LAW OF NEGOTIABLE INSTRUMENTS · NI ACT, 1881

· L A W O F ·

NEGOTIABLE
INSTRUMENTS
The Negotiable Instruments Act, 1881

“Wit beyond measure is man’s greatest treasure.”

— and in the law merchant, certainty beyond measure is the merchant’s —

THE ARCHIVE PARTICULARS

Course LAW983D7 — Law of Negotiable Instruments

Programme 9BALLB / BBALLB, Semester IX

Faculty Ms. Oindrilla Ghosh

Coverage Units 1–4 (Mid-Semester Examination), with Unit 5 & 6 foundations

Method F.I.L.A.C. — Facts · Issues · Law · Analysis · Conclusion

Purpose Consolidated doctrinal notes, case digest and specimen problem

answers

Prepared as a study compendium. Bare Act reference is mandatory in class; this document supplements, and does not
substitute, the statute.

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THE COMPENDIUM
How this volume is arranged

PART CONTENT

Part I Foundations — meaning, characteristics, types and essential features of

negotiable instruments; the Hundi

Part II Section-by-Section Commentary — ss. 3, 4, 5, 6, 7, 8, 9, 13, 15, 16, 17, 20,

22, 23, 24, 25, 26, 33, 39, 40, 42, 43, 52, 53, 54, 57, 58, 59

Part III Supplementary Sections referred to in the course resources and syllabus

Part IV Case Law Digest — every authority analysed in F.I.L.A.C. form

Part V Problem Questions — twenty specimen answers in the prescribed six-limb

format

Part VI Revision Apparatus — comparative tables, maturity-computation drill,

examiner’s rubric map

The rubric prescribed for CIA-1 and CIA-3 rewards four things and only four things: a
correctly identified and explained legal provision, application of that provision to every
relevant factual detail, precedent identified with citation and applied, and organised
analysis. Every answer in Part V is therefore drafted to that specification — the statement
of law is never left as a bare section number, and the analysis never repeats the facts without
working them.

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PART I — FOUNDATIONS
Unit 1, Topics 1 and 2

1. Meaning of a Negotiable Instrument

A negotiable instrument is a written document that creates a right to receive a specified sum
of money, and which is transferable from one person to another in such a manner that the
transferee obtains a valid title to the instrument in his own name. The expression is a
compound of two ideas: negotiability, meaning the capacity to be transferred so as to
confer a title independent of, and often superior to, that of the transferor; and instrument,
meaning a written document that itself embodies the right rather than merely evidencing it.

The Act nowhere defines the genus. Section 13 instead defines it by enumeration,
recognising three principal species — the Promissory Note, the Bill of Exchange, and the
Cheque. The definition is not exhaustive: instruments recognised as negotiable by
mercantile usage or custom, such as the hundi, share certificates payable to bearer,
debentures payable to bearer and treasury bills, are equally negotiable although not named
in section 13.

These instruments are used in commerce and banking as substitutes for money. They permit
value to move without the physical movement of cash, they permit credit to be extended and
simultaneously to be turned back into cash by discounting, and they reduce the risk and cost
of carrying specie. The whole architecture of the Act is built to protect that circulating
quality.

1.1 Characteristics of a Negotiable Instrument

◆ Free transferability. The instrument passes by delivery alone if it is payable to bearer,
and by endorsement completed by delivery if it is payable to order.
◆ Title of the transferee. A bona fide transferee for value, before maturity and without
notice of defect — the holder in due course — takes a title better than that of his
transferor. This is the single most important departure from the general rule nemo dat
quod non habet.
◆ Right to sue in one’s own name. The holder may sue upon the instrument in his own
name without joining the original payee or proving privity.
◆ Presumptions as to consideration. Every negotiable instrument is presumed to have
been made, drawn, accepted, endorsed or transferred for consideration, and to have
been made on the date it bears, accepted within reasonable time, and transferred
before maturity. The burden of displacing these presumptions lies on the party who
disputes them.

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◆ Certainty. Because the instrument is meant to circulate among strangers, everything

essential to it — the sum, the parties, the promise or order, the time of payment —
must be ascertainable from the face of the document.
◆ Unconditional character. The promise or order to pay must not depend upon a
contingency; a conditional instrument is not negotiable at all.
Taken together these features make the negotiable instrument convenient, reliable and
secure, and it is that security which sustains commercial confidence in it.

2. The Three Statutory Types

2.1 Promissory Note

A promissory note is a written instrument 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. It involves two parties — the maker (the promisor,
primarily liable) and the payee. It is the ordinary instrument of loan and credit transactions.
The maker’s liability is primary and absolute.

2.2 Bill of Exchange

A bill of exchange is a written instrument 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. It involves three parties — the drawer
(who gives the order), the drawee (who is directed to pay, and who upon signing his assent
becomes the acceptor), and the payee. The drawer’s liability is secondary and
conditional: it arises only upon dishonour by the drawee and after due notice. Bills are the
standard instrument of commercial and international trade.

2.3 Cheque
A cheque is a species of bill of exchange, but a peculiar one: it is always drawn upon a
specified banker and is always payable on demand. It requires no acceptance, is not intended
for circulation, and is given for immediate payment. Since the 2002 amendment it includes
the electronic image of a truncated cheque and a cheque in the electronic form. Cheques may
be bearer or order, open or crossed, generally or specially crossed, post-dated, ante-dated
or stale.

3. Essential Features Common to All Negotiable Instruments

1. In writing. An oral engagement to pay is outside the Act altogether. The writing may
be in pencil or ink, handwritten, typed, printed or lithographed; there is no
requirement that it be on paper — cloth or linen will serve. The writing supplies
certainty and serves as documentary evidence.

