Negotiable Instrument Act

Negotiable Instrument Act, 1881 MFM 1st Year, Division B
Mumbai Education Trust

MFM (FIRST YEAR), DIV: B First Semester
BUSINESS LAW Project on
Case Law on Negotiable Instruments Act, 1881
Page 1 of 48
Presented by
Sr. No. 1 2 3 4 5 Name Nidhi GANDHI Ameya MAHURKAR Pranav PRAJAPATI Durgashree DATE Unnati UMROOTKAR Roll No. 75 89 98 111 114
Page 2 of 48
TABLE OF CONTENTS
Sr. No. 1 2 3 4 5 6 Particulars Introduction Preamble Introduction Key Definitions Case Law Conclusion Page No. 4 5 4 4 33 48
Page 3 of 48
NEGOTIABLE INSTRUMENT ACT, 1881

INTRODUCTION: In India, there is reason to believe that instrument to exchange were in use from early times and we find that papers representing money were introducing into the country by one of the Mohammedan sovereigns of Delhi in the early part of the fourtheenth century. The word 'hundi', a generic term used to denote instruments of exchange in vernacular is derived from the Sanskrit root 'hund' meaning 'to collect' and well expresses the purpose to which instruments were utilised in their origin. With the advent of British rule in India commercial activities increased to a great extent. The growing demands for money could not be met be mere supply of coins; and the instrument of credit took the function of money which they represented. Before the enactment of the Negotiable Instrument Act, 1881, the law of negotiable instruments as prevalent in England was applied by the Courts in India when any question relating to such instruments arose between Europeans. When then parties were Hindu or Mohammedans, their personal law was held to apply. Though neither the law books of Hindu nor those of Mohammedans contain any reference to negotiable instruments as such, the customs prevailing among the merchants of the respective community were recognised by the courts and applied to the transactions among them. During the course of time there had developed in the country a strong body of usage relating to hundis, which even the Legislature could not without hardship to Indian bankers and merchants ignore. In fact, the Legislature felt the strength of such local usages and though fit to exempt them from the operation of the Act with a proviso that such usage may be excluded altogether by appropriate words. In the absence of any such customary law, the principles derived from English law were applied to the Indians as rules of equity justice and good conscience. The history of the present Act is a long one. The Act was originally drafted in 1866 by the India Law Commission and introduced in December, 1867 in the Council and it was referred to a Select Committee. Objections were raised by the mercantile community to the numerous deviations from the English Law which it contained. The Bill had to be redrafted in 1877. After the lapse of a sufficient period for criticism by the Local Governments, the High Courts and the chambers of commerce, the Bill was revised by a Select Committee. In spite of this Bill could not reach the final stage. In 1880 by the Order of the Secretary of State, the Bill had to be referred to a new Law Commission. On the recommendation of the new Law Commission the Bill was re-drafted and again it was sent to a Select Committee which adopted most of the additions recommended by the new Law Commission. The draft thus prepared for the fourth time was introduced in the Council and was passed into law in 1881 being the Negotiable Instruments Act, 1881 (26 of 1881).
Page 4 of 48
PREAMBLE:
An Act to define and amend the law relating to Promissory Notes, Bills of Exchange and Cheques WHEREAS it is expedient to define and amend the law relating to promissory notes, bills of exchange and cheques. Contains 147 Sections divided into XVII chapters. Chapter XVII containing sections 138 to 142 added in 1988 (effective from 1.4.1989) Sections 143 to 147 added in 2002 (effective from 6.3.2003) amendment
PRELIMINARY: Local extent, Saving of usage relating to hundis, etc., Commencement It extends to [the whole of India] but nothing herein contained affects the Indian Paper Currency Act, 1871 (3 of 1871), section 2, or affects any local usage relating to any instrument in an oriental language: Provided that such usages may be excluded by any words in the body of the instrument, which indicate and intention that the legal relations of the parties thereto shall be governed by this Act; and it shall come into force on the first day of March, 1882. 1. The Act has been extended to Goa, Daman, and Diu by Regulation 12 of 1962, sec. 3 and Sch. (w.e.f. 1-12-1965) and to Dadra and Nagar Haveli by Regulation 6 of 1963, sec. and Sch. I (w.e.f. 1-11-1956). 2. Substituted by the A.O. 1950, for "all the Provinces of India". 3. The Words "except the State of Jammu and Kashmir" omitted by Act 62 of 1956, sec. 2 and Sch. (w.e.f. 1-11-1956). Repeal of enactments. [Rep. by the Amending Act, 1891 (12 of 1891), Sec. 2 and Sch. I,Pt. I.] NEGOTIABLE INSTRUMENT
Sec. 13. A Negotiable Instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer. Explanation
Page 5 of 48
o A promissory note, bill of exchange or cheque is payable to order which is

expressed to be so payable or which is expressed to be payable to a particular person, and does not contain words prohibiting transfer or indicating an intention that it shall not be transferable.
o A promissory note, bill of exchange or cheque is payable to bearer which

is expressed to be so payable or on which the only or last endorsement is an endorsement in blank.
o Where a promissory note, bill of exchange or cheque, either originally or

by endorsement, is expressed to be payable to the order of a specified person, and not to him or his order, it is nevertheless payable to him or his order at his option.
A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one of two, or one or -some of several payees.
NEGOTITATION
Sec. 14. When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated.
PROMISSORY NOTE Definition
Sec 4. A Promissory Note is an instrument in writing (not being a bank note or currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.
Features Instrument in writing Not a bank note or currency note Contains unconditional undertaking Signed by the maker of the instrument To pay a certain sum of money only To or the order of certain person Or to the bearer of the instrument
Page 6 of 48
Illustrations
I promise to pay B or order Rs. 1,000/I promise to pay B Rs. 500 and all other sums which shall be due to him
BILL OF EXCHANGE
Sec 5. A "bill of exchange" is an instrument in writing, containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.
CHEQUE
Sec. 6. A "cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and cheque in the electronic form.
o a cheque in the electronic form means a cheque which contains the

exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system;
o a truncated cheque means a cheque which is truncated during the

