International business laws lesson 02

23 Negotiable Instruments LESSON NEGOTIABLE INSTRUMENTS CONTENTS 2.0 Aims and Objectives 2.1 Introduction 2.2 Negotiable Instruments 2.2.1 2.3 2.4 2.5 2.6 2.7 Characteristics Types of Negotiable Instruments 2.3.1 Negotiable by Statue 2.3.2 Negotiable by Custom or Usage 2.3.3 Negotiation Endorsement 2.4.1 Essentials of Valid Endorsement 2.4.2 Acceptance Presentation 2.5.1 Presentment for Acceptance 2.5.2 Presentment for Sight 2.5.3 Presentment for Payment Dishonor 2.6.1 Dishonor by Non-acceptance 2.6.2 Dishonor by Non-payment 2.6.3 Effect of Dishonor 2.6.4 Notice of Dishonor 2.6.5 Consequences of Not Giving Notice of Dishonor Discharge 2.7.1 Different Modes of Discharge 2.7.2 Discharge of a Party or Parties 2.8 Compensation 2.9 International Law 2.9.1 Liability 2.9.2 Dishonor 2.9.3 Instruments Made Out of India according to the Provisions of Indian Law 2.10 Let us Sum up 2.11 Lesson End Activity 2.12 Keywords 2.13 Questions for Discussion 2.14 Suggested Readings 24 International Business Law 2.0 AIMS AND OBJECTIVES After studying this lesson, you should be able to: z Explain the concept of negotiable instruments z Write a critical appreciation of the characteristics of negotiable z Analyse the types of negotiable instruments z Study the international laws 2.1 INTRODUCTION The word “negotiable” means ‘transferable by delivery’ and the word “instrument” means ‘a written document by which a right is created in favor of some person’ Thus, the term “negotiable instrument” literally means ‘a written document transferable by delivery’ According to section 13 of the Negotiable Instruments Act, “a negotiable instrument means a promissory note, bill of exchange, or cheque payable either to order or to bearer” “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” The act thus mentions three kinds of negotiable instruments namely promissory notes, bills of exchange and cheque and declares that to be negotiable they must be made payable in any of the following forms: Payable to order: A note, bill or cheque is payable to order which is expressed to be payable to a particular person of his order Ex: (i) Pay A (ii) Pay A or order, (iii) Pay to order of A (iv) pay A and B and (v) Pay A or B are various forms in which an instrument may be made payable to order But it should not contain any words prohibiting transfer It may be noted that documents containing express words prohibiting negotiability remain valid as a document but they are not negotiable instrument, as they cannot be negotiated further There is however an exception in favor of a cheque A cheque crossed “Account payee only” can still be negotiated further of course the banker is to take extra care like a bloodhound in that case Payable to Bearer: Payable to bearer means payable to any person whosoever bears it A note bill 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 Thus a note, bill or cheque in the form pay to A or bearer or Pay A, B or bearer or Pay bearer is payable to bearer Where an instrument is originally payable to order it may become payable to bearer if endorsed in blank by the payee Ex: A cheque is payable to A A endorses it merely by putting his signature on the back and delivers it to B with the intention of negotiating it In the hands of B the cheque is a bearer instrument Check Your Progress Define the following: Negotiable Instrument …………………………………………………………………………… …………………………………………………………………………… Payable to Bearer …………………………………………………………………………… …………………………………………………………………………… 2.2 NEGOTIABLE INSTRUMENTS 2.2.1 Characteristics Easy Negotiability: They are transferable from one person to another without any formality In other words the property in these instruments passes by either endorsement or delivery or by delivery merely and no further evidence of transfer is needed Transferee can sue in his own name without giving notice to the debtor: A bill note or cheque represents a debt and implies the right of the creditor to recover something form his debtor The creditor can either recover this amount himself or can transfer his right to another person In case he transfers his right, the transferee of a negotiable instrument is entitled to sue on the instrument in his own name in case of dishonour, without giving notice to the debtor of the fact that he has become holder In case of transfer or assignment of an ordinary actionable claim under the transfer of property act, notice to the debtor is necessary in order to make the transferee entitled to sue in his own name; otherwise he has always to sue in his transferor before he can recover his claim from the debtor Better title to a bona fide transferee for value: A bona fide transferee of a negotiable instrument for value gets the instrument free from all defects He is not affected by any defect of title of the transferor or any prior party Thus, the general rule of the law of transfer applicable in the case of ordinary chattels that nobody can transfer a better title than that of his won does not apply to negotiable