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2. Unconditional promise or order. A note contains a promise, a bill or cheque an

order. If payment depends on an uncertain event the instrument loses its negotiable
character.
3. Certain sum of money. The amount must be definite and ascertainable from the face
of the instrument and must not be susceptible to contingent variation. Payment must
be in money and money only — an undertaking to deliver goods, or to pay money
and additionally do something else, destroys negotiability.
4. Certainty of parties. Maker, drawer, drawee and payee must be indicated with
reasonable certainty so that rights and liabilities may be fixed without ambiguity.
5. Signature of the maker or drawer. Until signature the instrument is incomplete and
of no effect.
6. Free transferability and negotiability. By delivery, or by endorsement and delivery,
according to whether the instrument is payable to bearer or to order.

4. The Hundi

A Hundi is the traditional indigenous negotiable instrument of India, used for trade, credit
and the transfer of money. The word derives from the Sanskrit hund, “to collect”. Hundis
were in extensive mercantile use long before the Act of 1881 and are, in substance, akin to
bills of exchange: they contain an order directing one person to pay a specified sum to
another. They are governed principally by mercantile custom and usage rather than by
the strict statutory provisions of the Act — section 1 of the Act expressly saves local usage
relating to instruments in an oriental language, unless the parties expressly exclude it.

Types of Hundi
7. Darshani Hundi — payable on demand or at sight.
8. Muddati (Miadi) Hundi — payable after a specified period.
9. Shah Jog Hundi — payable only to a shah, that is, a respectable person or banker of
known credit.
10. Nam Jog Hundi — payable to the person named in the hundi.
11. Dhani Jog Hundi — payable to the holder or owner.
12. Jokhmi Hundi — drawn against goods shipped, payable only upon the safe arrival
of the goods; it therefore carries the risk (jokhim) of the voyage and is in the nature of
an insured instrument.

Features
◆ Governed by local trade customs and usages.

◆ Functions as a credit instrument.

◆ Facilitates transfer of money without movement of cash.

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◆ Operates substantially like a bill of exchange.

◆ Widely used in indigenous banking and mercantile transactions.

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PART II — SECTION-BY-SECTION COMMENTARY

The prescribed provisions, in statutory order

“Certainty regarding all essential aspects is the most important requisite of an instrument meant for free
circulation.”

Section 3 — “Banker”

“Banker” includes any person acting as a banker and any post office savings bank.

Section 3 is an inclusive, not exhaustive, definition. Its importance is that section 6 requires
a cheque to be drawn upon a banker; if the drawee is not a banker, the instrument cannot
be a cheque, whatever it looks like. The classical working test is that of Hart, adopted
judicially: a banker is one who, in the ordinary course of his business, honours cheques
drawn upon him by persons from and for whom he receives money on current accounts.
Two elements are therefore essential — receiving money on current account, and honouring
cheques drawn against it.

Applied in R. Pillai v S. Ayyar (1920) 43 Mad 816, this test excluded a Government
Treasury: a District Board keeping its funds in the Treasury and withdrawing them by
orders in cheque form was held not to have issued cheques at all, because the Treasury was
not a bank. The instruments were bills of exchange under section 5. (Analysed in Part IV.)

Section 4 — Promissory Note

A “promissory note” is an instrument in writing (not being a bank-note or a 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.

4.1 The test is intention, judged from substance

To determine whether a particular document is a promissory note the court looks to the
intention of the parties, ascertained from the substance of the document, the surrounding
circumstances of its execution, and its negotiability in the popular mercantile sense. The
question is whether the document was intended to be a promissory note, or was intended
to be a mere acknowledgment of debt or a receipt for consideration. Intention is decisive: if
the parties had no intention to execute a promissory note, then even though the instrument
satisfies every formal requirement it may still not be one. Conversely, a document primarily
intended as a receipt or a bond, and not intended to be negotiable in the ordinary mercantile
sense, does not become a promissory note within the meaning of the Act merely because it
recites a debt.

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4.2 Must be in writing [s. 4.1.1]

Every engagement connected with a promissory note must be signified by writing upon the
instrument itself; the object is to exclude oral engagements to pay from the purview of the
Act. The writing may be in pencil or ink; “writing” includes printing, lithography and other
modes of representing or reproducing words in visible form, and may consist of printed,
typewritten or handwritten matter. There is no requirement that it be on paper — a note
may be written on cloth, linen or any other thing usable for the purpose.

4.3 Must contain an undertaking to pay [s. 4.1.2]

The essential element is an express promise to pay. A mere acknowledgment of
indebtedness, without an express promise, is not a promissory note.

Held NOT to be promissory notes

13. “Mr X, I owe you Rs 100.”
14. “I have received Rs 1,000 which I borrowed of you, and I have to be accountable to
you for the same with interest.”
15. “The amount which I have this day received from you in cash is Rs 1,000. This sum I
am bound to pay to you.”
16. “Deposited with me Rs 1,000 to be returned on demand.”
17. “I am liable to A in sum of Rs 1,000 which is to be paid by instalments for rent.”
18. “This receipt is hereby executed by B for Rs 43,900… received from the firm of… for
and on behalf of A. The amount to be payable after two years. Interest at the rate of Rs
5-4-0 per cent per year to be charged. Dated: 1 April 1947.”

Held to BE promissory notes

19. “Rs 1,000 balance due to you I am still indebted and do promise to pay.”
20. “Received from X Rs 1,000 which I promise to pay on demand with interest.”
21. “I do acknowledge myself to be indebted to X in Rs 1,000 to be paid on demand for
value received.”
22. “We shall order the borrowed moneys to be repaid.”
23. “Whereas with regard to glass of Hamiman Glass Works account is due from us, we
therefore acknowledge and promise to pay on demand Rs 1,781 with interest at 2%
per mensem.”
24. An undertaking to pay on demand necessarily implies a promise to pay; a note
expressed as payable on demand is therefore a promissory note within the section.
The distinction running through these examples is between an acknowledgment that a debt
exists (“I owe”, “I am bound”, “to be returned”) and an engagement that the maker will
discharge it (“I promise”, “do promise to pay”, “acknowledge and promise”). Words of

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acknowledgment coupled with words of promise suffice; words of acknowledgment alone

do not.

