Discharge
of a Negotiable Instrument
by Asok Nadhani
6.1
Discharge of a Negotiable Instrument
a. Term
'Discharge' in respect to a negotiable instrument applies to:
i. Discharge
of the instrument,
ii.
Discharge of Liability of Parties
b. An
instrument is said to be discharged when all the rights, liabilities and claims
in respect of a negotiable instrument are extinguished or discharged.
6.2 Modes of Discharge of an Instrument
-
Payment in due course.
-
Party
primarily liable becoming holder.
-
Express
waiver.
-
Cancellation of Acceptor’s Name.
-
Discharge as Simple Contract. [Raja of Venkatgiri vs. Sri Krishnayya]
6.2.1 Payment in due
course
i.
When an instrument is paid on maturity
by the party primarily liable in due course and the instrument is cancelled or
the fact of payment is recorded on the instrument, the instrument is
discharged.(s.82 (c)) [Burdridge vs.
Manners]
ii.
When a party pays a negotiable
instrument, he is entitled to get back the instrument and retain it with
himself (Sec. 81). [Ramanadam Chettiar vs. Gundu Aiyyar], [Gopalan vs. Lakshminarasamma]
6.2.2
Primarily Liable Party becomes holder
If
the maker of a note or the acceptor of a bill becomes its holder in his own
right, the instrument is discharged (Sec. 90).
6.2.3
Express waiver
If a
holder of an instrument gives up his rights against all the parties to the
instrument, the instrument is discharged. s.82(b)
6.2.4 Cancellation of Acceptor’s Name
Where
the holder knowingly cancels the name of the acceptor or of all the parties to
the instrument, with authority, it is discharged. s.82(a)
6.2.5
Discharge of contract
An
instrument may also be discharged by other ways (like Novation, Recession,
Period of Limitaion etc.).
6.3
Discharge of liabilities of Parties
The
Parties related to an instrument may be discharged as follows:
i.
Payment
a.
When payment on an instrument is made
in due course, both the instrument and the parties to it are discharged [Sec.
82 (c)].
b.
Where a banker pays a cheque payable to
order which purports to be indorsed by or in behalf of the payee, he is
discharged by payment in due course. (Sec. 85).
c.
Where any draft drawn by one bank upon
another purported to be indorsed by or on behalf of the payee, the bank is
discharged by payment in due course (Sec. 85-A).
ii.
Cancellation
Where the
holder cancels the name of any party liable on the instrument (eg. endorser),
such parties are discharged (82a).
iii. Release
Where the
holder releases any party liable to the instrument, such a party (and all
parties subsequent to him) is discharged (82c).
iv. Delay in Acceptance
If the holder
of a bill allows the drawee more than forty-eight hours to decide for
acceptance, all previous parties not consenting to the same are discharged from
liability to such holder (Sec. 83).
v.
Non-presentment of cheque
If holder
defaults to present the cheque within a reasonable time and the bank fails, the
drawer shall be discharged to the actual damages suffered by him (drawer).
However, the holder may prove this debt against the insolvent bank (sec. 84) [Abdul Majid
v.Ganesh Das Kalooram], Ex. 6.1, Ex.6.2
vi. Qualified
acceptance (sec.86)
Where the
holder of the bill consent to qualified
acceptance, all the prior parties who did not consent to qualified acceptance are discharged.
vii. Operation
of law
An instrument
gets discharged when:
a. Insolvent.: By an order of
Insolvency Court
b. Merger : When a
judgment is obtained against the acceptor, maker or indorser, the debt under
the bill is merged into judgment debt.
c. Time Barred : When the
remedy becomes time-barred.
viii.
Material Alteration
On any material
alteration, the instrument becomes void against parties prior to alteration
unless they have consented to the alteration. (Sec. 87) Ref. 6.4
ix.
Discharge by payment of altered
instrument
a.
When an instrument is altered in a way
that is not apparent, or a cheque presented for payment does not appear to be
crossed, payment on such an instrument to apparent tenor or in due course
discharges the party. [Sec. 89 (1)]
b.
In case of any difference in apparent
tenor in an electronic image of a truncated cheque, bank or the clearing house
must ensure the correctness of the apparent tenor in the electronic image of
the cheque while transmitting the image. [Sec. 89 (2)]
x.
Acceptor or
indorser bound notwithstanding previous alteration
An acceptor or indorser of
a negotiable instrument is bound by his acceptance or indorsement
notwithstanding any previous alteration of the instrument (Sec. 88).
