Illegal Consideration in a Negotiable Instrument

Category: Law on Negotiable Instruments

Lorenzo drew a bill of exchange in the amount of P100,000.00 payable to Barbara or order, with his wife, Diana, as drawee. At the time the bill was drawn, Diana was unaware that Barbara is Lorenzo’s paramour. Barbara then negotiated the bill to her sister, Elena, who paid for it for value, and who did not know who Lorenzo was. On due date, Elena presented the bill to Diana  for payment, but the latter promptly dishonored the instrument because, by then, Diana had already learned of her husband’s dalliance.

a. Was the bill lawfully dishonored by Diana? Explain.

b. Does the illicit cause or consideration adversely affect the negotiability of the bill? Explain.

a. No. Illegal consideration is merely a personal defense which cannot be raised against a holder in due course. In this case, Elena is a holder in due course because she received the instrument for value and without notice of any defect in the title of the person negotiating the instrument. Diana therefore cannot refuse to accept the instrument by reason of illegal consideration because it is merely a personal defense which cannot be raised against a holder in due course. The bill was not lawfully dishonored by Diana. Elena, to whom the instrument was negotiated, was a holder in due course inasmuch as she paid value therefore in good faith.

b. No, illegal consideration does not affect the negotiability of the instrument. Under the Negotiable Instruments law there are only two ways by which the negotiable character of the instrument can be terminated and this is by restrictively indorsing the instrument or by discharge through payment or otherwise. Illegal consideration is not one of the means of destroying the negotiable character of the instrument. (2009 Bar Question)