instruments A man may sell to another a stolen radio set but the true owner may claim back the radio set from the buyer even though he may have got it in good faith for consideration The result would have been different if instead of the radio set a negotiable instrument, say a bill of exchange made payable to bearer, had thus been transferred in which case the buyer would have obtained a good title It is relevant to state that such instruments, which restrict transferability, are treated like ordinary chattels and not like negotiable instruments Hence the transferee takes such instruments subject to all equities and his title shall not be better than that of the transferor Presumptions: Certain presumptions apply to all negotiable instruments unless contrary is proved These presumptions are dealt with in secs 118 and 119 and are as follows: a) Consideration: Every negotiable instrument is presumed to have been made, dawn, accepted, indorsed, negotiated or transferred, for consideration This would help a holder to get a decree from a court without any difficulty b) Date: Every negotiable instrument bearing a date is presumed to have been made or drawn on such date c) Time of Acceptance: When a bill of exchange has been accepted, it is presumed that it was accepted within a reasonable time of its date and before its maturity d) Time of Transfer: Every transfer of a negotiable instrument is presumed to have been made before its maturity e) Order of Endorsements: The endorsements appearing upon a negotiable instrument are presumed to have been made in the order in which they appear thereon f) Stamp: When an instrument has been lost, it is presumed that it was duly stamped 25 Negotiable Instruments 26 International Business Law g) Holder Presumed to be a Holder in Due Course: Every holder of a negotiable instrument is presumed to be a holder in due course h) Proof of Protest: In a suit upon an instrument, which has been dishonored, the court on proof of protest, presumes the fact of dishonor until such fact is disproved 2.3 TYPES OF NEGOTIABLE INSTRUMENTS 2.3.1 Negotiable by Statue The Negotiable Instruments Act mentions only three kinds of negotiable instruments (sec 13) These are: promissory notes, bills of exchange and cheques These instruments are negotiable by statue 2.3.2 Negotiable by Custom or Usage These are certain other instruments which have acquired the character of negotiability by the usage or custom of trade In England, for example, the following instruments have been held to be negotiable by custom, viz., exchequer bills, bank notes, banker’s drafts, share warrants, circular notes, bearer debentures, dividend warrants, share certificates with blank transfer deeds etc The list of negotiable instruments thus appears to be flexible and inclusive The courts in India usually follow the practice of English courts in according the character of negotiability to other instruments Notes or Promissory Notes: A promissory note is an instrument in writing 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 sec The person who makes the promissory note and promises to pay the amount is called the maker The person to whom the payment is to be made is called the payee Bills of Exchange: 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 sec There are three parties to a bill of exchange, viz., the drawer, the drawee and the payee The person who gives the order to pay or who makes the bill is called drawer The person who is directed to pay is called the drawee, and when the drawee accepts the bill, he is called the acceptor The person to whom the payment is to be made is called the payee Cheque: A cheque is a bill of exchange drawn upon a specified banker and payable on demand A cheque is a species of a bill of exchange; but it has the following two additional qualifications, viz., ™ it always is drawn on a specified banker, ™ it is always payable on demand 2.3.3 Negotiation One of the essential characteristics of a negotiable instrument is that it is freely transferable form one person to another This transfer may take place by negotiation When a promissory note, bill of exchange or a cheque is transferred by one party to another so as to constitute the transferee the holder thereof, the instrument is said to be negotiated sec 14 Thus if A hands over a cheque to B asking him to keep it in safe custody, the cheque is not negotiated to B, because the delivery of the cheque to B, as a bailee, does not make him its holder There are two methods of transfer by negotiation They are: Negotiation by Delivery: An instrument payable to bearer is negotiable by delivery thereof sec 47 For instance if A is the holder of a negotiable instrument payable to bearer he delivers it to B’s agent to keep it for B, the instrument has been negotiated Negotiation by Endorsement and Delivery: An instrument payable to order is negotiable by the holder by endorsement and delivery thereof sec 48 To complete the negotiation delivery of the instrument is essential whether the instrument is payable to