But  since  the  indorsement  is  forged,  
  it  is  inoperative  and,  therefore,  it  cannot  operate  to  transfer  any  right  or  title  over  the  instrument.  
They  can  raise  the  real  defense  of  forgery.  
 
Where  the  instrument  is  payable  to  order  at  the  time  of  forgery,  the  signature  of  its  rightful  holder  is  
essential  to  transfer  title  to  the  same  instrument.  When  the  holder’s  indorsement  is  forged,  all  the  
prior  parties  to  the  forgery  may  raise  the  real  defense  of  forgery  against  all  parties  subsequent  
thereto.  
 
 The  forger  is  liable  because  he  perpetrated  the  forgery  and  the  law  condemns  criminal  acts  in  
commercial  transactions.  He  also  warrants  the  instrument  to  be  genuine  and  in  all  respects  what  it  
purports  to  be  because  he  negotiated  it  by  delivery.    
 
As  to  subsequent  parties,  they  are  liable  because  by  negotiating  by  delivery,  they  warrant  that  the  
instrument  is  genuine  and  in  all  respects  what  it  purports  to  be.  
B. Forgery  on  the   Forgery  of  the  maker’s  signature  is  a  real  defense  to  him  even  as  against  a  holder  in  due  course.  He  is  
Maker’s   never  a  party  to  the  instrument.  The  instrument  is  wholly  inoperative  so  the  holder  cannot  retain  the  
signature   instrument,  cannot  give  discharge  therefor,  and  cannot  enforce  payment  thereof  as  against  parties  
thereto.  
 
 
The  forger  is  liable  because  he  perpetrated  the  forgery  and  the  law  condemns  criminal  acts  in  
commercial  transactions.  He  also  warrants  the  instrument  to  be  genuine  and  in  all  respects  what  it  
purports  to  be  because  he  negotiated  it  by  delivery.  
 
Parties  other  than  the  maker  are  liable  because  by  negotiating  the  instrument  by  delivery,  they  
warrant  that  the  instrument  is  genuine  and  in  all  respects  what  it  purports  to  be.  Hence,  they  are  
precluded  from  raising  the  defense  of  forgery.    
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
    
   
   
   
   
Bills  of   1.  Forgery  of  the  drawer’s  signature  
Exchange   a. Accepted  by  the   Since  an  acceptor  of  a  bill  warrants  the  genuineness  of  the  signature  of  the  drawer,  he  cannot  
drawee   therefore  resist  payment  of  the  bill  as  against  a  bona  fide  holder  (holder  in  due  course)  if  the  drawer’s  
  name  be  forged.  
 Relate  to  warranties  of    
acceptor.  Sec.  62   The  drawee  is  primarily  liable  and  by  accepting  the  instrument,  he  warrants  the  existence  of  the  
drawer  and  the  genuineness  of  the  drawer’s  signature.  He  is  precluded  from  setting  up  the  defense  of  
forgery  but  only  as  to  the  drawer’s  signature.  (refer  to  sec.  62)  
 
The  drawer  cannot  be  held  liable  because  he  can  raise  the  real  defense  of  forgery.  His  forged  
signature  is  fully  inoperative  and  no  RGE.  
 
The  forger  is  liable  because  he  perpetrated  the  forgery  and  the  law  condemns  criminal  acts  in  
commercial  transactions.  He  also  warrants  that  the  instrument  is  genuine  and  in  all  respects  what  it  
purports  to  be.    
 
Parties  subsequent  to  the  forgery  are  liable  because  by  negotiating  the  instrument  by  delivery,  they  
warrant  that  the  instrument  is  genuine  and  in  all  respects  what  it  purports  to  be.    

b. Paid  by  the   The  drawee  of  a  bill  of  exchange  is  conclusively  presumed  to  know  the  signature  of  the  drawer,  and  if  
drawee  without   he  pays,  in  the  usual  course  of  business,  a  bill  wherein  the  signature  of  the  drawer  is  a  forgery,  he  will  
acceptance   be  estopped  afterwards  to  deny  the  genuineness  of  such  signature.  
 
As  between  equally  innocent  persons,  the  drawee  who  pays  money  on  a  check  or  draft  the  signature  
on  which  was  forged  cannot  recover  the  money  from  the  one  who  received  it.  Such  rule  is  founded  on  
estoppels  and  principle  of  natural  justice,  and  on  public  policy  which  is  the  policy  of  maintain  
confidence  in  the  security  of  negotiable  paper.  
 