course of clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing
Drawer and Drawee: Sec. 7. The maker of a bill of exchange or cheque is called the Drawer"; the person thereby directed to pay is called the "Drawee". o Drawee in case of need: When in the bill or in any endorsement thereon the name of any person is given in addition to the drawee to be resorted to in case of need, such person is called a "Drawee in case of need ".
Acceptor: Sec. 7. After the drawee of a bill has signed his assent upon the bill, or, if there are more parts thereof than one, upon one of such parts, and delivered the same,
Page 7 of 48
or given notice of such signing to the holder or to some person on his behalf, he is called the "Acceptor".
Acceptor for honour: When a bill of exchange has been noted or protested for non-acceptance or for better security, and any person accepts it supra protest for honour of the drawer or of any one of the endorsers, such person is called an "Acceptor for honour".
Payee: Sec.7. The person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid, is called the "Payee".
Holder: Sec.8. The "Holder" of a promissory note, bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. When the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction
Holder in due course Sec.9. "Holder in due course " means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or indorsee thereof, if payable to order, before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.
Payment in due course Sec.10. "Payment in due course" means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned.
Inland instrument Sec.11. A promissory note, bill of exchange or cheque drawn or made in 10[India] and made payable in, or drawn upon any person resident in 10[India] shall be deemed to be an inland instrument.
Foreign instrument Sec.12. Any such instrument not so drawn, made or made payable shall be deemed to be foreign instrument.
Page 8 of 48
Endorsement Sec.15. When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to endorse the same, and is called the "endorser".
Endorsement "in blank" and "in full"-"endorsee" As per Sec.16. o If the endorser signs his name only, the endorsement is said to be "in blank", and if he adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified person, the endorsement is said to be "in full", and the person so specified is called the "endorsee" of the instrument. The provisions of this Act relating to a payee shall apply with the necessary modifications to an endorsee.
Ambiguous instruments Sec.17. Where an instrument may be construed either as a promissory note or bill of exchange, the holder may at his election treat it as either and the instrument shall be thenceforward treated accordingly.
Where amount is stated differently in figures and words Sec.18. If the amount undertaken or ordered to be paid is stated differently in figures and in words, the amount stated in words shall be the amount undertaken or ordered to be paid.
Instruments payable on demand Sec.19. A promissory note or bill of exchange, in which no time for payment is specified, and a cheque, are payable on demand.
"At sight", "On presentment", "After sight" Sec.21. In a promissory note or bill of exchange the expressions "at sight" and "on presentment" means on demand. The expression "after sight" means, in a promissory note, after presentment for sight, and, in a bill of exchange after acceptance, or noting for non-acceptance, or protest for non-acceptance. "Maturity" Sec.22. The maturity of a promissory note or bill of exchange is the date at which it falls due.
Page 9 of 48
Days of grace: Every promissory note or bill of exchange which is not expressed to be payable on demand, at sight or on presentment is at maturity on the third day after the day on which it is expressed to be payable. Calculating maturity of bill or note payable so many months after date or sight Sec.23. In calculating the date at which a promissory note or bill of exchange, made payable at stated number of months after date or after sight, or after a certain event, is at maturity, the period stated shall be held to terminate on the day of the month, which corresponds with the day on which the instrument is dated, or presented for acceptance or sight, or noted for non-acceptance, or protested for non-acceptance, or the event happens or, where the instrument is a bill of exchange made payable at stated number of months after sight and has been accepted for honour, with the day on which it was so accepted. If the month in which the period would terminate has no corresponding day, the period shall be held to terminate on the last day of such month. Calculating maturity of bill or note payable so many days after date or sight Sec.24. In calculating the date at which a promissory note or bill of exchange made payable at certain number of days after date or after sight or after a certain event is at maturity, the day of the date, or of presentment for acceptance or sight, or of protest for non-acceptance, or on which the event happens, shall be excluded. When day of maturity is a holiday Sec.25. When the day on which a promissory note or bill of exchange is at maturity is a public holiday, the instrument shall be deemed to be due on the next preceding business day. Explanation: The expression "Public Holiday" includes Sundays 15[***] and any other day declared by the 16[Central Government], by notification in the Official Gazette, to be a public holiday. Capacity to make, etc., promissory notes, etc. Sec.26. Every person capable of contracting, according to the law to which he is subject, may bind himself and be bound by the making, drawing, acceptance, endorsement, delivery and negotiation of a promissory note, bill of exchange or cheque. Minor: A minor may draw, endorse, deliver and negotiate such instruments so as to bind all parties except himself. Nothing herein contained shall be deemed to empower a corporation to make, endorse or accept such instruments except in cases in which, under the law for the time being in force, they are so empowered. Agency
Page 10 of 48
Sec.27. Every person capable of binding himself or of being bound, as mentioned in section 26, may so bind himself or be bound by a duly authorised agent acting in his name. A general authority to transact business and to receive and discharge debts does not confer upon an agent the power of accepting or endorsing bills of exchange so as to bind his principal. An authority to draw bills of exchange does not of itself import an authority to endorse. Liability of agent signing Sec.28. An agent who signs his name to a promissory note, bill of exchange or cheque without indicating thereon that he signs as agent, or that he does not intend thereby to incur personal responsibility, is liable personally on the instrument, except to those who induced him to sign upon the belief that the principal only would be held liable. Liability of legal representative signing Sec.29. A legal representative of a deceased person who signs his name to a promissory note, bill of exchange or cheque is liable personally thereon unless he expressly limits his liability to the extent of the assets received by him as such.
Liability of drawer Sec.30. The drawer of a bill of exchange or cheque is bound in case of dishonour by the drawee or acceptor thereof, to compensate the holder, provided due notice of dishonour has been given to, or received by, the drawer as hereinafter provided. Liability of drawee of cheque Sec.31. The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required so to do, and, in default of such payment, must compensate the drawer for any loss or damage caused by such default. Liability of maker of note and acceptor of bill Sec.32. In the absence of a contract to the contrary, the maker of a promissory note and the acceptor before maturity of a bill of exchange are bound to pay the amount thereof at maturity according to the apparent tenor of the note or acceptance respectively, and the acceptor of a bill of exchange at or after maturity is bound to pay the amount thereof to the holder on demand.
Page 11 of 48
In default of such payment as aforesaid, such maker or acceptor is bound to compensate any party to the note or bill for any loss or damage sustained by him and caused by such default. Only drawee can be acceptor except in need or for honour Sec.33. No person except the drawee of a bill of exchange, or all or some of several drawees, or a person named therein as a drawee in case of need, or an acceptor for honour, can bind himself by an acceptance. Acceptance by several drawees not partners Sec.34. Where there are several drawees of a bill of exchange who are not partners, each of them can accept it for himself, but none of them can accept it for another without his authority. Liability of endorser Sec. 35. In the absence of a contract to the contrary, whoever endorses and delivers a negotiable instrument before maturity, without, in such endorsement, expressly excluding or making conditional his own liability, is bound thereby to every subsequent holder, in case of dishonour by the drawee, acceptor or maker, to compensate such holder for any loss or damage caused to him by such dishonour, provided due notice of dishonour has been given to, or received by, such endorser as hereinafter provided. Every endorser after dishonour is liable as upon an instrument payable on demand.
Liability of prior parties to holder in due course Sec.36. Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied. Maker, drawer and acceptor principals Sec.37. The maker of a promissory note or cheque, the drawer of a bill of exchange until acceptance, and the acceptor are, in the absence of a contract to the contrary, respectively liable thereon as principal debtors, and the other parties thereto are liable thereon as sureties for the maker, drawer or acceptor, as the case may be. Prior party a principal in respect of each subsequent party Sec.38. As between the parties so liable as sureties, each prior party is, in the absence of a contract to the contrary, also liable thereon as a principal debtor in respect of each subsequent party. Suretyship
Page 12 of 48
Sec.39. When the holder of an accepted bill of exchange enters into any contract with the acceptor which, under section 134 or 135 of the Indian Contract Act, 1872 (9 of 1872), would discharge the other parties, the holder may expressly reserve his right to charge the other parties, and in such case they are not discharged. Discharge of endorser's liability Sec.40. Where the holder of a negotiable instrument, without the consent of the endorser, destroys or impairs the endorser's remedy against a prior party, the endorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity. Acceptor bound, although endorsement forged Sec.41. An acceptor of a bill of exchange already endorsed is not relieved from liability by reason that such endorsement is forged, if he knows or had reason to believe the endorsement to be forged when he accepted the bill. Acceptance of bill drawn in fictitious name Sec.42. An acceptor of a bill of exchange drawn in a fictitious name and payable to the drawer's order is not, by reason that such name is fictitious, relieved from liability to any holder in due course claiming under an endorsement by the same hand as the drawer's signature, and purporting to be made by the drawer. Negotiable instrument made, etc. without consideration Sec.43. A negotiable instrument made, drawn, accepted, endorsed, or transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties to the transaction. But if any such party has transferred the instrument with or without endorsement to a holder for a consideration, such holder, and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transferor for consideration or any prior party thereto. Exception I: No party for whose accommodation a negotiable instrument has been made, drawn, accepted or endorsed can, if he has paid the amount thereof, recover thereon such amount from any person who became a party to such instrument for his accommodation. Exception II: No party to the instrument who has induced any other party to make draw, accept, endorse or transfer the same to him for a consideration which he has failed to pay or perform in full shall recover therein an amount exceeding the value of the consideration (if any) which he has actually paid or performed. Partial absence or failure of money-consideration Sec.44. When the consideration for which a person signed a promissory note, bill of exchange or cheque consisted of money and was originally absent in part, or has
Page 13 of 48
subsequently failed in part, the sum which a holder standing in immediate relation with such signer is entitled to receive from him is proportionally reduced. Partial failure of consideration not consisting of money Sec.45. Where a part of the consideration for which a person signed a promissory note, bill of exchange or cheque, though not consisting of money, is ascertainable in money without collateral enquiry, and there has been a failure of that party, the sum which a holder standing in immediate relation with such signer is entitled to receive from him is proportionally reduced. 17[45A. Holder's right to duplicate of lost bill Where a bill of exchange has been lost before it is overdue, the person who was the holder of it may apply to the drawer to give him another bill of the same tenor, giving security to the drawer, if required, to indemnify him against all persons whatever in case the bill alleged to have been lost shall be found again. If the drawer on request as aforesaid refuses to give such duplicate bill, he may be compelled to do so. Delivery Sec.46. The making, acceptance or endorsement of a promissory note, bill of exchange or cheque is completed by delivery, actual or constructive. As between parties standing in immediate relation, delivery to be effectual must be made by the party making, accepting or endorsing the instrument, or by a person authorised by him in that behalf. As between such parties and any holder of the instrument other than a holder in due course, it may be shown that the instrument was delivered conditionally or for a special purpose only, and not for the purpose of transferring absolutely the property therein. A promissory note, bill of exchange or cheque payable to bearer is negotiable by the delivery thereof. A promissory note, bill of exchange or cheque payable to order is negotiable by the holder by endorsement and delivery thereof. Negotiation by delivery Sec.47. Subject to the provisions of section 58, a promissory note, bill of exchange or cheque payable to bearer is negotiable by delivery thereof. Exception: A promissory note, bill of exchange or cheque delivered on condition that it is not to take effect except in a certain event is not negotiable (except in the hands of a Negotiation by endorsement
Page 14 of 48