bearer or order The delivery must be voluntary It is also important that the object of delivery should be to pass the property in the instrument to the person to whom it is delivered so as to constitute that person the holder thereof Until the instrument is actually delivered the contract on a negotiable instrument is not complete Check Your Progress What you understand by: Negotiable by statue ……………………………………………………………………………… ……………………………………………………………………………… Cheque ……………………………………………………………………………… ……………………………………………………………………………… 2.4 ENDORSEMENT Literally endorsement means writing in an instrument In its technical sense in the Negotiable Instruments Act it means the writing of a persons name on the face or back of the instrument or on a slip of paper annexed thereto for the purpose of negotiation The person who so signs the instrument is called the endorser and the person to whom the instrument is endorsed is called the endorsee 2.4.1 Essentials of Valid Endorsement The following are the essentials of a valid endorsement: It must be on the instrument itself If no space is left on the instrument it must be on separate slip of paper attached to the instrument called ‘allonge’ It must be signed by the endorser for the purpose of negotiation Signature of the endorser on the instrument without any additional words is sufficient When in a bill or note payable to order the endorsee name is wrongly spelt, he should when he endorses or sigh the mane as spelt in the instrument and wrote the correct spelling within brackets after his endorsement It may be made by the endorser wither by merely signing his mane on the instrument or by specifying in addition to his signature the person to whom or to whose order the instrument is payable No particular form of words is necessary for an endorsement It must be completed by the delivery of the instrument The delivery of the instrument with the intention of passing the property on to the endorsee is important Further, the delivery must be made by the endorser himself to by someone on his behalf 27 Negotiable Instruments 28 International Business Law 2.4.2 Acceptance Acceptance refers to the agreeing of a person with a particular agreement by the way of giving his signature for the terms and conditions and the matter in that particular bill, note or cheque A bill must be presented for acceptance and must be accepted by the acceptor in the following cases: z A bill payable some period after sight, or after presentment in order to fixes its date or maturity It may however be negotiated even before acceptance z A bill on which there is an express stipulation that it shall be presented for acceptance before it is presented for payment Even in cases where presentation is optional, it is always desirable to get a bill accepted as soon as possible in order to obtain the additional security of the acceptors name on the bill or an immediate right of recourse against the drawer and the other parties in case the bill is dishonored by non-acceptance Modes of Acceptance An acceptance may be general or qualified General Acceptance: An acceptance is general or absolute where the drawee, while accepting the bill, does not attach any condition or qualification to it If the acceptance is not absolute, the holder may treat the bill as dishonored by nonacceptance Qualified Acceptance: An acceptance is qualified where it is given subject to some condition or qualification A qualified acceptance in express terms varies the effect of the bill as drawn The holder may in such a case refuse to take a qualified acceptance, and treat the bill as dishonored by non acceptance But if he takes a qualified acceptance, he does so at his own risk, and discharges all the parties prior to himself, unless he obtains their consent to such acceptance An acceptance is qualified when it is, conditional, partial, qualified as to place, qualified as to time, acceptance by some of the drawee 2.5 PRESENTATION Presentment or presentation means showing an instrument to the drawee, acceptor or maker for acceptance, sight or payment There are therefore three kinds of presentment: 2.5.1 Presentment for Acceptance It is only bills of exchange of a certain type that require acceptance A bill is said to be accepted, when the drawee puts his signature on it signifying his assent to the order of the drawer that he will pay the bill at the time when it is dye The liability of the drawee does not arise until he has accepted the bill/ the acceptance is given by the drawee by signing his mane on the bill The word accepted is also sometimes added, but this is not necessary After the drawee has accepted the bill, he is known as the acceptor 2.5.2 Presentment for Sight In the case of a promissory note, there is no question of acceptance because the maker himself is the person primarily liable on it A note payable at a certain period after sight must, however, be presented to the maker for sight in order to fix its maturity If the maker cannot be found after reasonable search, presentment is excused and