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What Are Personal Defenses?

What Are Personal Defenses?

November 30
00:00 -0001

What Are Personal Defenses?

While any given party issuing a defense against paying claims on a negotiable instrument would likely desire for that defense to be universal, universal defenses do not typically apply. As a result, most defenses will likely be personal defenses instead. Personal defenses will protect the defending party from payment to ordinary holders, but which will not penetrate the rights of a holder in due course (HDC).

In other words, personal defenses will often protect the defender from the first party to hold a negotiable instrument after it is issued, but if that instrument is then transferred to any other party that fills the requirements for being an HDC, then the defending party will not be able to avoid payment to that party. Of course, in many such instances the defending party will be able to sue the intermediary party for some form of reparations, thereby getting back whatever money the defending party lost in payment to the HDC.

Breach of Contract or Warranty

This type of defense is often linked to action beyond the negotiable instrument itself. While the negotiable instrument must be unconditional to be deemed as such, most often a negotiable instrument will be exchanged as some form of payment for a larger contract. For example, the buyer issues a check to the seller in exchange for a shipment of goods that the seller is bringing into the country. But if that overarching contract is broken in some fashion, then a given party may claim a personal defense against paying the exchanged negotiable instrument.

In the prior example, if the seller shipped very shoddy or faulty goods to the buyer without the buyer having had any prior knowledge of such poor quality, then the buyer would likely be able to claim a breach of contract defense and have the check stopped. Assuming that the seller was not a holder in due course, which would be unlikely, the buyer would not have to pay the seller. Breaches of contract such as this are a very common form of personal defense from paying claims on negotiable instruments.

Breaches of warranty also function in the same fashion. A maker or issuer of a negotiable instrument could claim that the other party broke warranty in some fashion in order to avoid making a payment on the negotiable instrument involved.

Lack of Consideration

In legal terms, consideration is some form of value offered in a contract. Consideration can be monetary or it can be based on a service. It can even be an offer to not take a given action. In regard to any negotiable instrument, if consideration is not offered from both parties involved with the negotiable instrument, then that negotiable instrument is actually unenforceable. For example, if someone were to offer another individual a written promise to pay money as a gift, then the transaction would actually lack consideration as the money offered up would be a gift. If the promising party were to mount a defense against paying on the promise, then they could do so based on the condition that the transaction lacked equal consideration.

A lack of consideration might also involve a situation in which the consideration offered by one party becomes unavailable for some reason. For example, if the seller's goods never actually reach the buyer, perhaps because they are stolen along the way, or the boat they are being shipped on sinks, then the buyer would have a defense under lack of consideration to avoid paying the negotiable instrument he or she had offered to the seller.

Of course, if the seller had already deposited the negotiable instrument with a bank, for example, then that bank would likely have holder in due course status and the buyer would still have to pay off the instrument. This is because lack of consideration will not protect the defending party from needing to pay to an HDC.

Fraud

This type of defense is also referred to as fraud in the inducement, or ordinary fraud. A defending party can mount this defense if he or she issues a negotiable instrument based on false or fraudulent information given to him or her by the receiving party. For example, if one party is selling a car to another and claims that the car is like new and has very few miles on its odometer, then the buying party may issue a negotiable instrument based on that information.

But if the buying party were to discover that the selling party had knowingly lied in these statements, that the car is actually old and very faulty with many miles on its odometer, then the buying party would have a right to employ this defense against paying the selling party. Again, however, as in all personal defenses, if the selling party had then in turn sold the negotiable instrument to a holder in due course, then the buying party would still have to pay the HDC.

Illegality

Illegal transactions that result in the transactions status as voidable, as opposed to outright void, would be grounds for a personal defense. The difference between something that is void and something that is voidable is generally that a void item is considered to have been void from the moment of creation, thus supporting a universal defense against any payments on a void negotiable instrument. A voidable item, on the other hand, is void only at the discretion of one of the involved parties.

When one of the involved parties chooses to void such a voidable negotiable instrument, then it would be the equivalent of mounting a personal defense against claims to payment on that instrument, instead of a universal defense against such claims. Doing so would not protect against claims from an HDC, however.

Incapacity

Mental incapacity, when firmly established by a court ruling, would generally be grounds for a universal defense. But if the court has not established that a given party suffers from such mental incapacity prior that party's creation of a given negotiable instrument, then mental incapacity cannot be used as a defense against paying that instrument. This is because the individual would not have been legally mentally incompetent at the time of the instrument's creation.

However, if the individual was still exhibiting the same problems and was mentally incompetent, even though the court had yet to acknowledge the individual as such, then the negotiable instrument which the individual had issued would be voidable. Thus, the individual could be protected from the claims of ordinary holders, but not the claims of holders in due course. 

Other

There are other, less commonly used defenses that can be employed as personal defenses in order to avoid payment to an ordinary holder. Such defenses include discharge by payment, which would involve payment on the negotiable instrument, even though another party has a claim on it so as to eliminate the defending party's involvement in the negotiable instrument; discharge by cancellation, under which a holder of a negotiable instrument can choose to eliminate obligation of a given party to pay for the instrument, or otherwise cancel the instrument; the unauthorized completion of an incomplete negotiable instrument, which was considered a matter of personal mistake, so that it could not be considered as a universal defense, but which would function as a personal defense; or any kind of lesser duress or manipulative influence that would have led to the authorization of a negotiable instrument which would otherwise never have been made. Such defenses would, again, allow the maker of the negotiable instrument to avoid the payment of ordinary holders, but would do nothing to prevent payment of HDCs.

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