4.4 Must be signed by the maker [s. 4.1.4]

Until the maker affixes his signature the instrument is incomplete and of no effect. A maker,
drawer or endorser unable to write may sign by a mark in lieu of signature. Marks and
initials have been held to be signatures where they were intended to be such. A signature in
pencil is valid. A printed signature is valid only if it is shown to have been adopted and used
by the party as his signature.

4.5 The maker must be certain

It is of the utmost importance that the note give a clear indication of the person who enters
into the contract and who engages or undertakes to pay. A person taking the instrument
must know from its face whom he may sue.

4.6 The sum payable must be certain

The sum expressed to be payable must be certain and not susceptible to contingent changes.
“Sum expressed… must be certain” means that anyone reading the document must be able
to calculate exactly how much money is owed simply by looking at it — “Pay Rs 1,000” is
certain. “Not susceptible to contingent changes” means the final amount must not depend
upon a future uncertain event: “I will pay you Rs 1,000 if it rains tomorrow” makes the sum
uncertain, because it is unknown whether the condition will occur.

An instrument which envisaged payment of interest at a certain time before the principal
amount had been demanded was held to be an instrument for an uncertain sum. The
reasoning is that if the quantum of interest fluctuates according to an unpredictable timeline
— such as waiting for an unmade demand — a reader cannot know the final payout, the law
treats the sum as uncertain, and the instrument fails the legal test of negotiability.

4.7 The payee must be certain

The payee’s name may be set out in any part of the instrument. So long as, on a reading of
the whole instrument, the payee is specified with certainty, the document is a promissory
note, assuming the other requirements of the definition are satisfied.

4.8 Payment in money only

The undertaking must be to pay a certain sum of money only. An instrument promising
money plus the delivery of goods, or promising to pay in a commodity, is not a promissory
note.

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Section 5 — Bill 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.

5.1 Essentials
◆ Must be in writing.

◆ Must contain an order to pay.

◆ The order must be unconditional.

◆ Must be signed by the drawer.

◆ The drawee must be certain.

◆ The sum payable must be certain.

◆ The order must be to pay money and money only.

◆ The payee must be certain.

5.2 The three parties

PARTY FUNCTION
Drawer The person who makes and gives the bill — he orders payment and
is secondarily liable on dishonour.
Drawee / Acceptor The person who is directed to pay; upon signing his assent he
becomes the acceptor and is primarily liable.

Payee The person to whom, or to whose order, the amount of the

instrument is payable.

5.3 The bill must contain an order — but courtesy does not destroy it
The essence of a bill is an order by the drawer to the drawee to pay the payee. The order
must be imperative in substance, but it need not be rude in form: a polite assertion will do.
“Please pay” affixed to the order is not invalid. “Mr AB will much oblige Mr CD by paying to
the order of P” has been held to be a good bill. What is fatal is a mere request or authority
that leaves the drawee free to refuse — the distinction is between courteous command and
genuine option.

5.4 Bill of exchange and promissory note compared

POINT OF POSITION
DISTINCTION

Nature of engagement Promissory note contains a promise; bill of exchange contains an

order.

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POINT OF POSITION
DISTINCTION

Liability of the In a promissory note the maker’s liability is primary and

maker/drawer absolute. In a bill the drawer’s liability is secondary and
conditional upon dishonour by the drawee and notice.

Number of parties Promissory note — two (maker, payee). Bill of exchange — three
(drawer, drawee, payee).
Acceptance A bill specially requires acceptance by the drawee; a note
requires none.

Presentment A bill requires presentment for acceptance (where payable after

sight) and for payment; a note requires presentment for payment
only.

Identity of parties In a note the maker and payee cannot be the same person. In a bill
the drawer and payee may be the same (a bill drawn payable to
the drawer himself).

Section 6 — Cheque

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 a cheque in the electronic form.

6.1 Must be drawn upon a “banker”

This is the first differentiating element. In R. Pillai v S. Ayyar (1920) 43 Mad 816 a District
Board kept its funds in a Government Treasury and withdrew money by issuing orders in
the form of a cheque. Ayyar J held that “a Treasury is not a bank”, and therefore the order
was not a cheque under section 6 but a bill of exchange under section 5. The learned Judge
adopted Hart’s definition: a banker is one who in the ordinary course of his business
honours cheques drawn upon him by persons from and for whom he receives money on
current accounts.

6.2 Must be payable on demand

This is the second differentiating element. Consequently a post-dated cheque is, until the
date it bears, only a bill of exchange and not a cheque — though it becomes a cheque on the
date from which it is payable on demand. A cheque may bear the date of a Sunday or a
holiday.

6.3 The cheque as a “peculiar” bill of exchange

“A cheque is a peculiar sort of instrument, in many respects resembling a bill of exchange,
but in some entirely different. A cheque does not require acceptance; in ordinary course it
is never accepted; it is not intended for circulation; it is given for immediate payment.” Three
consequences follow: no acceptance is needed and the banker’s obligation is to the customer

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under the banker–customer contract rather than to the holder on the instrument; no days
of grace are allowed; and the drawer’s countermand or the customer’s death, insolvency or
insanity determines the banker’s authority to pay.

6.4 Cheque and bill of exchange distinguished

CHEQUE BILL OF EXCHANGE

A document used to make payments on A written document evidencing the

demand, transferable by delivery (if bearer). indebtedness of the debtor towards the
creditor.

Drawn only on a specified banker. May be drawn on any person, including a

banker.

Always payable on demand. Payable on the expiry of a certain date or

period, or on demand.