the instrument may be treated as dishonored The presentment should be made during business hours on a business day In default of such presentment, no party thereto is liable to the person making such default 2.5.3 Presentment for Payment Promissory note, bills of exchange and cheques must be presented to the maker, acceptor or drawee thereof respectively, by or on behalf of the holder, in default of such presentment, the other parties to the instrument are not liable thereon to such holder If authorized by agreement to usage, a presentment through the post office by means of a registered letter is sufficient 2.6 DISHONOR A bill may be dishonored by non-acceptance or by non payment A promissory note and a cheque are dishonored by non payment only When a negotiable instrument is dishonored, the holder must give a notice of dishonor to all the prior parties in order to make them liable on the instrument if he fails to some except in cases when notice of dishonor may be excused, he forfeits his right of action against the prior parties entitled to the notice of dishonor sec 93 2.6.1 Dishonor by Non-acceptance A bill of exchange is dishonored by non acceptance in any one of the following ways: z If the drawee does not accept the bill within forty-eight hours from the time of presentment though it is duly presented for acceptance z Or there are several drawee and all of them not accept z When presentment for acceptance is excused and the bill is not accepted z When the drawee is incompetent to contract z When the drawee gives a qualified acceptance z When the drawee is a fictitious person or after reasonable search cannot be found 2.6.2 Dishonor by Non-payment A promissory note, bill of exchange or cheque is said to be dishonored 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 An instrument is also dishonored by non-payment when presentment for payment is excused and the instrument when overdue remains unpaid 2.6.3 Effect of Dishonor As soon as a negotiable instrument is dishonored the holder becomes entitled to sue the parties liable to pay thereon The drawer of cheque, maker of note, acceptor and drawer of bill and all the endorsers are liable severally and jointly to a holder in due course The holder must, however, give notice of dishonor to all parties against whom he intends to proceed He may also have the instrument noted and protested before a notary public 2.6.4 Notice of Dishonor Notice of dishonor means formal communication of the fact of dishonor It is given to the party sought to be made liable and therefore it serves as a warning to the person to whom the notice is given that he could now be made liable Such a notice also serves the purpose of enabling the person so notified to protect himself against his prior parties 29 Negotiable Instruments 30 International Business Law Notice by whom Notice of dishonor must be given by the holder or by some party to the instrument who remains liable thereon sec 93 Further, any party receiving notice of dishonor must also transmit the same within a reasonable time to all prior parties in order to render them liable to himself He cannot sue any prior party to whom he has not transmitted the notice unless that party has received due notice from the holder or some other party to the instrument sec 95 It may be noted that where a number of persons are required to give notice to certain persons it is not necessary that all of them must give the notice If some of them have given notice of dishonor the other persons can take advantage of the same Notice of dishonor can also be given by the duly authorized agent of the person who is bound to give notice When an instrument is deposited with an agent for presentment and is dishonored the agent can himself give notice to prior parties on behalf of the holder But it is not obligatory on him to so He may give notice to his principal within the same time as if he were the holder and the principal may then give notice to parties to whom he wants to hold liable The principal is also entitled to a further like period to give notice of dishonor sec 96 Notice to whom Notice of dishonor must be given to all parties to whom the holder seeks to make liable or to their duly authorized agents Where there are two or more persons jointly liable as drawers or endorsers, notice to any one of them is sufficient No notice need be given to the maker of a note or acceptor of a bill or drawee of a cheque who are the principal debtors and have themselves dishonored the instrument sec 93 In case of death of a person notice must be given to his legal representative or where he has been declared an insolvent it must be given to his official assignee sec 94 When the party to whom notice of dishonor is dispatched is dead, but the party dispatching the notice is ignorant of his death, the notice is sufficient to bind the estate of the deceased sec 97 Mode of giving Notice According to sec 94, the notice of dishonor may be oral or written If it is written it may be sent by post A notice duly addressed and