In the jurisprudence of promissory notes, it is well established that the ability of an obligor on an instrument to raise a defense based upon the rights of a third person (so called “Jus Tertii defense”) is strictly limited. For example, ‘A’ (an obligor who issued promissory note) cannot raise a defense against ‘C’ (an occupant of the promissory note) based upon the underlying transaction between ‘B’ (an initial recipient of the promissory note) and C. The obvious reason for this limitation is to provide better protection for current noteholder, thereby securing uninterrupted transactions of promissory notes.
Two exceptional cases have been discussed by scholars and courts in Korea and Japan. First case arises where B has paid off the underlying debt against C but C, instead of returning the promissory note to B, turns to A for the claim based upon the promissory note. In order to avoid B’s baseless enrichment, most scholars in Korea argue that A should be allowed to use B‘s defense against C.
Second one is similar to first case but the fact that A’s debt against B has also been paid off (so called doppelmangel defense by A)The supreme courts in Korea and Japan assume different approaches. The Korean Supreme Court acknowledges second-type defense while turned down the first one. The Japanese Supreme Court allowed both defenses but upon different rationales.
This paper compares and criticizes the stances of both supreme courts by showing the logical inconsistency and practical inconveniences. The author stands against two theories taken by each supreme court. The better interpretation should be to allow both defenses under strict requirements and same rationales.