Sec.48. Subject to the provisions of section 58, a promissory note, bill of exchange or cheque 18[payable to order], is negotiable by the holder by endorsement and delivery thereof. Conversion of endorsement in blank into endorsement in full Sec.49. The holder of a negotiable instrument endorsed in blank may, without signing his own name, by writing above the endorser's signature a direction to pay to any other person as endorsee, convert the endorsement in blank into an endorsement in full; and the holder does not thereby incur the responsibility of an endorser. Effect of endorsement Sec.50. The endorsement of a negotiable instrument followed by delivery transfers to the endorsee the property therein with the right of further negotiation, but the endorsement may by express words, restrict or exclude such right, or may merely constitute the endorsee an agent to endorse the instrument, or to receive its contents for the endorser, or for some other specified person. Who may negotiate Sec.51. Every sole maker, drawer, payee or indorsee, or all of several joint makers, drawers, payees or endorsees, of a negotiable instrument may, if the negotiability of such instrument has not been restricted or excluded as mentioned in section 50, endorse and negotiate the same. Explanation : Nothing in this section enables a maker or drawer to endorse or negotiate an instrument, unless he is in lawful possession or is holder thereof, or enables a payee or endorsee to endorse or negotiate an instrument, unless he is holder thereof. Illustration A bill is drawn payable to A or order. A endorses it to B, the endorsement not containing the words "or order" or any equivalent words. B may negotiate the instrument. Endorser who excludes his own liability or makes it conditional Sec.52. The endorser of a negotiable instrument may, by express words in the endorsement, exclude his own liability thereon, or make such liability or the right of the endorsee to receive the amount due thereon depend upon the happening of a specified event, although such event may never happen. Where an endorser so excludes his liability and afterwards becomes the holder of the instrument all intermediates endorsers are liable to him. Holder deriving title from holder in due course
Page 15 of 48
Sec.53. A holder of a negotiable instrument who derives title from a holder in due course has the rights thereon of that holder in due course. Instrument endorsed in blank Sec.54. Subject to the provisions hereinafter contained as to crossed cheques, a negotiable instrument endorsed in blank is payable to the bearer thereof even although originally payable to order. Conversion of endorsement in blank into endorsement in full Sec.55. If a negotiable instrument, after having been endorsed in blank, is endorsed in full, the amount of it cannot be claimed from the endorser in full, except by the person to whom it has been endorsed in full, or by one who derives title through such person. Endorsement for part of sum due Sec.56. No writing on a negotiable instrument is valid for the purpose of negotiation if such writing purports to transfer only a part of the amount appearing to be due on the instrument; but where such amount has been partly paid a note to that effect may be endorsed on the instrument, which, may then be negotiated for the balance. Legal representative cannot by delivery only negotiate instrument endorsed by deceased
Sec.57. The legal representative of a deceased person cannot negotiate by delivery only a promissory note, bill of exchange or cheque payable to order and endorsed by the deceased but not delivered. Instrument obtained by unlawful means or for unlawful consideration Sec.58. When a negotiable instrument has been lost, or has been obtained from any maker, acceptor or holder thereof by means of an offence or fraud, or for an unlawful consideration, no possessor or endorsee who claims through the person who found or so obtained the instrument is entitled to receive the amount due thereon from such maker, acceptor or holder, or from any party prior to such holder, unless such possessor or endorsee is, or some person through whom he claims was, a holder thereof in due course. Instrument acquired after dishonour or when overdue Sec.59.The holder of a negotiable instrument, who has acquired it after dishonour, whether by non-acceptance or non-payment, with notice thereof, or after maturity, has only, as against the other parties, the rights thereon of his transferor : Accommodation note or bill : Provided that any person who, in good faith and for consideration, becomes the holder, after maturity, of a promissory note or bill of exchange made, drawn or accepted without consideration, for the purpose of
Page 16 of 48
enabling some party thereto to raise money thereon, may recover the amount of the note or bill from any prior party. Instrument negotiable till payment or satisfaction Sec.60. A negotiable instrument may be negotiated (except by the maker, drawee or acceptor after maturity) until payment or satisfaction thereof by the maker, drawee or accepter at or after maturity, but not after such payment or satisfaction. Presentment for acceptance Sec.61. A bill of exchange payable after sight must, if no time or place is specified therein for presentment, be presented to the drawee thereof for acceptance, if he can, after reasonable search, be found, by a person entitled to demand acceptance, within a reasonable time after it is drawn, and in business hours on a business day. In default of such presentment, no party thereto is liable thereon to the person making such default. If the drawee cannot, after reasonable search, be found, the bill is dishonoured. If the bill is directed to drawee at a particular place, it must be presented at that place, and if at the due- date for presentment he cannot, after reasonable search, be found thereon, the bill is dishonoured. 17[When authorised by agreement or usage, a presentment through the post office by means of a registered letter is sufficient.]
Presentment of promissory note for sight Sec.62. A promissory note, payable at a certain period after sight, must be presented to the maker thereof for sight (if he can after reasonable search be found) by a person entitled to demand payment, within a reasonable time after it is made and in business hours on a business day. In default of such presentment, no party thereto is liable thereon to the person making such default. Drawee's time for deliberation Sec.63. The holder must, if so required by the drawee of a bill of exchange presented to him for acceptance, allow the drawee 19[forty-eight] hours (exclusive of public holidays) to consider whether he will accept it. Presentment for payment Sec.64. Promissory notes, bill of exchange and cheques must be presented for payment to the maker, acceptor or drawee thereof respectively, by or on behalf of the holder as hereinafter provided. In default of such presentment, the other parties thereto are not liable thereon to such holder.
Page 17 of 48
20[Where authorised by agreement or usage, a presentment through the post office by means of a registered letter is sufficient.] Exception: Where a promissory note is payable on demand and is not payable at a specified place, no presentment is necessary in order to charge the maker thereof. Hours for presentment Sec.65. Presentment for payment must be made during the usual hours of business and, if at a banker's, within banking hours. Presentment for payment of instrument payable after date or sight Sec.66. A promissory note or bill of exchange, made payable at a specified period after date or sight thereof, must be presented for payment at maturity. Presentment for payment of promissory note payable by instalments Sec.67. A promissory note payable by instalments must be presented for payment on the third day after the date fixed for payment of each instalment; and nonpayment on such presentment has the same effect as non-payment of a note at maturity. Presentment for payment of instrument payable at specified place and not elsewhere Sec.68. A promissory note, bill of exchange or cheque made, drawn or accepted payable at a specified place and not elsewhere must, in order to charge any party thereto, be presented for payment at that place. Instrument payable at specified place Sec.69. A promissory note or bill of exchange made, drawn or accepted payable at a specified place must, in order to charge the maker or drawer thereof, be presented for payment at the place. Presentment where no exclusive place specified Sec.70. A promissory note or bill of exchange, not made payable as mentioned in sections 68 and 69, must be presented for payment at the place of business(if any) or at the usual residence, of the maker, drawee or acceptor thereof, as the case may be. Presentment when maker, etc., has no known place of business or residence Sec.71. If the maker, drawee, or acceptor of a negotiable instrument has no known place of business or fixed residence, and no place is specified in the instrument for presentment for acceptance or payment, such presentment may be made to him in person wherever he can be found.
Page 18 of 48
Presentment of cheque to charge drawer Sec.72. 20[Subject to the provisions of section 84] a cheque must, in order to charge the drawer, be presented at the bank on which it is drawn before the relation between the drawer and his banker has been altered to the prejudice of the drawer. Presentment of cheque to charge any other person Sec.73. A cheque must, in order to charge any person except the drawer, be presented within a reasonable time after delivery thereof by such person. Presentment of instrument payable at demand Sec.74. Subject to the provisions of section 31, a negotiable instrument payable on demand must be presented for payment within a reasonable time after it is received by the holder. Presentment by or to agent, representative of deceased, or assignee of insolvent Sec.75. Presentment for acceptance or payment may be made to the duly authorised agent of the drawee, maker or acceptor, as the case may be, or, where the drawee, maker or acceptor has died, to his legal representative, or, where he has been declared an insolvent, to his assignee. 21[75A. Excuse for delay in presentment for acceptance or payment Delay in presentment 22[for acceptance or payment] is excused if the delay is caused by circumstances beyond the control of the holder, and not imputable to his default, misconduct or negligence. When the cause of the delay ceases to operate, presentment must be made within a reasonable time.] When presentment unnecessary Sec.76. No presentment for payment is necessary, and the instrument is dishonoured at the due date for presentment, in any of the following cases: (a) if the maker, drawee or acceptor intentionally prevents the presentment of the instrument, or If the instrument being payable at his place of business, he closes such place on a business day during the usual business hours, or If the instrument being payable at some other specified place, neither he nor any person authorised to pay it attends at such place during the usual business hours, or If the instrument not being payable at any specified place, he cannot after due search be found; (b) as against any party sought to be charged therewith, if he has engaged to pay notwithstanding non-presentment;
Page 19 of 48
(c) as against any party if, after maturity, with knowledge that the instrument has not been presentedo he makes a part payment on account of the amount due on the instrument, or promises to pay the amount due therein whole or in part, o or otherwise waives his right to take advantage of any default in presentment for payment; (d) as against the drawer, if the drawer could not suffer damage from the want of such presentment. Liability of banker for negligently dealing with bill presented for payment Sec.77. When a bill of exchange, accepted payable at a specified bank, has been duly presented there for payment and dishonoured, if the banker so negligently or improperly keeps, deals with or delivers back such bill as to cause loss to the holder, he must compensate the holder for such loss. To whom payment should be made Sec.78. Subject to the provisions of section 82, clause (c), payment of the amount due on a promissory note, bill of exchange or cheque must, in order to discharge the maker or acceptor, be made to the holder of the instrument. Interest when rate specified Sec.79. When interest at a specified rate is expressly made payable on a promissory note or bill of exchange, interest shall be calculated at the rate specified, on the amount of the principal money due thereon, from the date of the instrument, until tender or realisation of such amount, or until such date after the institution of a suit to recover such amount as the court directs. Interest when no rate specified Sec.80. When no rate of interest is specified in the instrument, interest on the amount due thereon shall, 23[notwithstanding any agreement relating to interest between any parties to the instrument], be calculated at the rate of 24[eighteen per centum] per annum, from the date at which the same ought to have been paid by the party charged, until tender or realisation of the amount due thereon, or until such date after the institution of a suit to recover such amount as the court directs. Explanation: When the party charged is the indorser of an instrument dishonoured by non-payment, he is liable to pay interest only from the time that he receives notice of the dishonour. Delivery of instrument on payment or indemnity in case of loss Sec.81. Any person liable to pay, and called upon by the holder thereof to pay, the amount due on a promissory note, bill of exchange or cheque is before payment entitled to have it shown, and is on payment entitled to have it delivered up, to him,
Page 20 of 48
or, if the instrument is lost or cannot be produced, to be indemnified against any further claim thereon against him. Discharge from liability Sec.82. The maker, acceptor or endorser respectively of a negotiable instrument is discharged from liability thereon(a) By cancellation-to a holder thereof who cancels such acceptor's or endorser's name with intent to discharge him, and to all parties claiming under such holder, (b) By release- to a holder thereof who otherwise discharges such maker, acceptor or endorser, and to all parties deriving title under such holder after notice of such discharge; (c) By payment-to all parties thereto, if the instrument is payable to bearer, or has been endorsed in blank, and such maker, acceptor or endorser makes payment in due course of the amount due thereon. Discharge by allowing drawee more than forty-eight hours to accept Sec.83. If the holder of a bill of exchange allows the drawee more than 19[forty eight] hours, exclusive of public holidays, to consider whether he will accept the same, all previous parties not consenting to such allowance are thereby discharged from liability to such holder.
When cheque not duly presented and drawer damaged thereby Sec.84. 25[(1) Where a cheque is not presented for payment within a reasonable time of its issue, and the drawer or person on whose account it is drawn had the right, at the time when presentment ought to have been made, as between himself and the banker, to have the cheque paid and suffers actual damage through the delay, he is discharged to the extent of such damage, that is to say, to the extent to which such drawer or person is a creditor of the banker to a large amount than he would have been if such cheque had been paid. (2) In determining what is a reasonable time, regard shall be had to the nature of the instrument, the usage of trade and of bankers, and the facts of the particular case. (3) The holder of the cheques as to which such drawer or person is so discharged shall be a creditor, in lieu of such drawer or person, of such banker to the extent of such discharge and entitled to recover the amount from him. Illustrations