Requires no acceptance. Requires acceptance by the drawee before he

is liable.

No days of grace. Three days of grace are allowed on time bills

(s. 22).

May be crossed; crossing is a direction to the Cannot be crossed.

paying banker.
Includes the electronic image of a truncated No such statutory extension.
cheque and a cheque in electronic form.

Section 7 — Drawer, Drawee, Acceptor, Payee, Drawee in case of need,

Acceptor for honour

Section 7 supplies the vocabulary of the Act. The maker of a bill or cheque is the drawer;
the person thereby directed to pay is the drawee. When, in the bill or in any endorsement,
a person is named in addition to the drawee to be resorted to in case of need, that person is
the drawee in case of need. After the drawee has signed his assent upon the bill, or if there
are more parts than one upon one of such parts, and delivered it, or given notice of such
signing to the holder or to some person on his behalf, he is the acceptor. Where a bill has
been noted or protested for non-acceptance or better security and any person accepts it
supra protest for honour of the drawer or of any endorser, that person is an acceptor for
honour. The person named in the instrument to whom or to whose order the money is
directed to be paid is the payee.

7.1 Certainty of the drawee — naming is not indispensable

The drawee must be “certain”, but the section does not require that he be named. It is
enough that he is indicated with reasonable certainty — for instance by a description or by
an address at which only one person can answer the description. Certainty is a question of
identification, not of nomenclature. Where the person so indicated writes his acceptance on

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the bill, he removes any residual doubt: by accepting, he acknowledges that the direction
was addressed to him (read with section 33, which provides that none but the drawee can
bind himself by acceptance, and with section 41).

7.2 Acceptance — general and qualified

An acceptance is general when it assents without qualification to the order of the drawer.
It is qualified when it varies the effect of the bill as drawn — for example, an acceptance for
part only of the amount, an acceptance to pay only at a particular place and not elsewhere,
an acceptance conditional upon an event, or an acceptance by some only of several drawees.
The holder is entitled to insist upon a general acceptance; if he takes a qualified acceptance,
he does so at the peril of the prior parties’ discharge (see the discussion under section 86).

Section 8 — Holder

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. Where the note, bill or cheque is lost or destroyed, its
holder is the person so entitled at the time of such loss or destruction.

Two cumulative conditions must be satisfied. The person must be (i) entitled in his own
name to the possession of the instrument, and (ii) entitled to receive or recover the amount
due thereon from the parties liable. Physical possession is therefore neither sufficient nor,
where the instrument is lost or destroyed, necessary.

In practice a holder will be the payee, the bearer, or the endorsee of an instrument. It
follows that:

◆ A finder of a lost bearer instrument, or a thief, is not a holder: possession is wrongful

and he is not entitled to it in his own name.
◆ An agent who holds his principal’s instrument is not a holder, because he is entitled to
possess it on his principal’s behalf, not in his own name; he cannot sue upon it in his
own name unless it has been endorsed to him.
◆ A beneficial owner whose instrument has been endorsed away is not a holder; the
endorsee is.
◆ Where the instrument is lost or destroyed, the person entitled at the moment of loss
remains the holder and may enforce it on furnishing indemnity (see s. 45A).

Section 9 — Holder in Due Course

“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
endorsee thereof, if payable to order, before the amount mentioned in it became

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payable, and without having sufficient cause to believe that any defect existed in the
title of the person from whom he derived his title.

A holder in due course is a person who takes the instrument in good faith and for value.
He becomes the true owner of the instrument and holds it free of the defects in the title of
prior parties. He is the beneficiary of the great commercial exception to nemo dat quod non
habet.

9.1 Essential attributes

25. Consideration. The holder must have taken the instrument for value. A donee or a
person taking by way of gift or as executor is not a holder in due course.
26. Before maturity. The holder must have obtained the instrument before the amount
mentioned in it became payable. One who takes an overdue instrument is put on
inquiry.
27. Complete and regular on its face. The instrument must be free of blanks in material
particulars and free of irregularities that would put a reasonable man on inquiry.
28. Good faith and absence of notice. The holder must have taken the instrument in
good faith and without sufficient cause to believe that any defect existed in the
instrument or in the title of the person negotiating it to him.

9.2 Rights and privileges of a holder in due course

◆ Presumption in his favour (s. 118(g)). Every holder is deemed prima facie to be a
holder in due course. If a defendant intends to set up the defence that something was
wrong in the inception or in the subsequent negotiations of the bill, the burden of
proving it lies upon him.
◆ Shifting burden. Once it is shown that the history of a bill is tainted with fraud or
illegality, the burden shifts to the holder to prove affirmatively that he is a holder in
due course — that he gave value in good faith.
◆ Inchoate instruments (s. 20). He may recover the whole amount filled in, up to the
amount covered by the stamp, even against a person who authorised a smaller sum.
◆ Fictitious drawer or payee (s. 42). The acceptor cannot plead fictitiousness against
him.
◆ Estoppels (ss. 120–122). The maker or drawer cannot deny the validity of the
instrument as originally made or drawn; the maker of a note and the acceptor of a bill
cannot deny the payee’s capacity to endorse; and an endorser cannot deny the
signature or capacity of prior parties.
◆ Cleansing effect (s. 53). Every subsequent holder deriving title through him takes the
rights of a holder in due course.

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◆ Instrument free of prior defects (s. 58). Fraud, duress, unlawful means and illegal
consideration are no answer against him — with the single exception of forgery, which
is a nullity and confers no title at all.