6.4
Material Alteration
It
means any alteration effecting change in character, identity, rights and
liabilities of the parties or the operation of the instrument. [Dhanoomal Parsaram v. P. Kuppura],
[Ramapadarathv. Narain]
6.4.1 Instances of Material Alteration
a.
Alteration vitiating the
instrument: Alteration of date, sum
payable, time of payment, addition of place of payment, rate of interest etc
are considered to be material alteration and vitiates the instrument.
b.
Alteration not likely to vitiate the
instrument :
i.
An alteration though material, made
before the instrument is issued.
ii.
An alteration which is not material or
made with the consent of the parties.
iii.
Any alteration made to
carry out the common intention of the original parties or for the purpose of
correcting a mistake
iv.
The following alterations do not
invalidate the instrument:
a.
Filling blanks of an inchoate
instrument (Sec. 20).
b.
Conversion of a blank indorsement into a
full (Sec. 49).
c.
Crossing of cheques (Sec. 125).
6.4.2 Effect of Material Alteration
i. No consent to
material alteration: The party who does not give its consent to the
material alteration is discharged from its liability and shall not remain
liable even to a holder in due course.
ii.
Consent to material alteration
In case of a party who gives consent to the material
alteration shall continue to be liable for payment.
iii.
Subsequent to material alteration: A
person who becomes party to the materially altered negotiable instrument, is
liable for payment whether the alteration benefits the party bound by the
instrument or the person who has made the material alteration. (s.87& 88) [Mysore State Road Transport Corporation v.
Somashankar], [Veera
Exports v.T.Kalavathy]
6.5 Rules of Evidence, Estoppel and International Law
The
rules of estoppel and international law regarding negotiable Instruments are
discussed below:
i.
Estoppel
When a person
is made to believe by another person that a certain state of affairs exists, he
is estopped from denying the fact of that statement later. The rules of
estoppel are:
a.
Estoppel against denying original
Validity of Instrument (Sec. 120) :
The maker of a
note, the drawer and the acceptor of a bill for the honour of the drawer are
not permitted, as against a holder in due course, to deny the validity of
instrument as originally drawn.
b.
Estoppel against denying capacity of
payee to Indorse (Sec. 121) :
The maker of a
note and the acceptor of a bill payable to order are not permitted as against a
holder in due course to deny the payee’s capacity to indorse the instrument.
c.
Estoppel against denying capacity of prior parties (Sec. 122 ):
The indorser of
a negotiable instrument is not permitted, as against a subsequent holder to
deny the signature or capacity to contract of any prior party to the
instrument.
ii.
International Law
The rules of
international law relating lo foreign negotiable instruments are as follows:
a.
Liability
The liability
of the maker or drawer of a foreign note, bill or cheque is regulated by the
law of the place where it was made. The liability of the acceptor and indorser
is determined by the law of the place where the instrument is payable or can be
subject to contract between the parties (Sec. 134). Ex. 6.3
b.
Dishonour
The notice of
dishonour of a note, bill or cheque depends on law of the place where it is
made payable and not where it is made or indorsed. (Sec. 135) Ex.6.4
c.
Instruments made out of India
If an
instrument is made, drawn, accepted, or indorsed out of India according to the
Indian Law, its acceptance or indorsement in India will not invalidate it even
though it is invalid according to the law of foreign country (Sec. 136).
d.
Presumptions as to foreign law
The law of a
foreign country regarding promissory notes, bills of exchange and cheques is
presumed to be the same as that of India unless and until the contrary is
proved (Sec. 137).
Ex:
6 Examples
Non
presentment of cheque
Ex.
6.1 L draws a cheque for Rs. 2000 (the bank could honour the cheque
at that time). Before the cheque is presented, the bank fails. It then pays 25
paise in the rupee. The drawer is discharged to the extent of Rs.1500. [Ref. 6.3 (a) (v)]
Ex.6.2 A draws a
cheque at Delhi Calcutta
Liability
under International Law
Ex.
6.3 A bill was drawn by E in Miami India
Dishonour
of Negotiable Instrument under International Law
Ex.6.4 A
bill drawn and indorsed in India Germany Germany
For more details, refer
to Business & Corporate Laws by Asok Nadhani, BPB Publications, www.bpbonline.com,
bpbpublications@gmail.com