Page 21 of 48
(a) A draws a cheque for Rs. 1,000, and, when the cheque ought to be presented, has funds at the bank to meet it. The bank fails before the cheque is presented. The drawer is discharged, but the holder can prove against the bank for the amount of the cheque. (b) A draws a cheque at Umballa on a bank in Calcutta. The bank fails before the cheque could be presented in ordinary course. A is not discharged, for he has not suffered actual damage through any delay in presenting the cheque. Cheque payable to order Sec.85. 26[(1) Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee is discharged by payment in due course. (2) Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, notwithstanding any endorsement whether in full or in blank appearing thereon, and notwithstanding that any such endorsement purports to restrict or exclude further negotiation.] 21[85A. Drafts drawn by one branch of a bank on another payable to order Where any draft, that is an order to pay money, drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand, purports to be endorsed by or on behalf of the payee, the bank is discharged by payment in due course.] Parties not consenting discharged by qualified or limited acceptance Sec.86. If the holder of a bill of exchange acquiesces in a qualified acceptance, or one limited to part of the sum mentioned in the bill, or which substitutes a different place or time for payment, or which, where the drawees are not partners, is not signed by all the drawees, all previous parties whose consent is not obtained to such acceptance are discharged as against the holder and those claiming under him, unless on notice given by the holder they assent to such acceptance. Explanation: An acceptance is qualified,(a) where it is conditional, declaring the payment to be dependent on the happening of an event therein stated; (b) where it undertakes the payment of part only of the sum ordered to be paid; (c) where, no place of payment being specified on the order it undertakes the payment at a specified place, and not otherwise or elsewhere; or where, a place of payment being specified in the order, it undertakes the payment at some other place and not otherwise or elsewhere; (d) where it undertakes the payment at a time other than that at which under the order it would be legally due.
Page 22 of 48
Affect of material alteration Sec. 87. Any material alteration of a negotiable instrument renders the same void as against anyone who is a party thereto at the time of making such alteration and does not consent thereto, unless it was made in order to carry out the common intention of the original parties; Alteration by endorsee: and any such alteration, if made by an endorsee, discharges his endorser from all liability to him in respect of the consideration thereof. The provisions of this section are subject to those of sections 20, 49, 86 and 125. Acceptor or endorser bound notwithstanding previous alteration Sec.88. An acceptor or endorser of a negotiable instrument is bound by this acceptance or indorsement notwithstanding any previous alteration of the instrument. Payment of instrument on which alteration is not apparent Sec.89. Where a promissory note, bill of exchange or cheque has been materially altered but does not appear to have been so altered, or where a cheque is presented for payment which does not at the time of presentation appear to be crossed or to have had a crossing which has been obliterated, payment thereof by a person or banker liable to pay, and paying the same according to the apparent tenor thereof at the time of payment and otherwise in due course, shall discharge such a person or banker from all liability thereon, and such payment shall not be questioned by reason of the instrument having been altered, or the cheque crossed. Extinguishment of rights of action on bill in acceptor's hands Sec.90. If a bill of exchange which has been negotiated is, at or after maturity, held by the acceptor in his own right, all rights of action thereon are extinguished. Dishonour by non-acceptance Sec.91. A bill of exchange is said to be dishonoured by non-acceptance when the drawees, or one of several drawees not being partners, makes default in acceptance upon being duly required to accept the bill, or where presentment is excused and the bill is not accepted. Where the drawee is incompetent to contract, or the acceptance is qualified the bill may be treated as dishonoured. Dishonour by non-payment
Page 23 of 48
Sec.92. A promissory note, bill of exchange or cheque is said to be dishonoured by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same. By and to whom notice should be given Sec.93. When a promissory note, bill of exchange or cheque is dishonoured by nonacceptance or non-payment, the holder thereof, or some party thereto who remains liable thereon, must give notice that the instrument has been so dishonoured to all other parties whom the holder seeks to make severally liable thereon, and to some one of several parties whom he seeks to make jointly liable thereon. Nothing in this section renders it necessary to give notice to the maker of the dishonoured promissory note, or the drawee or acceptor of the dishonoured bill of exchange or cheque. Mode in which notice may be given Sec.94. Notice of dishonour may be given to a duly authorised agent of the person to whom it is required to be given, or, where he has died, to his legal representative, or, where he has been declared an insolvent, to his assignee; may be oral or written; may, if written, be sent by post; and may be in any form; but it must inform the party to whom it is given, either in express terms or by reasonable intendment, that the instrument has been dishonoured, and in what way, and that he will be held liable thereon; and it must be given within a reasonable time after dishonour, at the place of business or (in case such party has no place of business) at the residence of the party for whom it is intended. If the notice is duly directed and sent by post and miscarries, such miscarriage does not render the notice invalid. Party receiving must transmit notice of dishonour
Sec.95. Any party receiving notice of dishonour must, in order to render any prior party liable to himself, give notice of dishonour to such party within a reasonable time, unless such party otherwise receives due notice as provided by section 93. Agent for presentment Sec.96. When the instrument is deposited with an agent for presentment, the agent is entitled to the same time to give notice to his principal as if he were the holder giving notice of dishonour, and the principal is entitled to a further like period to give notice of dishonour. When party to whom notice given is dead Sec.97. When the party to whom notice of dishonour is despatched is dead, but the party despatching the notice is ignorant of his death, the notice is sufficient.
Page 24 of 48
When, notice of dishonour is unnecessary Sec.98. No notice of dishonour is necessary,(a) when it is dispensed with by the party entitled thereto; (b) in order to charge the drawer, when he has countermanded payment; (c) when the party charged could not suffer damages for want of notice; (d) when the party entitled to notice cannot after due search be found; or the party bound to give notice is, for any other reason, unable without any fault of his own to give it; (e) to charge the drawers, when the acceptor is also a drawer; (f) in the case of a promissory note which is not negotiable; (g) when the party entitled to notice, knowing the facts, promises unconditionally to pay the amount due on the instrument. Noting Sec.99. When a promissory note or bill of exchange has been dishonoured by nonacceptance or non-payment, the holder may cause such dishonour to be noted by a notary public upon the instrument, or upon a paper attached thereto, or partly upon each, such note must be made within a reasonable time after dishonour, and must specify the date of dishonour, the reason, if any assigned for such dishonour, or if the instrument has not been expressly dishonoured, the reason why the holder treats it as dishonoured, and the notary's charges. Protest Sec.100. When a promissory note or bill of exchange has been dishonoured by nonacceptance or non-payment, the holder may, within a reasonable time, cause such dishonour to be noted and certified by a notary public. Such certificate is called a protest. Protest for better security : When the acceptor of a bill of exchange has become insolvent, or his credit has been publicly impeached, before the maturity of the bill, the holder may, within a reasonable time, cause a notary public to demand better security of the acceptor, and on its being refused may, with a reasonable time, cause such facts to be noted and certified as aforesaid. Such certificate is called a protest for better security. Contents of protest Sec.101. A protest under Section 100 must contain-
Page 25 of 48
(a) either the instrument itself, or a literal transcript of the instrument and of everything written or printed thereupon; (b) the nature of the person for whom and against whom the instrument has been protested; (c) a statement that payment or acceptance, or better security, as the case may be, has been demanded of such person by the notary public; the terms of his answer, if any, or a statement that he gave no answer, or that he could not be found; (d) when the note or bill has been dishonoured, the place and time of dishonour, and, when better security has been refused, the place and time of refusal; (e) the subscription of the notary public making the protest; (f) in the event of an acceptance for honour or of a payment for honour, the name of the person by whom, of the person for whom, and the manner in which, such acceptance or payment was offered and effected. 17[A notary public may make the demand mentioned in clause (c) of this section either in person or by his clerk or, where authorised by agreement or usage, by registered letter.] Notice of protest Sec.102. When a promissory note or bill of exchange is required by law to be protested, notice of such protest must be given instead of notice of dishonour, in the same manner and subject to the same conditions; but the notice may be given by the notary public who makes the protest. Protest for non-payment after dishonour by non-acceptance Sec.103. All bills of exchange drawn payable at some other place than the place mentioned as the residence of the drawee, and which are dishonoured by nonacceptance, may, without further presentment to the drawee, be protested for nonpayment, in the place specified for payment, unless paid before or at maturity. Protest of foreign bills Sec.104. Foreign bills of exchange must be protested for dishonour when such protest is required by the law of the place where they are drawn. 17[104A. When noting equivalent to protest For the purposes of this Act, where a bill or note is required to be protested within a specified time or before some further proceeding is taken, it is sufficient that the bill has been noted for protest before the expiration of the specified time or the taking of the proceeding; and the formal protest may be extended at any time thereafter as of the date of the noting.] Reasonable time
Page 26 of 48
Sec.105. In determining what is a reasonable time for presentment for acceptance or payment, for giving notice of dishonour and for noting, regard shall be had to the nature of the instrument and the usual course of dealing with respect to similar instruments; and, in calculating such time, public holidays shall be excluded. Reasonable time of giving notice of dishonour Sec.106. If the holder and the party to whom notice of dishonour is given carry on business or live (as the case may be) in different places, such notice is given within a reasonable time if it is despatched by the next post or on the day next after the day of dishonour. If the said parties carry on business or live in the same place, such notice is given within a reasonable time if it is despatched in time to reach its destination on the date next after the day of dishonour. Reasonable time for transmitting such notice Sec.107.A party receiving notice of dishonour, who seeks to enforce his right against a prior party, transmits the notice within a reasonable time if he transmits it within the same time after its receipt as he would have had to give notice if he had been the holder. Acceptance for honour Sec.108. When a bill of exchange has been noted or protested for non-acceptance or for better security, any person not being a party already liable thereon may, with the consent of the holder, by writing on the bill accept the same for the honour of any party thereto 27[***]. How acceptance for honour must be made Sec.109. A person desiring to accept for honour must, 28[by writing on the bill under his hand], declare that he accepts under protest the protested bill for the honour of the drawer or of a particular endorser whom he names, or generally for honour 29[***]. Acceptance not specifying for whose honour it is made Sec.110. Where the acceptance does not express for whose honour it is made it shall be deemed to be made for the honour of the drawer. Liability of acceptor for honour Sec.111. An acceptor for honour binds himself to all parties subsequent to the party for whose honour he accepts to pay the amount of the bill if the drawee does not; and such party and all prior parties are liable in their respective capacities to compensate the acceptor for honour for all loss or damage sustained by him in consequence of such acceptance.
Page 27 of 48
But an acceptor for honour is not liable to the holder of the bill unless it is presented, or (in case the address given by such acceptor on the bills is a place other than the place where the bill is made payable) forwarded for presentment, not later than the day next after the day of its maturity. When acceptor for honour may be charged Sec.112.An acceptor for honour cannot be charged unless the bill has at its maturity been presented to the drawee for payment, and has been dishonoured by him, and noted or protested for such dishonour. Payment for honour Sec.113. When a bill of exchange has been noted or protested for non-payment, any person may pay the same for the honour of any party liable to pay the same; provided that the person so paying 17[or his agent in that behalf] has previously declared before a notary public the party for whose honour he pays, and that such declaration has been recorded by such notary public. Right of payer for honour Sec.114. Any person so paying is entitled to all the rights in respect of the bill, of the holder at the time of such payment, and may recover from the party for whose honour he pays all sums so paid, with interest thereon and with all expenses properly incurred in making such payment. Drawee in case of need Sec.115. Where a drawee in case of need is named in a bill of exchange, or in any endorsement thereon, the bill is not dishonoured until it has been dishonoured by such drawee. Acceptance and payment without protest Sec.116. A drawee in case of need may accept and pay the bill of exchange without previous protest Rules as to compensation Sec.117. The compensation payable in case of dishonour of promissory note, bill of exchange or cheque, by any party liable to the holder or any endorsee, shall 30[***] be determined by the following rules: (a) the holder is entitled to the amount due upon the instrument together with the expense properly incurred in presenting, noting and protesting it; (b) when the person charged resides at a place different from that at which the instrument was payable, the holder is entitled to receive such sum at the current rate of exchange between the two places;