9.3 The content of “good faith”

The English authorities disclose two competing standards, and the modern Indian position
is a synthesis of them. In Miller v Race (1758) 1 Sm LC 524, good faith was equated with
honesty in fact: an innkeeper who took a stolen bank note for full and valuable
consideration in the usual course of his business, with no pretence or suspicion of collusion
with the robber, was protected. In Gill v Cubitt (1824) the court demanded due care and
caution: a bill broker who discounted a stolen bill for a respectable-looking stranger
without inquiring his name or address was held not to have acted in good faith, because it is
the duty of the court to lay down rules that tend to prevent fraud and robbery and not to
encourage them, and no person should take a security of this kind from another without
using reasonable caution. Section 9 adopts the substance of the stricter view by its own
language — the test is whether the holder had sufficient cause to believe that a defect
existed, which imports an objective element of reasonable inquiry rather than pure
subjective innocence. Both cases are analysed in Part IV.

Section 13 — Negotiable Instrument

A “negotiable instrument” means a promissory note, bill of exchange or cheque payable

either to order or to bearer. Explanation (i): 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. Explanation (ii): 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. Explanation (iii):
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.

Three propositions follow. First, an instrument expressed to be payable to a particular

person is payable to order even without the words “or order”, provided it does not contain
words prohibiting or restricting transfer. Secondly, an instrument whose last endorsement
is in blank is payable to bearer and passes by mere delivery (see s. 54). Thirdly, the section
is definitional by enumeration, not exhaustive of negotiability itself: instruments made
negotiable by custom or usage of trade — hundis, bearer debentures, share warrants,
dividend warrants, treasury bills — remain negotiable although outside section 13.

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Section 15 — Endorsement

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”.

15.1 Endorsement is completed by delivery

An endorsement is not complete until the instrument is delivered to the endorsee. Every
contract on a bill — whether the drawer’s, the acceptor’s or an endorser’s — is incomplete
and revocable until delivery of the instrument in order to give effect thereto. “An
endorsement means an endorsement completed by delivery.”

The consequence is stark. Where a person endorses an instrument to another and then
keeps it among his papers, where it is found after his death and delivered to the endorsee,
the endorsee acquires no right whatever on the instrument: the intention to negotiate was
never perfected by the act of delivery, and death revoked the incomplete contract. This is
reinforced by section 57, which provides that a legal representative of a deceased person
cannot, by delivery only, negotiate an instrument endorsed by the deceased but not
delivered.

15.2 Formal requirements

◆ The signature must be that of the maker or holder, and must be made otherwise than
in the capacity of maker.
◆ It must be for the purpose of negotiation.

◆ It may be on the back, on the face, or on a slip of paper annexed to the instrument (an
allonge).
◆ It must be of the entire instrument: a partial endorsement, purporting to transfer only
part of the amount due, does not operate as a negotiation (s. 56).

Section 16 — Endorsement “in Blank” and “in Full”

(1) 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. (2) The provisions of this Act relating to a
payee shall apply with the necessary modifications to an endorsee.

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16.1 Endorsement in blank

Where the endorser signs only his name on the back of the instrument for the purpose of
negotiating it, the endorsement is “in blank”. Its effect is to convert an order instrument into
a bearer instrument: for all purposes of negotiation it becomes payable to bearer, may be
negotiated by simple delivery, and the bearer is entitled to payment. It remains so until the
holder converts the blank endorsement into an endorsement in full under section 49.

Two important corollaries follow. A subsequent endorsement in full will not have the effect
of re-converting the instrument into an order instrument; all subsequent endorsements are
needless, and forgery of a redundant endorsement will not affect the title of a subsequent
party. And where a cheque is originally payable to bearer, no endorsement — blank, full or
restrictive — will destroy its bearer character; the banker is discharged by payment to the
bearer (this is the rule “once a bearer cheque, always a bearer cheque”, reflected in s. 85(2)).

16.2 Endorsement in full

Where the endorser adds to his signature the name of the person to whom, or to whose
order, he wants the instrument to be paid, the endorsement is in full. If A, the holder of a
cheque, wishes to endorse it in full to B, he writes “Pay B or order. Sd. A.” He need not add
the words “or order”: an endorsement to “A” is equivalent to an endorsement to “A or order”.
Where an instrument was endorsed “pay the contents to L.A.”, it was held in Acheson v
Fountain (1723) that L.A. could have endorsed it to another and the party liable could not
object to any such endorsement.

No particular form is prescribed. Any words will do so long as they clearly show the
endorser’s intention. A note endorsed “I hereby assign this draft, and all benefit of the money
secured thereby to J, and order maker of the note to pay him the amount thereof and all
interest in respect thereof” was held to be not an agreement requiring a stamp but an
ordinary endorsement of the note, though in a very elaborate form.

Section 54 — Instrument Endorsed in Blank

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.

Section 54 is the operative consequence of section 16(1). It is subject to the crossing

provisions (ss. 123–131A): a crossed cheque, even if endorsed in blank, cannot be paid over
the counter to a bearer, because crossing is a statutory direction to the paying banker to pay
only through a banker.

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Section 50 — Effect of Endorsement; and Restrictive Endorsement

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.

Illustrations
B signs the following endorsements on different negotiable instruments payable to bearer.
These exclude the right of further negotiation by C:

◆ “Pay the contents to C only.”

◆ “Pay C for my use.”

◆ “Pay C or order for the account of B.”

◆ “The within must be credited to C.”

These do not exclude the right of further negotiation by C:

◆ “Pay C.”

◆ “Pay C value in account with the Oriental Bank.”

◆ “Pay the contents to C, being part of the consideration in a certain deed of assignment
executed by C to the endorser and others.”

Effect of a restrictive endorsement

One effect of an endorsement completed by delivery is that the property in the instrument
passes to the endorsee, who acquires the right of further endorsement. Where that right of
further negotiation is, by express words in the endorsement, restricted or taken away, the
endorsement is called restrictive. The endorser may exclude the right of further negotiation
altogether, or merely restrict it, or may constitute the endorsee an agent to endorse the
instrument or to receive its contents for the endorser or for some other specified person.