posted is good even though it may be miscarried The notice may be in any form but the language used must indicate that the instrument has been dishonored and that the recipient will be held liable thereon It should be given within a reasonable time after dishonor, at the place of business or at the residence of the party for whom it is intended What is reasonable Time In determining what is a reasonable time for giving notice of dishonor, regard shall be had to the nature of the instrument, the usual course of dealing with respect to similar instruments and the distance between the parties, and in calculating such time, public holidays shall be excluded sec 105 Section 106 further provides that if the holder and the party to whom notice of dishonor is given carry on business or live in different places, such notice shall be deemed to be given within a reasonable time if it is dispatched by the next post or on the day next after the day of dishonor If the said parties carry on business or live in the same place, such notice is within reasonable time if it is dispatched in time to reach its destination on the day next after the day of dishonor If a party who receives the notice of dishonor is to transmit the same to his own prior parties, the transmission is within reasonable time if he transmits it within 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 sec 107 When notice of dishonor is unnecessary Notice of dishonor is not necessary in the following cases mentioned in section 98: When it is dispensed with by the party entitled to the notice For example, where the endorser while signing in that capacity adds the words notice of dishonor waived no notice of dishonor is required When the drawer of a cheque has countermanded payment, no notice of dishonor is required to share the drawer When the party charged could not suffer damage for want of notice For example, when the cheque is dishonored because the drawer had closed his account with the banker, or in case of accommodation bills, no notice of dishonor to the drawer is required When the party entitled to notice cannot, after due search, be found; or the arty bound to give notice is, because of some justifiable reason unable to give it When the drawer also happens to be the acceptor In the case of a promissory note which is not negotiable Since such a note is not negotiable, the payee ought not to indorse it, and if it is indorsed, the indorse cannot have any claim against the maker of the note or the endorser Therefore no one is prejudiced for want of notice When the party entitled to notice promises to pay unconditionally the amount due on the instrument after dishonor and with full knowledge of facts 2.6.5 Consequences of Not Giving Notice of Dishonor Any party to a negotiable instrument to whom notice of dishonor is not sent by the holder is discharged from his obligation under the instrument and cannot be sued b the holder, unless the circumstances are such tat no notice of dishonor is required to be sent The drawer or endorser who has not received notice is discharged not only on the bill or note but also in respect of the original consideration (Mohd Raffi vs Qazi Mahzar) 2.7 DISCHARGE The term ‘discharge’ in relation to a negotiable instrument is used in two senses, viz., discharge of the instrument and discharge of one or more of the parties from liability thereon 2.7.1 Different Modes of Discharge The different modes of discharge of an instrument are as follows: By payment in due course This is the most obvious and the usual mode of discharge of an instrument and of the parties to it The instrument is discharged by payment made in due course by the party, who is primarily liable to pay, or by a person who is accommodated in case the instrument was made or accepted for his accommodation The payment of the amount due on the instrument must be made at or after the maturity to the holder of the instrument if the maker or acceptor is to be discharged sec 78 a payment by a party who is secondarily liable does not discharge the instrument Again, any person liable to pay is entitled to have the instrument shown to him before payment On payment he is entitled to have the instrument delivered up to him sec 81 31 Negotiable Instruments 32 International Business Law By payment of interest If a rate of interest is specified in the promissory note or bill of exchange, interest shall be calculated on the principal amount at the specified rate from the date of the instrument until tender or realization of the amount sec 80 If no rate of interest is specified the law implies an agreement to pay interest at 18 % per annum By party primarily liable becoming holder If the maker of a note or the acceptor of a bill becomes its holder at or after its maturity in his own right the instrument is discharged sec 90 By express waiver When the holder of a negotiable instrument at or after its maturity absolutely and unconditionally renounces in writing or gives up his rights against all the parties to the instrument, the instrument