Page 28 of 48
(c) an endorser who, being liable, has paid the amount due on the same is entitled to the amount so paid with interest at 31[eighteen per centum] per annum from the date of payment until tender or realisation thereof, together with all expenses caused by the dishonour and payment; (d) when the person charged and such endorser reside at different places, the endorser is entitled to receive such sum at the current rate of exchange between the two places; (e) the party entitled to compensation may draw a bill upon the party liable to compensate him, payable at sight or on demand, for the amount due to him, together with all expenses properly incurred by him. Such bill must be accompanied by the instrument dishonoured and the protest thereof (if any). If such bill is dishonoured, the party dishonouring the same is liable to make compensation thereof in the same manner as in the case of the original bill. Presumptions as to negotiable instruments Sec.118.Until the contrary is proved, the following presumption shall be made:(a) of consideration-that every negotiable instrument was made or drawn for consideration, and that every such instrument, when it has been accepted, endorsed, negotiated or transferred, was accepted, endorsed, negotiated or transferred for consideration; (b) as to date-that every negotiable instrument bearing a date was made or drawn on such date; (c) as to time of acceptance-that every accepted bill of exchange was accepted within a reasonable time after its date and before its maturity; (d) as to time of transfer-that every transfer of a negotiable instrument was made before its maturity; (e) as to order of endorsements-that the endorsements appearing upon a negotiable instrument were made in the order in which they appear thereon; (f) as to stamps-that a lost promissory note, bill of exchange or cheque was duly stamped; (g) that holder is a holder in due course-that the holder of a negotiable instrument is a holder in due course; provided that, where the instrument has been contained from its lawful owner, or from any person in lawful custody thereof, by means of an offence or fraud, or has been obtained from the maker or acceptor thereof by means of an offence or fraud, or for unlawful consideration, the burden of proving that the holder is a holder in due course lies upon him. Presumption on proof of protest
Page 29 of 48
Sec.119. In a suit upon an instrument which has been dishonoured, the court shall, on proof of the protest, presume the fact of dishonour, unless and until such fact is disproved. Estoppel against denying original validity of instrument Sec.120. No maker of a promissory note, and no drawer of a bill of exchange or cheque, and no acceptor of a bill of exchange for the honour of the drawer shall, on proof of the protest, presume the fact of dishonour, unless and until validity of the instrument as originally made or drawn. Estoppel against denying capacity of payee to endorse Sec.121. No maker of a promissory note, and no acceptor of a bill of exchange 32[payable to order] shall, in suit thereon by a holder in due course, be permitted to deny the payee's capacity, at the rate of the note or bill, to endorse the same. Estoppel against denying signature or capacity of prior party Sec.122. No endorser of a negotiable instrument shall, in a suit thereon by a subsequent holder, be permitted to deny the signature or capacity to contract of any prior party to the instruments Cheque crossed generally Sec.123. Where a cheque bears across its face an addition of the words "and company" or any abbreviation thereof, between two parallel transverse lines or of two parallel transverse lines simply, either with or without the word "not negotiable", that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally. Cheque crossed specially
Sec.124. Where a cheque bears across its face an addition of the name of a banker, either with or without the words "not negotiable", that addition shall be deemed a crossing and the cheque shall be deemed to be crossed specially, and to be crossed to that banker. Crossing after issue Sec.125. Where a cheque is uncrossed, the holder may cross it generally or specially. Where a cheque is crossed generally, the holder may cross it specially. Where a cheque is crossed generally or specially, the holder may add the words "not negotiable".
Page 30 of 48
Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another banker, his agent, for collection. Payment of cheque crossed generally Sec.126. Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker. Payment of cheque crossed specially: Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is crossed, or his agent for collection. Payment of cheque crossed specially more than once Sec.127. Where a cheque is crossed specially to more than one banker, except when crossed to an agent for the purpose of collection, the banker on whom it is drawn shall refuse payment thereof. Payment in due course of crossed cheque Sec.128. Where the banker on whom a crossed cheque is drawn has paid the same in due course, the banker paying the cheque, and (in case such cheque has come to the hands of the payee) the drawer thereof, shall respectively be entitled to the same rights, and be placed in the same position in all respects, as they would respectively be entitled to and placed in if the amount of the cheque had been paid to and received by the true owner thereof. Payment of crossed cheque out of due course Sec.129. Any banker paying a cheque crossed generally otherwise than to a banker, or a cheque crossed specially otherwise than to the banker to whom the same is crossed, or his agent for collection, being a banker, shall be liable to the true owner of the cheque for any loss he may sustain owing to the cheque having been so paid.
Cheque bearing "not negotiable" Sec.130. A person taking a cheque crossed generally or specially, bearing in either case the words "not negotiable", shall not have and shall not be capable of giving, a better title to the cheque than that which the person from whom he took it had. Non-liability of banker receiving payment of cheque Sec.131. A banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment.
Page 31 of 48
33[Explanation: A banker receives payment of a crossed cheque for a customer within the meaning of this section notwithstanding that he credits his customer's account with the amount of the cheque before receiving payment thereof.] 34[131A. Application of chapter to drafts The provisions of this chapter shall apply to any draft, as defined in section 85A, as if the draft were a cheque. Set of bills Sec. 132. Bills of exchange may be drawn in parts, each part being numbered and containing a provision that it shall continue payable only so long as the others remain unpaid. All the parts together make a set; but the whole set constitutes only one bill, and is extinguished when one of the parts of a separates bill, would be extinguished. Exception: When a person accepts or endorses different parts of the bill in favour of different person, he and the subsequent endorsers of each part are liable on such part as if it were a separate bill. Holder of first acquired part entitled to all Sec.133. As between holders in due course of different parts of the same set, he who first acquired title to his part is entitled to the other parts and the money represented by the bill. Law governing liability of maker, acceptor or endorser of foreign instrument Sec.134. In the absence of a contract to the contrary, the liability of the maker or drawer of a foreign promissory note, bill of exchange or cheque is regulated in all essential matters by the law of the place where he made the instrument, and the respective liabilities of the acceptor and endorser by the law of the place where the instrument is made payable. Law of place of payment governs dishonour Sec.135. Where a promissory note, bill of exchange or cheque is made payable in a different place from that in which it is made or endorsed, the law of the place, where it is made payable determines what constitutes dishonour and what notice of dishonour is sufficient. Instrument made, etc. out of India, but in accordance with the law of India Sec.136. If a negotiable instrument is made, drawn, accepted or endorsed 35[outside India], but in accordance with the 35[law of India], the circumstance that any agreement evidenced by such instrument is invalid according to the law of the country wherein it was entered into does not invalidate any subsequent acceptance or endorsement made thereon 35[within India]. Presumption as to foreign law
Page 32 of 48
Sec.137. The law of any foreign country 36[***] regarding promissory note, bills of exchange and cheques shall be presumed to be the same as that of 37[India], unless and until the contrary is proved. Dishonour of cheque for insufficiency, etc., of funds in the accounts Sec.138.Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may extend to one year, or with fine which may extend to twice the amount of the cheque, or with both: PROVIDED that nothing contained in this section shall apply unless(a) the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier. (b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer of the cheque, within fifteen days of the receipt of information by him from the bank regarding the return of the cheque as unpaid, and (c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice. Explanation: For the purpose of this section, "debt or other liability" means a legally enforceable debt or other liability. Presumption in favour of holder Sec.139. It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of the nature referred to in section 138 for the discharge, in whole or in part, or any debt or other liability. Defence which may not be allowed in any prosecution under section 138 Sec.140. It shall not be a defence in a prosecution of an offence under section 138 that the drawer had no reason to believe when he issued the cheque that the cheque may be dishonoured on presentment for the reasons stated in that section. Offences by companies Sec.141. (1) If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was
Page 33 of 48
responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly: PROVIDED that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence. (2) Notwithstanding anything contained in sub-section (1), where any offence under this Act, has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. Explanation: For the purpose of this section (a) "company" means any body corporate and includes a firm or other association of individuals; and (b) "director", in relating to a firm, means a partner in the firm. Cognisance of offences Sec.142. Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974),(a) no court shall take cognisance of any offence punishable under section 138 except upon a complaint, in writing, made by the payee or, as the case may be, the holder in due course of the cheque; (b) such complaint is made within one month of the date on which the cause -ofaction arises under clause (c) of the proviso to section 138; (c) no court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class shall try any offence punishable under section 138.
CASE LAW
Title CANARA BANK Vs. CANARA SALES CORPORATION & ORS. Coram
KHALID, V. (J)
Subject
Page 34 of 48
Negotiable Instruments Act, 1881-Sections 6, 31, 77, 85 and 117- Bank and customer of the Bank Relationship between -That of a creditor and debtor- Cheque duly signed by a customer presented-Mandate to Bank to pay the amount Element of trust between Bank and its customer exists. Banking Law -Bank and Customer Entries in pass book and statement of accounts furnished by bank customer whether duty bound to intimate discrepancies.
Citation
1987 AIR 1603, 1987( 2 )SCR1138, 1987( 2 )SCC 666, 1987( 1 )SCALE924 , 1987( 2 )JT 491
Head Notes
The respondent company had a current account with the lant bank in its Mangalore Builder Branch. The Managing Director of the company and the General Manager of a sister concern of the company had been authorised to operate the said current account. The second defendant was attending to the maintenance of accounts of the respondent-company and was also in charge and had the custody of the cheque book issued by the Bank to the respondent-company. During the process of bringing the accounts upto date certain irregularities were noticed in the account and on verification it was found that cheques purporting to bear the signature of the Managing Director were encashed, though they did not bear 'his signature. A complaint was lodged by the respondent Company with the police and a special audit of the company's accounts for the years 1957-58 to 1960-61 by a firm of Chartered Accountants disclosed that the second defendant had withdrawn a sum of Rs.3,26,047.92 under 42 cheques. A suit was filed for the recovery of the said amount on the plea that the amounts as per the forged cheques were not utilised for the purpose of the respondent company that they were not authorised ones, that there was no acquiescence or ratification open or tacit on the part of the respondent company and that the respondent was unaware of the fraud till the new accountant discovered it. The appellant-bank resisted the suit on the grounds (1) that the cheques were not forged ones; (2) that even if they were forged ones, the company was not entitled to recover the amount on account of its own negligence; (3) that there was settlement of accounts between the parties from time to time and as such. the company was not entitled to reopen the same and claim the sums paid under the cheques; and (4) that the suit was barred by limitation. The second defendant pleaded that the cheques were utilised for the purpose of the company. The trial Court negatived the contentions of the bank and passed a decree for the sum claimed with interest at 6%. In appeal the Division Bench confirmed the judgment of the trial court but as the case involved substantial questions of law of general public importance it granted a certificate to file the appeal. In the appeal before this Court it was contended on behalf of the appellant that:
Page 35 of 48
(1) after reasonable opportunities are given to the customer to examine the bank statements, its debit entries should be deemed to be final and will not be open for reconstruction to the detriment of the bank; (2) a representation may be made either by statement or by conduct, and conduct included negligence, silence, acquiescence or encouragement, and if a customer of a bank, by his negligence, to give timely information of forged cheques, allows amount to be drawn on such cheques. The debit will stand for the whole amount and the consumer will be estopped from claiming the amount; and (3) in-action for a long period would amount to such negligence as would persuade a court to impute to the customer with knowledge or at any rate constructive knowledge, to decline him relief in an action for recovery of amounts which would be to the detriment of an innocent party, namely, the bank
Dismissing the appeal