The consequence is that the endorsee gets the right to receive payment when due and to sue
the parties for it, but he cannot further negotiate the instrument except as authorised by the
endorser. He is constituted merely an agent for collection, and the endorser remains the real
owner of the instrument.

Restrictive and conditional endorsements distinguished

A conditional endorsement makes the endorser’s liability dependent upon the occurrence
of a specified event — for example, “Pay John Doe upon the successful completion of the
roofing project.” A restrictive endorsement, by contrast, limits the instrument’s future
transferability, dictating exactly how the funds must be used or who may handle them — for
example, “For Deposit Only” or “Account Payee”, followed by the account number and

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signature. The first qualifies liability; the second qualifies negotiability. A restrictive
endorsement essentially prevents the cheque from being cashed by unauthorised persons
or passed on to third parties.

Section 17 — Ambiguous Instruments

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.

Section 17 confers a right of election upon the holder, and the election once made is final
— the instrument is “thenceforward treated accordingly”. The classic instances of ambiguity
are a bill drawn on a fictitious drawee, a bill where the drawer and drawee are the same
person, and a bill drawn by an agent on his principal.

The section was applied in Punjab and Sindh Bank v Vinkar Sahakari Bank Ltd, AIR 2001
SC 3641, where the Supreme Court held that a demand draft answers the characteristics of
a cheque; and further observed that even if the draft were capable of being construed either
as a promissory note or as a bill of exchange, the law gives the holder the option to treat it
as he chooses. Once the holder — there, the complainant bank — elected to treat the
instrument as a cheque, it could not thereafter be treated as anything else. (Analysed in Part
IV.)

Section 20 — Inchoate Stamped Instruments

Where one person signs and delivers to another a paper stamped in accordance with
the law relating to negotiable instruments then in force in India, and either wholly
blank or having written thereon an incomplete negotiable instrument, he thereby gives
prima facie authority to the holder thereof to make or complete, as the case may be,
upon it a negotiable instrument, for any amount specified therein and not exceeding
the amount covered by the stamp. The person so signing shall be liable upon such
instrument, in the capacity in which he signed the same, to any holder in due course for
such amount: provided that no person other than a holder in due course shall recover
from the person delivering the instrument anything in excess of the amount intended
by him to be paid thereunder.

In plain terms: by handing over a signed, stamped but unfinished document, the signatory
gives the other person an implied (prima facie) authority to fill up the blanks and complete
it into a proper negotiable instrument such as a promissory note or a bill of exchange.

20.1 The four essentials

◆ Signature — the person must have signed the paper.

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◆ Stamp — the paper must be stamped in accordance with the prevailing stamp duty
laws, and liability cannot exceed the amount covered by the stamp.
◆ Incompleteness — the document must be either wholly blank or missing crucial
details such as the amount, the date or the payee’s name.
◆ Delivery — the signer must actively deliver the paper to another person. If it is stolen
from his drawer, section 20 does not apply at all.

20.2 The critical divide: holder in due course or not

The proviso creates two entirely different regimes. Against a holder in due course, the
signatory is liable for the whole amount filled in, up to the stamp cover, even though the
amount exceeds what he authorised — the loss falls on the man who put a signed blank into
circulation rather than on the innocent taker. Against any other holder, recovery is limited
to the amount actually intended by the signatory. Everything therefore turns on whether the
person seeking to enforce took the instrument for value, before maturity, and without
sufficient cause to believe in a defect. A person who receives a signed blank from an agent
in payment of the agent’s own private debt is thereby put on notice of a probable breach
of authority, is not a holder in due course, and cannot enforce the excess.

20.3 Inchoate and ambiguous instruments distinguished

An ambiguous instrument must be carefully distinguished from an inchoate one. In the case
of an ambiguous instrument, the holder, having made his election to treat the instrument as
a note or a bill, can institute a suit on it, and he is not precluded from doing so because of the
ambiguous character of the instrument. An inchoate instrument, by contrast, operates only
as an authority to the holder to fill it in; until that is done, the holder cannot maintain an
action upon it. Further, in the case of an ambiguous instrument the court puts upon it the
construction most favourable to its validity and construes it as a bill or a note. However, an
instrument in the form of a bill containing the name neither of the payee nor of the drawer
is an inchoate instrument, even though it is addressed to a person and accepted by him;
such an instrument cannot be treated as an ambiguous instrument within the meaning of
section 17.

Sections 21–25 — Time of Payment and Computation of Maturity

Section 21 — “At sight”, “on presentment”, “after sight”

In a promissory note or bill of exchange the expressions “at sight” and “on presentment”
mean 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. This distinction is the key to computing maturity
of “after sight” paper: for a note, time runs from presentment for sight; for a bill, from
acceptance or from noting/protest for non-acceptance.

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Section 22 — Maturity and days of grace

The maturity of a promissory note or bill of exchange is the date at which it falls due.
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.

Three days of grace are therefore added to every time instrument — whether payable after
date, after sight, or on the happening of a certain event. Days of grace are not allowed on
instruments payable on demand, at sight or on presentment, and consequently never on a
cheque.

Section 23 — Computation of maturity of instruments payable in months

In calculating the date at which a note or bill made payable a stated number of months after
date or 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 on which the event happens. Where 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. Three days of grace are then added.

Illustration: a bill dated 31 August payable three months after date. November has no 31st
day; the period therefore terminates on 30 November, and with three days of grace the bill
matures on 3 December.

Section 24 — Computation of maturity of instruments payable in days

In calculating the date at which a promissory note or bill of exchange, made payable a
stated 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.

The rule is therefore: exclude the first day, include the last, then add three days of grace
under section 22.

Section 25 — When the day of maturity is a holiday

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.