is discharged The renunciation must be in writing unless the instrument is delivered up to the party primarily liable By cancellation Where an instrument is intentionally cancelled by the holder or his agent and the cancellation is apparent thereon, the instrument is discharged Cancellation may take place by crossing out signatures on the instrument, or by physical destruction of the instrument with the intention of putting an end to the liability of the parties to the instrument By discharge as a simple contract A negotiable instrument may be discharged in the same way as any other contract for the payment of money This includes, for example, discharge of an instrument by novation or rescission or by expiry of period of limitation 2.7.2 Discharge of a Party or Parties A party or parties to a negotiable instrument is/are discharged in any one of the following ways: By payment When payment on an instrument is made in due course both the instrument and the parties to it are discharged sec 82(c) By cancellation When the holder of a negotiable instrument or his agent cancels the name of a party on the instrument with intent to discharge him, such party and all subsequent parties, who have a right of recourse against the party whose name is cancelled, are discharged from liability to the holder sec 82(a) The subsequent parties are in the position of sureties to the prior party whose name is cancelled and discharge of the principal debtor automatically discharges the sureties By release Where the holder of a negotiable instrument releases any party to the instrument by any method other than cancellation, the party so released is discharged from liability sec 82(b) By allowing drawee more than forty eight hours If the holder of a bill of exchange allows the drawee more than 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 sec 83 By non-presentment of cheque Where a cheque is not presented by the holder for payment within a reasonable time of its issue and the drawer suffers actual damage through the delay because of the failure of the bank, he is discharged from liability to the extent of such damage Example: a draws a cheque for Rs 1000 and when the cheque ought to be presented, has funds at the bank to meet the cheque The bank fails before the cheque is presented and pays 25 paise in the rupee The drawer is discharged to the extent of Rs 750 Cheque payable to order Where a cheque payable to order purports to be indorsed by the payee, the banker is discharged by payment in due course Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof It makes no difference even if any endorsement whether in full or In blank appears on the cheque and even if any such endorsement purports to restrict or exclude further negotiation sec 85 Draft drawn by one branch on another Where any draft 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 indorsed by or on behalf of the payee, the bank is discharged by payment in due course sec 85-A Parties not consenting discharged by qualified acceptance If the holder of a bill of exchange acquiesces in a qualified acceptance, all the previous parties whose consent is not obtained to such acceptance are discharged from liability sec 86 They will however be liable if on a notice being given to them they give their ascent to such acceptance By operation of law This includes discharge: By an order of insolvency court, discharging the insolvent By merger when a judgment is obtained against the acceptor, maker or endorser, the debt under the bill is merged into judgment debt By lapse of time i.e., when the remedy becomes time-barred By material alteration A material alteration of a negotiable instrument renders the same void against persons who were parties thereto before such alteration unless they have consented to the alteration sec 87 Discharge by payment of altered instrument When 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, payment on such an instrument discharges the party liable if he pays according to the apparent tenor of the instrument at the time of payment and otherwise in due course Such a payment cannot be questioned even if it is proved that the instrument has been altered or that the cheque was originally crossed sec 89 33 Negotiable Instruments 34 International Business Law Material Alteration An alteration is material which: Alters the character or identity of the instrument or which shakes the very foundation of the instrument (Dhanoomal Parsaram vs P Kuppura) Changes the rights and liabilities of the parties, or any of the parties to the instrument or Alters the operation of the instrument Any change in an instrument which causes it to speak a different language in effect from that which it originally spoke, or which changes the legal identity or character of the instrument either in its terms or the relation of the parties to it, is a material alteration, it makes no difference whether the alteration is beneficial or prejudicial (Ramapadarath vs Narain) Instances of Material Alteration The following alterations are