HELD: 1. When a cheque duly signed by a customer is presented before a bank with whom he has an account there is a mandate on the bank to pay the amount covered by the cheque. However, if the signature on the cheque is not genuine, there is no mandate on the bank to pay. The bank when it makes payment on such a cheque cannot resist the claim of the customer with the defence of negligence on his part such as leaving the cheque book carelessly so that third parties would easily get hold of it. This is because a document in cheque form on which the customer's name as drawer is forged is a mere nullity. [1147B-D] 2. The relationship between the customer of a bank and the bank is that of a creditor and debtor. When a cheque presented for encashment contains a forged signature the bank has no authority to make payment against such a cheque. The bank would be acting against law in debiting the customer with the amounts covered by such cheques. When a customer demands payment for the amount covered by such cheques, the bank would be liable to pay the payment to the customer. The bank can succeed in denying payment only when it establishes that the customer is disentitled to make a claim either on account of adoption, estoppel or ratification. [1146G-H; 1147A-B] For negligence to constitute an estoppel, it is necessary to imply the existence of some duty which the party against whom estoppel is alleged owes to the other party. There is a duty of sorts on the part of the customer to inform the bank of the irregularities when he comes to know of it. But by mere negligence, one cannot presume that there has been a breach of duty by the customer to the bank. The customer should not by his conduct facilitate payment of money on forged cheques. In the absence of such circumstances, mere negligence will not prevent a customer from successfully suing the bank for recovery of the amount. [1150B-D] 4. In order to sustain a plea of acquiescence, it is necessary to prove that the party against whom the said plea is raised had remained silent about the matter regarding which the plea of acquiescence is raised. even after knowing the truth of the matter. [1150D-E]
Page 36 of 48
5. There is no duty for a customer to inform the bank of a fraud committed on him, of which he was unaware. Nor can in action for a reasonably long time in not discovering fraud or irregularity be made a defence to defeat a customer in an action for loss. [1157G-H] 6. There is no duty on the part of the customer to intimate the banker about any error that may be seen in the pass book and he will be entitled to claim any amount paid on a forged cheque though there may be some negligence or in action on his part in not being careful to discover the errors in the pass book or other documents. 7. Banks do business for their benefit. Customers also get some benefit. If banks are to insist upon extreme care by the customers in minutely looking into the pass book and the statements sent by them, no bank perhaps can do profitable business. It is common knowledge that the entries in the pass books and the statements of account sent by the bank are either not readable, decipherable or legible. There is always an element of trust between the bank and its customer. The bank's business depends upon this trust. [1156B-D] 8. Whenever a cheque purporting to be by a customer is presented before a bank it carries a mandate to the bank to pay. If a cheque is forged there is no such mandate. The bank can escape liability only if it can establish knowledge to the customer of the forgery in the cheques. In-action for continuously long period cannot by itself afford a satisfactory ground for the bank to escape the liability. [1156D-E] 9. In the present case during the relevant period when 42 cheques were encashed, the company did not know anything about the sinister design of the second defendant. Since the bank had not proved to the satisfaction of the court that the company had with full knowledge acknowledged the correctness of the accounts for the relevant period the case of acquiescence cannot be flourished against the company. There is no evidence to show that any one other than the second defendant knew that the forged cheques had been encashed. After the matter was discovered immediate action was taken. Therefore, in the absence of any evidence of the respondent-company's involvement it cannot be non-suited on the ground of negligence or in-action. Unless the bank is able to satisfy the court of either an express condition in the contract with its customer or an unequivocal ratification it will not be possible to save the bank from its liability. [1150E-F; 1151A-B; 1156B] Bihta Co-operative Development Cane Marketing Union Ltd.
Judgment Made On 22nd April, 1987