Note the direction of the movement. Unlike much commercial legislation, the Act moves the
maturity date backwards to the preceding business day, not forward. A public holiday for
these purposes includes days declared by the Central Government by notification in the
Official Gazette; 2 October (Gandhi Jayanti) is such a day.

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The four-step maturity drill

29. Identify the starting event — the date of the instrument (after date), the date of
presentment for sight or acceptance (after sight), or the date of the event.
30. Exclude that day (s. 24) and count the stated number of days; or, for months, find the
corresponding day, applying the “no corresponding day” rule (s. 23).
31. Add three days of grace (s. 22) — unless the instrument is payable on demand, at
sight or on presentment, or is a cheque.
32. If the day so arrived at is a public holiday, move back to the next preceding business
day (s. 25).

Section 26 — Capacity to Make, Draw, Accept, Endorse, Deliver and

Negotiate

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. A minor may draw,
endorse, deliver and negotiate such instrument so as to bind all parties except
himself.

The second limb of section 26 is a deliberate commercial device. A minor’s contract is void
ab initio under section 11 of the Indian Contract Act, 1872, and no liability can be fastened
upon him on the instrument. But the Act refuses to let the minor’s personal incapacity
destroy the instrument itself. The minor is treated as a conduit of title: his endorsement
passes a good title to the endorsee, and every other party who is sui juris remains fully
bound.

Two consequences must be kept distinct in problem questions:

◆ The minor is immune. He cannot be sued on the instrument, and his plea of minority
is a good and complete defence.
◆ Nobody else is released. A major joint-promisor on a note remains liable for the
whole amount as a principal promisor; a drawer of a cheque payable to a minor
remains liable to the ultimate holder; and every adult endorser in the chain remains
bound. The minor’s endorsement successfully passes legal title down the chain, so
subsequent holders are not prejudiced.

Section 33 — Only Drawee Can Be Acceptor, Except in Need or for

Honour

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.

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The section is the counterpart of section 7. Its effect is twofold. Negatively, a stranger to the
bill cannot make himself liable as acceptor, though he may of course become liable in
another capacity, for example as an endorser or a guarantor. Positively, and more
importantly for problem questions, where a person answering the description in the bill
does accept it, his acceptance identifies him conclusively as the drawee — he is estopped
from later denying that the direction was addressed to him. Read with section 7, a bill which
does not name the drawee but indicates him with reasonable certainty (for instance by the
address at which he resides) is a valid bill, and the resident who writes his acceptance upon
it is liable as acceptor. Section 41 similarly makes an acceptor liable notwithstanding a prior
endorsement in a fictitious name.

Sections 39 and 40 — Suretyship and Discharge of the Endorser

Section 39 — Suretyship
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, 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.

Section 39 recognises the suretyship structure of a negotiable instrument. As between the

parties liable upon it, they are not co-equal debtors; they stand in a hierarchy. The acceptor
is the principal debtor; the drawer and every endorser stand successively as sureties. As
between endorsers, prior parties are principal debtors and subsequent parties are
sureties, because a subsequent endorser who is compelled to pay has a right of recourse
against every party prior to him.

Section 40 — Discharge of endorser’s liability

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.

The rationale is pure suretyship law: a surety who is deprived of the securities or remedies
to which he would have been subrogated on payment is discharged pro tanto. If the holder
cancels, releases or strikes out the endorsements of prior parties, he destroys the
subsequent endorser’s right of recourse against them, and the subsequent endorser is
discharged to that extent — which, where the remedy is wholly destroyed, means
discharged completely. The words “without the consent of the endorser” are the hinge: with
consent, no discharge follows.

This must be read with section 41 (acceptor bound where endorsement is forged) and
section 45A (holder’s right to duplicate of lost bill), and contrasted with the holder’s

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undoubted right under section 49 to convert a blank endorsement into a full one — a right
which does not extend to obliterating parties’ liabilities.

Section 42 — Acceptance of a Bill Drawn in a Fictitious Name

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.

The section creates a statutory estoppel against the acceptor. Three conditions must concur:
(i) the bill must be drawn in a fictitious name; (ii) it must be payable to the drawer’s
order; and (iii) the first endorsement must purport to be made by the drawer and must be
in the same handwriting as the drawer’s signature. Where they concur, the acceptor
cannot escape liability to a holder in due course by pleading that the drawer never existed.

The justification is that by accepting the bill the drawee admits the existence of the drawer
and the genuineness of his signature (see also s. 41 and the estoppel in s. 122). The holder
in due course parted with value on the faith of the acceptance; as between two innocent
parties, the loss must fall on the one who gave currency to the instrument. Note the limits:
the section protects only a holder in due course, and only where the handwriting condition
is satisfied.

Section 43 — Negotiable Instrument Made Without Consideration

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 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.

43.1 The two limbs

◆ Between immediate parties — an instrument made without consideration creates no
obligation of payment. The absence of consideration is a good defence inter se.
◆ As against a holder for consideration — once the instrument is transferred to a
holder who gives value, that holder and every subsequent holder deriving title from
him may recover from the transferor for consideration or from any prior party.

43.2 Accommodation bills

An accommodation bill is an instrument signed, drawn, accepted or endorsed by a person
(the accommodation party) without receiving value or consideration, solely for the

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purpose of lending his name, credit and financial standing to another (the accommodated
party) so that the latter may raise funds by discounting or negotiating it. Under the general
law of contract an agreement without consideration is void; but commercial expediency
requires an exception, and sections 43 and 59 supply it.

◆ Inter-se: between the accommodation party and the accommodated party no

enforceable obligation arises, since no consideration passed. The accommodated party
can never sue the accommodation party on the bill.
◆ As against remote parties: once the accommodated party negotiates the instrument
to a third party who gives valuable consideration, the accommodation party becomes
fully bound to that third party and is precluded from pleading absence of consideration.