material, i.e., the alteration of: the date the sum payable the time of payment the place of payment addition of place of payment the rate of interest These alterations vitiate the instrument Alterations not vitiating the instrument In the following cases, the alteration of a negotiable instrument will not vitiate or avoid the instrument: An alteration, though in a material part, made before the instrument is issued An alteration made for the purpose of correcting a mistake, e.g., the correction of mistake in a bill dated 1989 instead of 1998 An alteration made to carry out the common intention of the original parties, e.g., the subsequent insertion of the words or order where the drawer of a bill forgets to use these words An alteration made with the consent of the parties An alteration which is not material Alterations authorized by the Act The following alterations, though material, are permitted by the Act, and not invalidate the instrument: Filling blanks of an inchoate instrument sec 20 Conversion of a blank endorsement into an endorsement in full sec 49 Crossing of cheques sec 125 Effect of material alteration The effect of material alteration of a negotiable instrument is only to discharge those who become arties thereto prior to the alteration But if an alteration is made in order to carry out the common intention of the original parties, it does not render the instrument void Any material alteration, if made by an endorsee, discharges his endorser form all liability to him in respect of the consideration thereof sec 87 The rule as contained in sec 87 is based on a sound policy and may be defended on two grounds: That no man should be permitted to take the chance of committing a fraud without running any risk of loss by the event when it is detected, and That by the alteration, the identity of the instrument is destroyed, and to hold one of the parties liable under such circumstances would be to make him liable for something to which he never agreed 2.8 COMPENSATION When a negotiable instrument is dishonored, the party liable to pay becomes bound to pay compensation to the holder or endorsee The rules for determining this compensation are follows: Compensation to holder: The holder is entitled to receive: (a) the amount due upon the instrument, (b) interest on the principal sum, and (c) expenses properly incurred in presenting, noting and protesting the instrument sec 117 (a) Re-exchange: Where the person charged resides in a country different from that in which the instrument was payable, the holder is entitled to receive the compensation at the current rate of exchange between the two countries on the date of dishonor sec 117(b) Compensation to Endorser: An endorser who, being liable, has paid the amount due on the instrument is entitled to the amount so paid with interest at 18% per annum from the date of payment until tender or realization thereof, together with all expenses caused by the dishonor and payment, but he can recover the amount only of at the time of payment he was liable on the instrument sec 117(c) When the person charged and the endorser are residents of different countries, the person charged and the endorser are residents of different countries, the current rate of exchange between he tow countries shall apply sec 117(d) Re-draft: The party entitled to compensation may draw a bill upon the party liable to compensate him, for the amount due to him together with all expenses incurred by him Such a bill is called a redraft It must be accompanied by the instrument dishonored, and the protest thereof If the redraft is dishonored, the party dishonoring the same is liable to make compensation thereof in the same manner as in the case of the original bill sec 117 (c) Estoppels: When a person by his conduct or words spoken or written leads another person to believe that a certain state of affairs exists, he is estopped from denying the fact of that statement later The negotiable instruments act lays down the following rules of estoppel: (a) Estoppel against denying original validity of instrument: The maker of a promissory note, the drawer of a bill of exchange or cheque and the acceptor of a bill for the honor of the drawer are not permitted, as against a holder in due course, to deny the validity of the instrument as originally made or drawn 35 Negotiable Instruments 36 International Business Law (b) Estoppel against denying capacity of payee to endorsee: The maker of a promissory note the drawer of a bill of exchange payable to order are not permitted as against a holder in due course, to say that the payee is incapable of endorsing the instrument (c) Endorser nor permitted to deny the capacity of prior parties: The endorser of a negotiable instrument is not permitted, as against a subsequent holder to deny the signature or capacity to contract of any prior party of the instrument Check Your Progress Fill in the blanks: The word “negotiable” means “a instrument means a promissory note, bill of exchange, or cheque payable either to order or to