JUDGMENT: Joint Stock Bank Ltd. v. Macmillan, [1918] AC 777; Tai Hing Cotton Ltd. v. Liu Chong Bank, [1985] 2 All England Reports 947; Greenwood v. Martins Bank Ltd., [1933] AC 51 = [1932] All England Reports 318; and New Marine Coal Co. (Bengal) Pvt. Ltd. v. Union of India, [1964] 2 SCR 859, referred to & CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1777 of 1973. From the Judgment and Decree dated 25.6.1973 of the Karnataka High Court in Regular First Appeal No. 56 of 1968.K.N. Bhatt, V.K. Verma and Ms Madhu Moolchandani for the Appellants S.S. Javaliand B .R. Agarwala for the respondents.
Page 37 of 48
The Judgment of the Court was delivered by 1142 KHALID, J. This is an appeal by certificate against the Judgment dated 25th June, 1972, passed by a Division Bench of the Karnataka High Court. The 1st defendant Bank is the appellant. Original Suit No. 72 of 1962 was filed in the Court of Civil Judge, Mangalore, by the Canara Sales Corporation, Ltd. through its Managing Director, V.S. Kudva. He died during the pendency of the suit and the suit was continued by the succeeding Managing Director of the Corporation. The suit was against two defendants: the appellant Bank was the first defendant and the second defendant was one Y.V, Bhat who was the Chief Accounts Officer of the plaintiff, till 1961. He died during the pendency of the appeal before the High Court and his legal representatives were brought on record. When the suit was filed, the appellant-Bank was called the Canara Bank Ltd. After the nationalisation of banks it became the Canara Bank which is the appellant before us. The suit was instituted for recovery of a sum of Rs.3,26,047.92 with the following allegations: The plaintiff is a private Limited Company with its head office at Mangalore. It had a current account with the appellant Bank in its Mangalore Bunder branch. The Managing Director of the company and the General Manager of a sister concern of the company had been authorised to operate the said current account of the plaintiff with the Bank. The second defendant was attending to the maintenance of accounts of the plaintiff and was also in charge and custody of the cheque books issued by the Bank to the plaintiff. In March, 1961, the second defendant was absent from duty for some time. During that period one A. Shenoy, who was the Assistant of the second defendant was directed to bring the accounts upto date. During this process, he noticed certain irregularities in the account and brought this to the notice of the plaintiff. On verification, it was found that cheques purporting to bear the signature of Shri V.S. Kudva were encashed though they did not bear his signature. In other words the signatures were forged. On 25-3-196 1, a complaint was made by the plaintiff with the Superintendent of Police. The plaintiff appointed a firm of Chartered Accountants to conduct special audit of the company's accounts, for the years 1957:58 to 196061. This special audit disclosed that the second defendant had withdrawn, in all, a sum of Rs.3,26,047.92 under 42 cheques. The suit was filed for recovery of the amount on the plea that the amounts as per the forged cheques were not utilized for the purpose of the plaintiff, that they were not authorised ones, that there was no acquiescence or ratification open or tacit on the part of the plaintiff, that the plaintiff was unaware of the 1143 fraud till the new accountant discovered it. The appellant Bank resisted the suit on the following grounds in their written statement:
(i) That the cheques were not forged ones. (ii) Even if they were forged ones the plaintiff was not entitled to recover the amount on account of its own negligence. (iii) There was settlement of accounts between the parties from time to time and as such the plaintiff was not entitled to reopen the same and claim the sums paid under the cheques in question. (iv) The suit was barred by limitation. The second defendant pleaded that the cheques were not forged ones and the amounts recovered by the cheques were utilized for the purpose of the plaintiff. The Trial Court negatived the contentions of the first defendant Bank and passed a decree for the sum claimed, with interest at
Page 38 of 48
6% from the date of the suit till recovery of the amount. In appeal before the Division Bench, the judgment of the Trial Court was confirmed. The High Court certified that the case involved substantial questions of law of general public importance and granted certificate to file the appeal. It is thus that this appeal has come before us. Venkataramiah, J. as he then was, who spoke for the Bench, has in his detailed Judgment considered all the aspects of the case both on facts and on law and agreed with the Trial Court that the suit had to be decreed, repelling the contentions raised by the first defendant. The courts have concurrently found that the cheques were forged and that the second defendant was responsible for it. We do not propose to consider the question of facts in this Judgment. The learned counsel for the appellant, Shri Bhat argued the case at length and took us through various authorities, bearing on the question, most of which fell for consideration at the hands of the High Court also. In the instant case, 42 cheques with forged signature were presented on various dates between the year 1957 and 1961. During the said period the appellant Bank used to send to the plaintiff-respondent 1144 pass sheets containing the debit and credit entries in the current account of the plaintiff with the Bank every month and at the end of every half year ending 30th June and 31 st December, a letter used to be sent asking the respondent to confirm that the balance in his account with the Bank was as mentioned in the letter. Till March, 1961 the correctness of the entries in the pass sheets and half yearly statements was not questioned by the plaintiff. The accounts of the plaintiff company were being audited as required by the Companies Act by Chartered Accountants. The Bank contended that if there was mis-appropriation of an amount of nearly Rs.3 lacs by forged cheques by the second defendant this would have been detected by the Chartered Accountants and would have come to the notice of the plaintiff company. The several entries in the books of account maintained by the plaintiff company show that all the amounts covered by the cheques in dispute had been credited in the books. The Managing Director of the plaintiff-company himself admitted that he had received the periodical statements and that he did not at any time intimate the Bank about the incorrectness either in the pass sheets or in the letters. The in-action on the part of the plaintiff-company and its Managing Director in not informing the Bank of the irregularities in the account and deliberately withholding such information from the Bank. According to the Bank, constituted negligence disentitling the plaintiff from claiming any amount from the Bank in respect of forged cheques. Alternatively it was contended that the principle of estoppel operated against the plaintiff from claiming the amount, on the ground of adoption or acquiescence. The case of the appellant can be summarised as follows: After reasonable opportunities are given to the customer to examine the Bank statements, its debit entries should be deemed to be final and will not be open for reconstruction to the detriment of the bank. Of course, what is a reasonable opportunity will depend on the facts of each case. In law, there can always be a settled or stated account between the banker and the customer. The question to be decided here is whether acceptance by the customer without protest of a balance struck in the pass book or statement of account constitutes a settled account. It is submitted that this aspect of the Banking law has not yet been authoritatively decided by this Court and invited us to pronounce upon it. On the question of estoppel it was contended that a representation 1145 may be made either by statement or by conduct: and conduct included negligence, silence, acquiescence or encouragement. If a customer of a bank, by his negligence to give timely information of forged cheques, allows amount to be drawn on such cheques. The debit will stand
Page 39 of 48
for the whole amount and the customer will be estopped from claiming the amount. If timely information was given, the Bank could have acted to ward off the mischief. It was further contended that inaction for a long period would amount to such negligence, as would persuade a Court to impute to the customer, with knowledge or at any rate constructive knowledge, to decline him, relief in an action for recovery of amounts, which would be to the detriment of an innocent party, namely the Bank. For this purpose, dictionary meanings of the word 'knowledge was brought to our notice". Knowledge may include not only actual knowledge, i.e., actual awareness of the facts relevant but constructive knowledge, i.e., knowledge attributed by law to the party in the circumstances, whether he actually had the knowledge or not, and knowledge may be attributed to a person who has sought to avoid finding out or has shut his eyes to obvious means of knowledge. e.g., the man who is offered valuables cheaply in circumstances which suggest that they may well have been stolen but who refrains from enquiry". Black's Law Dictionary Fifth Edition defines "Constructive knowledge" as "If one by exercise of reasonable care would have known a fact. he is deemed to have had costructive knowledge of such fact, e.g., matters of public record". "Notice" means "bringing it to a person's knowledge". Then he referred us to the Transfer of Property Act, Trusts Act, Law of Agency etc. to contend that a person is said to have noticed of a fact when but for willful abstention from an enquiry. He would have known it and that in equity a man who ought to have known a fact should be treated as if he actually does know it. He then developed his submission as follows: It is accepted to be a duty of customer who knows that his cheques are being forged, to inform the bank. If he fails to give such information, he is estopped from claiming that the cheques were forged. In law, there should be no difference in the consequence between a person having constructive knowledge and a person having actual knowledge. Thus a person having constructive knowledge of a matter cannot be allowed to take advantage of his own negligence. According to him the terms of contract between a banker and its customer can never be complete unless there is an implied condition that the customer was under a duty to examine the statement to account, particularly when the bank issues a notice that if no errors are pointed out within a specified time. The bank will proceed to believe that there are no errors. Such a notice imposes on a customer a duty to react and failure to react would amount to negligence, leading to estoppel. The company's Balance Sheet for four years clearly show that the auditors have examined the books and vouchers. It is in evidence (spoken to by PW 8) that the balance sheets were adopted by the general bodies for four successive years. This shows that the statements of account. given by the Bank was accepted as such. There is a duty on the part of the Company's directors to present a correct Balance Sheet. Negligence to verify the obvious things like examining the counterfoil of cheques amounts not only to estoppel but to adoption and ratification. For, no one can take shelter under one's own failure to examine the obvious. Further, the annual reports are to be treated as public documents and public are likely to rely upon its representation and defendantbank is, at any rate, a member of the public. We have set out above, the contentions of the appellant, in detail, so as to bring into focus, the questions of law to be decided in the appeal. Now we propose to consider the submissions made by the appellant to test their validity qua the Banking Law, applicable to India. It is true that there is no direct authority of this Court on this Branch of the Law. It is therefore, necessary to briefly outline the confines of this Branch of law. The relationship between the customer of a bank and the bank is that of a creditor and debtor. When a cheque
Page 40 of 48
which presented for encashment contains a forged signature the bank has no authority to make payment against such a cheque. The bank would be acting against law in debiting the customer with the amounts covered by such cheques. When a customer demands payment for the amount covered by such cheques. The bank would be liable to pay the amount to the customer. The bank can succeed in denying payment only when it establishes that the customer is disentitled to make a claim either on account of adoption, estoppel or ratification. The principle of law regarding this aspect is as follows: When a cheque duly signed by a customer is presented before a bank with whom he has an account there is a mandate on the bank to pay the amount covered by the cheque. However, if the signature on the cheque is not genuine there is no mandate on the bank to pay. The bank, when it makes payment on such a cheque, cannot resist the claim of the customer with the defence of negligence on his part such as leaving the cheque book carelessly so that third parties would easily get hold of it. This is because a document in cheque form, on which the customer's name as drawer is forged, is a mere nullity. The bank can succeed only when it establishes adoption or estoppel. The relationship between a bank and its customers indirectly arose before this Court in Bihta Co-operative Development Cane Marketing Union Ltd. & Anr. v. The Bank of Bihar & Ors., [1967] SCR 848. In that case a suit was filed by a Society registered under the Bihar and Orissa Co-operative Societies Act, 1935, and its Secretary. This Society had an account with the first defendant-Bank. The 7th defend ants were respectively its Joint Secretary and Treasurer. A sum of Rs.11,000 was withdrawn from the account by means of a cheque, not from the cheque book of the Society, but from a loose cheque leaf surrendered by an ex-constituent of the bank. It bore the signature of the 7th defendant but the forged signature of the 6th defendant. The suit against the bank, its manager and other employees was decreed by the Trial Court and confirmed by the High Court on the question relevant for our purpose but dismissed on the ground jurisdiction. The question before us in this appeal was considered by this Court with reference to a Judgment of the House of Lords in London Joint Stock Bank Ltd. v. Macmillan, [1918] AC 777. It was argued before this Court that the decree against the bank could not be sustained since even though there was negligence on the part of the bank and its employees, the plaintiffs' Society was not altogether free from blame or negligence in that but for the part played by at least one of its employees in the matter of encashment of the cheque for Rs.11,000 the fraud could not have been perpetrated. It was also argued that if both the parties were negligent or blameworthy. The plaintiffs claim ought not to succeed. It was, in this connection that Macmillan's case fell for reference. Being a landmark case, we would set out the facts of that case in brief: The plaintiffs, Macmillan etc. brought a suit against the London Stock Bank for a declaration that the bank was not entitled to debit the plaintiffs with a cheque for pound 120. The plaintiffs had in their employment a confidential clerk who made out cheques and got the signature of partners. On a certain day, the clerk made out a cheque for pound 2 and asked one of the partners to sign it, which the partner did. The next day the clerk did not turn up. The partners became suspicious and went to the bank when they discovered that the cheque for pound 2 was distorted by using the space on either side of the figure '2' by the clerk by insertion of additional figures 1 & 0 and thus he pocketed pound. 120. The question before the House of Lords was whether the plaintiffs had been so negligent with regard to the cheque that their action against the bank should fail. The Trial Judge found that the plaintiffs were not guilty of negligence in the mode of signing the cheque and decreed the suit. The Court of
Page 41 of 48
Appeal upheld this decision. The House of Lords reversed the judgment. We may usefully quote the following passages from the Judgment. Lord Finlay observed: "As the customer and the banker are under a contractual relation in this matter it appears obvious that in drawing a cheque the customer is bound to take usual and reasonable precautions to prevent forgery. Crime is indeed, a very serious matter, but every one knows that crime is not uncommon. If the cheque is drawn in such a way as to facilitate or almost invite an increase in the amount by forgery if the cheque should get into the hands of a dishonest person, forgery is not a remote but a very natural consequence of negligence of this description." The learned Lord Chancellor further observed: Of course the negligence must be in the transaction itself, that is, in the manner in which the cheque is drawn. It would be no defence to the banker, if the forgery had been that of a clerk of a customer, that the latter had taken the clerk into his service without sufficient inquiry as to his character. Attempts have often been made to extend the principle of Young v. Grote, 4 Bing 253 beyond the case of negligence in the immediate transaction, but they have always failed. According to the learned Lord Chancellor, leaving blank spaces on either side of the figure '2' in the cheque amounted to a clear breach of duty which the customer owed to the banker. The learned Lord Chancellor said: "If the customer chooses to dispense with ordinary precautions because he has complete faith in his clerk's honesty, he cannot claim to throw upon the banker the loss which results. No one can be certain of preventing forgery, but it is a very simple thing in drawing a cheque to take reasonable and ordinary precautions against forgery. If owing to the neglect of such precautions it is put into the power of any dishonest person to increase the amount by forgery, the customer must bear the loss as between himself and the banker." The principles so settled by the House of Lords was pressed into service before this Court in the above case. This Court held that the principle settled by the House of Lords could not help the bank. The accepted principle that if the signatures on the cheque are genuine, there is a mandate by the customer to the bank to pay was reiterated. It was also held that if an unauthorised person got hold of such a cheque and encashed it, the bank might have had a good defence hut, however, if the signatures on the cheque or at least one of the signatures are or is not genuine, there is no mandate on the bank to pay and the question of any negligence on the part of the customer, such as leaving the cheque book carelessly so that a third party could easily get hold of it would afford no defence to the bank. This Court distinguished Macmillan's case, observing that if any of the signatures was forged the question of negligence of the customer in between the signature and the presentation of the cheque never arose. The suit was, however, dismissed on another point and that of jurisdiction. That takes us to the question as to whether there is a duty on the part of the customer to examine the pass book and inner part of cheques and to communicate to the banker within a reasonable time of the debits which he does not admit. The kindered question connected with this is whether a customer is estopped from disputing the debits shown in the pass book when the pass book is returned without
Page 42 of 48