As  to  the  drawer,  the  forger,  and  parties  subsequent  to  the  forgery,  the  same  rules  apply  as  that  
 reflected  in  the  preceding  column.  
2.  Forgery  of  an  indorsement  of  the  bill    
a. Payable  to   As  to  the  drawee,  he  is  liable  because  the   However,  if  the  holder  is  not  a  holder  in  due  
bearer   instrument  being  a  bearer  instrument,  any   course,  he  cannot  enforce  payment  against  the  
indorsement  is  not  necessary  to  acquire  title.   party  whose  signature  was  forged  and  all  parties  
The  drawee  may  debit  the  drawer’s  account  in   prior  to  him,  because  as  to  them,  want  of  delivery  
spite  of  the  forged  indorsement.  The  reason  is   is,  under  sec.  16,  a  valid  defense  against  a  holder  
that  the  forged  indorsement  is  not  necessary  to   not  in  due  course.  The  defense  of  non-­‐delivery  is  
the  title  of  the  holder.  The  drawee  cannot   not  available  against  a  holder  in  due  course  
recover  from  the  holder.     because  as  to  him,  there  is  a  conclusive  
  presumption  of  valid  delivery.    
  In  other  words,  the  party  whose  signature  was  
As  to  the  parties  prior  to  the  forgery,  including   forged  as  well  as  the  parties  prior  to  him  are  not  
the  drawer,  they  are  also  liable  because  the   liable  because  they  can  raise  the  defense  of  want  of  
forged  signature  is  not  necessary  to  acquire   delivery.  
title  to  the  instrument.  They  are  also  precluded    
from  setting  up  forgery  as  they  are  negotiating  
it  by  mere  delivery,  the  instrument  being  a  
bearer  instrument.  As  to  the  drawer,  he  cannot  
raise  the  defense  of  non-­‐delivery  because  as  to  
a  holder  in  due  course,  there  is  a  conclusive  
presumption  of  valid  delivery.  
 
b. Payable  to  order   The  party  whose  indorsement  is  forged,  is  not  liable  to  any  holder  even  a  holder  in  due  course.  The  
forged  indorsement  is  wholly  inoperative  so  no  RGE.  
 
As  to  the  drawee  who  is  primarily  liable,  he  only  warrants  the  genuineness  of  the  drawer’s  signature.  
Therefore,  he  is  not  precluded  from  raising  the  defense  of  the  indorsers’  signature  being  forged.  As  he  
is  a  prior  party,  heis  not  liable  as  he  can  raise  the  defense  of  forgery.  Consider  section  62  also.  
The  drawee  also  warrants  he  will  pay  in  accordance  to  the  tenor  of  the  instrument  so  he  cannot  be  
made  to  pay  unless  it  is  the  order  of  the  person  whose  name  appears  in  the  instrument.  
 
The  forger  is  liable  because  he  perpetrated  the  forgery  and  the  law  condemns  criminal  acts  in  
commercial  transactions.  He  also  warrants  the  instrument  to  be  genuine  and  in  all  respects  what  it  
 purports  to  be  because  he  negotiated  it  by  delivery.    
 
As  to  subsequent  parties,  they  are  liable  because  by  negotiating  by  delivery,  they  warrant  that  the  
instrument  is  genuine  and  in  all  respects  what  it  purports  to  be.  
3.  Forgery  on  the  drawee’s  signature  
 
The  holder  cannot  go  after  the  drawee  because  there  was  no  acceptance  by  the  real  drawee,  the  instrument  is  wholly  inoperative.  
He  can’t  go  after  the  drawer  too  because  it  was  not  yet  accepted  by  the  drawee.  No  liability  lies  yet  in  the  instrument.  What  he  can  
do  is  to  present  the  instrument  to  the  drawee  for  acceptance.  If  the  drawee  refuses,  then  he  may  go  against  the  drawer  and  
invoke  his  warranty  that,  on  due  presentment,  the  instrument  will  be  accepted  or  piad  or  both  (sec.  61).  
 
 He  cannot  go  to  parties  subsequent  to  the  drawee  because  he  cannot  say  that  the  instrument  has  already  been  dishonored  just  
yet.  He  must  present  it  to  the  person  primarily  liable  for  acceptance  first.