bearer” A promissory note is an in writing containing an unconditional undertaking, signed by the maker, to pay a certain sum of money 2.9 INTERNATIONAL LAW The rules of international law relating to foreign negotiable instruments are as follows: 2.9.1 Liability The liability of the maker of drawer of a foreign promissory note, bill of exchange or cheque is regulated in all essential matters by the law of the place where the instrument has been made The liability of the acceptor and endorser is determined by the law of the place where the instrument is payable This rule is however subject to the contract between the parties 2.9.2 Dishonor Where a promissory note, bill of exchange or cheque is made payable in a different place form that in which it is made or endorsed, the law of the place where it is made payable determines what constitutes dishonor and what notice of dishonor is sufficient 2.9.3 Instruments Made Out of India according to the Provisions of Indian Law If an instrument is made, drawn, accepted, or endorsed out of India according to the Indian law its subsequent acceptance or endorsement in India will not invalidate it even though the agreement evidenced by such an instrument is invalid according to the law of foreign country 2.10 LET US SUM UP The word “negotiable” means ‘transferable by delivery’ and the word “instrument” means ‘a written document by which a right is created in favor of some person’ Literally endorsement means writing in an instrument In its technical sense in the Negotiable Instruments Act it means the writing if a persons name on the face or back of the instrument or on a slip of paper annexed thereto for the purpose of negotiation Presentment or presentation means showing an instrument to the drawee, acceptor or maker for acceptance, sight or payment When a negotiable instrument is dishonored, the party liable to pay becomes bound to pay compensation to the holder or endorsee 2.11 LESSON END ACTIVITY Explain the following: Payable to order types of endorsement Agreement Presentation 2.12 KEYWORDS Negotiable: The word “negotiable” means ‘transferable by delivery’ Instrument: The word “instrument” means ‘a written document by which a right is created in favor of some person’ Discharge: The term ‘discharge’ in relation to a negotiable instrument is used in two senses, viz., discharge of the instrument and discharge of one or more of the parties from liability thereon 2.13 QUESTIONS FOR DISCUSSION Explain the characteristics of negotiable instruments Explain briefly the concepts of dishonor, discharge and compensation Explain the meaning of endorsement and the essentials of endorsement Check Your Progress: Model Answers CYP 1 The word “negotiable” means ‘transferable by delivery’ and the word “instrument” means ‘a written document by which a right is created in favor of some person’ Thus, the term “negotiable instrument” literally means ‘a written document transferable by delivery’ According to section 13 of the Negotiable Instruments Act, “a negotiable instrument means a promissory note, bill of exchange, or cheque payable either to order or to bearer” Payable to bearer means payable to any person whosoever bears it A note bill 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 CYP The Negotiable Instruments Act mentions only three kinds of negotiable instruments (sec 13) These are: promissory notes, bills of exchange and cheques These instruments are negotiable by statue A cheque is a bill of exchange drawn upon a specified banker and payable on demand A cheque is a species of a bill of exchange; but it has the following two additional qualifications, viz., ™ it always is drawn on a specified banker, ™ it is always payable on demand Contd… 37 Negotiable Instruments 38 International Business Law CYP ‘Transferable by delivery’ Negotiable, Instrument 2.14 SUGGESTED READINGS Herbert M Bohlman & Mary Jane Dundas, The Legal Ethical, and International Law Environment of Business, 4th Edition, South-Western College Publishing, 1999 Miller, Roger LeRoy; Cross, Frank B., Legal Environment Today: Businessmen Its Ethical, Regulatory & International Law Krishnaveni Muttai, Logistics Management Kapoor S K, International Law, Central Law Agency, 13th ed., Motilal Nehru Road, Allah bad, 2000 Kapoor N D, Elements of Mercantile Law, 26th ed., Sultan Chand & Sons, New Delhi, 2002 Gulshan S S , Business Law, Excel Books, New Delhi, 2002 Mithani D M, International Economics, 3rd ed., Himalaya Publishing House, Mumbai, 2000 ...24 International Business Law 2.0 AIMS AND OBJECTIVES After studying this lesson, you should be able to: z Explain the concept of negotiable... Instruments 38 International Business Law CYP ‘Transferable by delivery’ Negotiable, Instrument 2.14 SUGGESTED READINGS Herbert M Bohlman & Mary Jane Dundas, The Legal Ethical, and International. .. Environment of Business, 4th Edition, South-Western College Publishing, 1999 Miller, Roger LeRoy; Cross, Frank B., Legal Environment Today: Businessmen Its Ethical, Regulatory & International