any comment and whether such a conduct would constitute a "stated and settled account." To answer this it is necessary to examine the question whether the customer owes a duty to the bank to inform it about the correctness or misstatements in the entries in the pass book within a reasonable time and whether failure to do so would amount to such negligence as to non-suit him in a suit for recovery of the amount paid on a forged cheque. When does negligence constitute estoppel? For negligence to constitute an estoppel it is necessary to imply the existence of some duty which the patty against whom estoppel is alleged owes to the other party. There is a duty of sorts on the part of the customer to inform the bank of the irregularities when he comes to know of it. But by mere negligence one cannot presume that there has been a breach of duty by the customer to the bank. The customer should not by his conduct facilitate payment .of money on forged cheques. In the absence of such circumstances, mere negligence will not prevent a customer from successfully suing the bank for recovery of the amount. A case of acquiescence also cannot be flourished against the plaintiff. In order to sustain a plea of acquiescence, it is necessary to prove that the party against whom the said plea is raised, had remained silent about the matter regarding which the plea of acquiescence is raised, even after knowing the truth of the matter. As indicated above, the plaintiff did not, during the relevant period, when these 42 cheques were encashed, know anything about the sinister design of the second defendant. If the bank had proved to the satisfaction of the Court that the plaintiff had with full knowledge acknowledged the correctness of the accounts for the relevant period, a case of acquiescence against the plaintiff would be available to the bank. That is not the case here,in this judgment under appeal, the High Court has elaborately considered the law obtaining in the United States of America on this aspect. We need not exercise ourselves with the American Law since the American Law is different from the law that we follow. On the questions involved in this appeal, it is the law that obtains in England which had been followed by this Court and High Courts in the country. The authorities in England have more or less consistently held that there is no duty on the part of the customer to intimate the banker about any error that may be seen in the pass book and that he will be entitled to claim any amount paid on a forged cheque though there may be some negligence or in-action on his part in not being careful to discover the errors in the pass book or other documents. In the instant ease, there is no evidence to show that anyone other than the second defendant knew that the forged cheques had been encashed. After the matter was discovered, immediate action was taken. Therefore, in the absence of any evidence of the plaintiff's involvement, the plaintiff cannot be nonsuited on the ground of negligence or in-action. Venkatramiah, J when he rendered the Judgment, under appeal, laid down the law correctly, with the aid of authorities then available and on his own reasons. Now we are in a more advantageous position. We have an authority, more or less identical on facts, rendered by the Privy Council in the decision in Tai Hing Cotton Ltd. v. Liu Chong Bank, 2 All England Reports 947. The facts of this case are similar to the case on hand; if anything, more to the disadvantage to the bank in terms of money involved than the instant case. The appellant before the Privy Council was a company, a textile manufacturer carrying on business in Hong Kong. The company was a customer of the three respondent banks and maintained with each of them a current account. The banks were authorised to pay cheques on behalf of the company if signed by its Managing Director or two authorised signatories. The banks agreed to send the appellant periodic statements which were deemed to be confirmed
Page 43 of 48
unless the customer notified the bank of any error therein by a specified time. Between 1972 and 1978 the accounts clerk employed by the company forged the signature of the Managing Director on 300 cheques purported to be drawn by the company for a total sum of $HK.5.5 million. The banks paid the cheques on presentation by the clerk and debited the company's current account accordingly. The clerk was able to manipulate the accounts without any obstruction or discovery because he was in almost sole control of the receipts and payments made through the accounts. As in this case, the fraud was uncovered in May, 1978 when a newly appointed accountant commenced reconciling the bank statements with the company's books. This was an exercise which had not been followed previously. The new accountant found at once that something was seriously wrong. He reported the matter to the Managing Director. The errant accountant was interrogated and he admitted the frauds. The company took action against the banks, the accountant and his wife. The Trial Judge basing his decision on the fundamental premise that a forged cheque is no mandate to pay held that unless the bank established affirmatively that they were entitled to debit the customers current account with the amounts of the forged cheques, the customer was entitled to the relief of the loss arising from the bank's payment on the forged cheques. A case was put forward before the Trial Judge that the Company was vicariously liable for the fraud played by its accountant. This was negatived and was not pursued. The Trial Judge also rejected the submission of the banks that their terms of business which was contractual called the banking contract, should be construed as ousting the common law rule. The defence included one of estoppel raised by each of the banks. The plea of estoppel was put forward in two ways; first, that the company was estopped by its negligence in the management of its bank accounts from asserting that the accounts had been wrongly debited, and second, that the company was estopped by a representation to be implied from the course of conduct that the periodic bank statements were correct. The Trial Judge rejected the plea of estoppel by negligence but held: "In the case of each bank the company by failing to challenge the debits shown on the bank statements, had represented to each bank that the debits had been correctly made. He held that Tokyo and Chekiang had acted in reliance on the representations so made by their willingness to continue operating their respective accounts and to expose themselves to the risk of paying out on forged cheques. He did not find the same prejudice had been suffered by Liu Chong Hing as it only became exposed to the fraud in November 1977, the first representation to it not being made until the company's failure. to query the December 1977 statement of account. The Judge found that the chance of recovery from Leung had not been substantially diminished during the period (December 1977 to May 1978) during which it could be said that the estoppel was operative." On this finding the Judge gave the company Judgment against one bank, but dismissed its claims against the other two banks. The company appealed and the defeated banks cross-appealed. The Court of appeal differed from the Trial Judge on the general question. The Court of appeal evolved a theory that the banker/customer relationship is such as to give rise to a general duty of care in the operation of its banking account and on this basis held that the company was in breach of the duty which they held, it owed to the banks and must bear the loss. According to the Court of appeal this duty arose in tort as well as in contract. There was difference of opinion among the Judges as to whether the in-action on the part
Page 44 of 48
of the customer in not objecting to the statement sent by the bank within the time specified would constitute conclusive evidence of the correctness of the debits recorded therein or whether the banking contracts could be construed as including a term requiring the monthly statements to be treated after a period of time as conclusive evidence of the state of the account. But all of them were agreed that estoppel operated against the company by its own negligence from challenging the correctness of the banks statements. The banks thus succeeded in the Court of appeal. The defeated company moved the Judicial Committee of the Privy Council by filing appeals. This was how the matter reached the Privy Council. The Privy Council had to decide the case in the light of the law settled by the House of Lords in the Macmillan's case and in Greenwood v. Martins Bank Ltd.; [1933] AC 51 1932 All England Reports 3 18. The Privy Council posed two questions before it, first, whether English law recognizes any duty of care owed by the customer to his bank in the operation of a current account beyond, first, a duty to refrain from drawing a cheque in such a manner as may facilitate fraud or forgery and, second, a duty to inform the bank of any forgery of cheque purportedly drawn on the account as soon as he, the customer, becomes aware of it. The respondent banks while recognising the existence of both the duties indicated above contended that the law had evolved in England after 19 18 and 1933 in recognising an altogether wider duty of care. This duty, according to them, required the customer to take reasonable precautions in the management of his business with the bank to prevent forged cheques being presented to it for payment. Additionally, it was contended that even if this wider duty did not exist at any rate the customer owed a duty to take such steps to check the periodic bank statements sent to him as a reasonable person in his position would take to enable him to notify the bank of any debit items in the account which he had not authorised. When it is accepted that the bank sent periodic statements to the customer, the bank contended that the duty and responsibility to look into such statements and to notify to the bank were necessary incidents of the contractual relationship between the customer and the bank. The source of this obligation according to the banks is to be found both in the contract law as an implied term of the banking contract and in the tort law as a civil obligation arising from the relationship of banker and customer. Then the Privy Council proceeded to consider the weightier submissions advanced by the bank (1) A wider duty on the part of the customer to act with diligence which must be implied the contract and alternatively that such a duty arises in tort from the relationship between banker and customer. The Privy Council parted company with the observation by the Court of Appeal here and repelled the plea that it was necessary to imply into a contract between a banker and the customer a wider duty and that it was not a necessary incident of banker-customer relationship that the customer should owe his banker a wider duty of care. This duty is in the form of an undertaking by the customer to exercise reasonable care in executing his written orders so as not to mislead the bank or to facilitate forgery. The Privy Council accepted that an obligation should be read into the contract as the nature of this contract implicity requires. In other words 'the term sought to be implied must be one without which the whole 'transaction would become futile and inefficacious.' After referring to some earlier decisions, the Privy Council rejected the implied term 'submission' and set out the limits of the care of the customer and the functions of the banks in the following words:
Page 45 of 48
" ...... One can fully understand the comment of Cons JA that the banks must today look for protection. So be it. They can increase the severity of their terms of business and they can use their influence as they have in the past, to seek to persuade the legislature that they should be granted by statute 'further protection. But it does not follow that because they may need protection as their business expands the necessary incidents of their relationship with their customer must also change. The business of banking is the business not of the customer but of the bank. They offer a service, which is to honour their customer's cheques when drawn on an account in credit or within an agreed overdraft limit. If they pay out on cheques which are not his, they are acting outside their mandate and cannot plead his authority in justification of their debit to his account. This is a risk of the service which it is their business to offer. The limits set to the risk in the Macmillan and Greenwood cases can be seen to be plainly necessary incidents of the relationship. Offered such a service, a customer must obviously take care in the way he draws his cheque, and must obviously warn his bank as soon as he knows that a forger is operating the account ........ " The limits of the duty and the confines of contractual obligation cannot be expressed better. On the question of tort also the bank could not satisfy the Privy Council as is seen from the following observation: "Their Lordships do not believe that there is anything to the advantage of the law's development in searching for a liability in tort where the parties are in a contractual relationship. This is particularly so in a commercial relationship. Though it is possible as a matter of legal semantics to conduct an analysis of the rights and duties inherent in some contractual relationships including that of a banker and customer either as a matter of contract law when the question will be what. If any terms are to be implied or as a matter of tort law when the task will be to identify a duty arising from the proximity and character of the relationship between the parties. Their Lordships believe it to be correct in principle and necessary for the avoidance of confusion in the law to adhere to the contractual analysis on principle because it is a relationship in which the parties have subject to a few exceptions, the right to determine their obligations to each other and for the avoidance of confusion because different consequences do follow according to whether liability arises from contract or tort, e.g. in the limitation of action. Their Lordships of the Privy Council summed up the Law, as followers: 'Their Lordships do not, therefore, embark on an investigation whether in the relationship of banker and customer it is possible to identify tort as well as contract as a source of the obligations owed by the one to the other. Their Lordships do not, however, accept that the parties' mutual obligations in tort can be any greater than those to be found expressly or by necessary implication in their contract. If, therefore, as their Lordships have concluded, no duty wider than that recognised in Macmillan and Greenwood can be implied into the banking contract in the absence of express terms to that effect, the respondent banks cannot rely on the law of tort to provide them with greater protection than that for which they have contracted. Having rejected the plea of implied terms, indirectly constructive notice and estoppel by negligence, it was held that the company was not under any breach of duty owed
Page 46 of 48
by it to the banks and as such mere silence, omission or failure to act is not a sufficient ground to establish a case in favour of the bank to non-suit its customer. We adopt the reasoning indicated above with great respect. Unless the bank is able to satisfy the Court of either an express condition in the contract with its customer or an unequivocal ratification it will not be possible to save the bank from its liability. The banks do business for their benefit. Customers also get some benefit. If banks are to insist upon extreme care by the customers in minutely looking into the pass book and the statements sent by them, no bank perhaps can do profitable business. It is common knowledge that the entries in the pass books and the statements of account sent by the bank are either not readable, decipherable or legible. There is always an element of trust between the bank and its customer. The bank's business depends upon this trust. Whenever a cheque purporting to be by a customer is presented before a bank it carries a mandate to the bank to pay. If a cheque is forged there is no such mandate. The bank can escape liability only if it can establish knowledge to the customer of the forgery in the cheques. In-action for continuously long period cannot by itself afford a satisfactory ground for the bank to escape the liability. The plaintiff in this case swung into action immediately on the discovery of the fraud committed by its accountant as in the case before the Privy Council. We may, in passing refer to a decision of this court on the question of negligence under circumstances not strictly akin to the case on hand reported in the New Marine Coal Co. (Bengal) Pvt. Ltd. v. Union of India, [1964] 2 SCR 859. There the suit was for recovery of certain amount representing the price of coal supplied to the respondent. Inter-alia the respondent pleaded in defence of the suit that the respondent had issued and sent bills to cover the amount and the intimation cards in accordance with the usual practice in the ordinary course of dealings. The respondents it was alleged paid the amount by cheque to a person authorised by the appellant and on presentation of proper receipts. It was pleaded that the appellant's claim having been satisfied he had no cause of action. It was established in the course of the trial that the appellant had not in fact authorised any person to issue the receipts but a certain person not connected with the appellant firm without the consent or knowledge of the appellant got hold of the intimation cards and bills addressed to the appellant. forged the documents and fraudulently received the cheque from the respondent and appropriated the amount for himself. We may usefully read the following passage relating to negligence in the context of a plea based on estoppel: ".....Apart from, this aspect of the matter, there is another serious objection which has been taken by Mr. Setalved against the view which prevailed with Mukharji J. He argues that when a plea of estoppel on the ground of negligence is raised, negligence to which reference is made in support of such a plea is not the negligence as is understood in popular language or in common sense; it has a technical denotation. In support of a plea of estoppel on the ground of negligence it must be shown that the party against whom the plea is raised owed a duty to the party who raises the plea. Just as estoppel can be pleaded on the ground of misrepresentation or act or omission. So can estoppel be pleaded on the ground of negligence; but before such a plea can succeed, negligence must be established in this technical sense. As Halsbury has observed:
Page 47 of 48
'Before anyone can be estopped by a representation inferred from negligent conduct, there must be a duty to use due care towards the party misled, or towards the general public of which he is one.' There is another requirement which has to be proved before a plea of estoppel on the ground of negligence can be upheld and that requirement is that 'the negligence on which it is based should not be indirectly or remotely connected with the misleading effect assigned to it, but must be the proximate or real cause of that result.' Negligence according to Halsbury, which can sustain a plea of estoppel must be in the transaction itself and it should be so connected with the result to which it led that it is impossible to treat the two separately. This aspect of the matter has not been duly examined by Mukharji. J. when he made his finding against the appellant." This is how this Court understood how a plea of estoppel based on negligence can be successfully put forward. We have seen that there is no duty for a customer to inform the bank of fraud committed on him of which he was unaware. Nor can in-action for a reasonably long time in not discovering fraud or irregularity be made a defence to defeat a customer in an action for loss. Thus the contentions put forward by the bank cannot be accepted to defeat the plaintiff. The various submissions made by the counsel for the bank based on constructive notice in the general law and on other branches of law cannot be extended to relationship between a bank and its customers. On a careful analysis of the questions of law, we hold that the judgment of the High Court and that of the Trial Judge have to be upheld. We do so, accordingly dismiss the appeal with costs of the 1st respondent. N.P.V. Appeal dismissed. Conclusion Negotiable Instruments are money/cash equivalents. These can be converted into liquid cash subject to certain conditions. They play an important role in the economy in settlement of debts and claims. The transactions involving the Negotiable Instruments in our country are regulated by law and the framework of the Statute which governs the transaction of these instruments is known as The Negotiable Instruments Act. This act was framed in our country in the year 1881 when the British ruled our country. Prior to 1881 the transactions governing Negotiable Instruments were regulated under the cover of Indian Contract Act 1872. This act has been amended as many as 23 times to meet the needs of the time. The last amendment was made in 2002. Bibliography www.courtjudgements.org www.lawyersclubindia.com
Page 48 of 48

Negotiable Instrument Act

Încărcat de

Informații document

Descriere originală:

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Negotiable Instrument Act

Încărcat de

Drepturi de autor:

Formate disponibile

Negotiable Instrument Act, 1881 MFM 1st Year, Division B

Mumbai Education Trust

Case Law on Negotiable Instruments Act, 1881