43.3 The limit of recovery: the pro tanto rule

The accommodation party is liable to a holder for value as though he were a primary debtor,
but this is a liability to pay the debt on the instrument, not a penalty. The holder cannot
recover more than the amount actually outstanding. If the accommodated party (the
principal debtor in substance) makes a part payment to the holder, the debt on the
instrument is reduced pro tanto, and the holder may enforce only the unpaid balance against
the accommodation party. To hold otherwise would allow the holder a double recovery.

Section 52 — Endorser Excluding His Own Liability

The maker, drawer or endorser of a negotiable instrument may, by express words in

the instrument, exclude his own liability thereon, or make such liability or the right of
the holder to receive the amount due thereon depend upon the happening of a specified
event, although such event may never happen.

An endorsement made with words such as “sans recours” or “without recourse” is a

facultative or qualified endorsement by which the endorser negatives the liability which
section 35 would otherwise impose upon him. He passes title but assumes no obligation to
compensate the holder on dishonour.

52.1 Negotiation back and circuity of action

Where an instrument is negotiated back to a prior party, the ordinary rule is that the
liabilities of the intermediate parties are extinguished as regards that party, in order to
prevent circuity of action: it would be futile to allow M to sue N, when N, upon paying, could
immediately sue M as a prior endorser. The chain cancels out.

But that rule presupposes that the re-acquiring party was himself liable to the
intermediate parties. Where his original endorsement was “without recourse”, he never
assumed any liability towards them, no circuity can arise, and the reason for the rule
disappears. On re-acquiring the instrument he holds it with all the rights of a holder and may

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enforce it against every intermediate endorser. This is the practical importance of the words
“sans recours”.

Section 53 — Holder Deriving Title from Holder in Due Course

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.

Section 53 embodies the shelter principle. Once an instrument passes through the hands
of a holder in due course, its title is cleansed of prior defects, and a subsequent transferee
steps into the shoes of the holder in due course and takes those rights, even though he
himself may lack one or more of the attributes required by section 9 — for example, even if
he had notice of the original fraud, or took the instrument after maturity, or took it as a gift.

The rationale is commercial: unless the holder in due course could pass on the full value of
his title, the marketability of the instrument in his hands would be destroyed, and the
protection given to him by section 9 would be worthless.

The section has one settled limitation, which examiners test. A person who was himself a
party to the fraud or illegality affecting the instrument cannot improve his own position
by taking the instrument back after it has passed through a holder in due course. A guilty
party cannot launder his own defective title through an innocent intermediary. Mere
knowledge of the fraud, without participation in it, does not disqualify the transferee.

Section 57 — Legal Representative Cannot Negotiate by Delivery Only

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.

The section is the logical completion of section 15. Since an endorsement is complete only
upon delivery, an endorsement written by a person who dies before delivering the
instrument is a wholly incomplete transaction. The legal representative takes the
instrument as part of the estate, but he cannot perfect the deceased’s inchoate endorsement
merely by handing the instrument over; if he wishes to negotiate it, he must endorse it
himself in his representative capacity. The endorsee who receives the instrument from the
deceased’s papers takes nothing.

Section 58 — Instrument Obtained by Unlawful Means or for Unlawful

Consideration

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

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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.

Section 58 states the general rule of defective title and its single great exception. A person
claiming through a finder, a thief, or one who obtained the instrument by offence, fraud or
unlawful consideration takes no right — unless he, or someone through whom he claims,
was a holder in due course. Read with section 53, the shelter principle then protects
everyone downstream.

58.1 The absolute limit: forgery

Section 58 cures defects of title. It does not, and cannot, cure the absence of title. A forged
signature is a complete nullity in law: it is not the signature of the person whose name is
written, it conveys nothing, and no title can be founded upon it. The maxim applies without
exception — a forgery is a nullity, and even a holder in due course acquires nothing from it.

The distinction to be worked in a problem is therefore between (i) an instrument genuinely

signed but obtained by fraud, coercion or unlawful means — where a holder in due course
succeeds; and (ii) an instrument bearing a forged signature — where even the most
innocent holder in due course fails against the person whose signature was forged. Statutory
qualifications exist (s. 41 protects the holder against an acceptor where an endorsement is
forged; s. 42 covers the fictitious drawer; ss. 85 and 89 protect the paying banker; s. 131
protects the collecting banker), but none of them makes the person whose signature was
forged liable upon it.

Section 59 — Instrument Acquired After Dishonour or When Overdue;

Accommodation Note or Bill

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: 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 enabling some party thereto to raise
money thereon, may recover the amount of the note or bill from any prior party.

59.1 The general rule

One who acquires an instrument after dishonour with notice, or after maturity, takes it
subject to equities — he acquires only the rights of his transferor, and no better, in
accordance with nemo dat quod non habet. Maturity is the point at which the instrument

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ceases to be current; a person who takes stale paper is put on inquiry as to why it remains
unpaid.

59.2 The accommodation proviso

The proviso is the exception that problem questions are built on. Its rationale is that the
absence of consideration in an accommodation bill is not a defect of title or an equity
attaching to the instrument at all — it is the very nature and purpose of the instrument.
An accommodation bill exists precisely so that the accommodated party may raise money
on it. It would defeat that purpose if the holder for value were met with the answer that no
consideration ever passed between the original parties. Accordingly, a person who in good
faith and for consideration becomes the holder of an accommodation instrument after
maturity may nonetheless recover from any prior party.

Note the conditions carefully: the holder must have taken it in good faith and for
consideration, and the instrument must have been made, drawn or accepted without
consideration, for the purpose of enabling some party to raise money on it.

A note on Brooks v Mitchell

A related question arises with demand paper. In Brooks v Mitchell (1841) 152 ER 7 it was
argued that a bill or note payable on demand must not be kept locked up for an unreasonable
time, and that one taking it long afterwards takes it overdue. Parke B held that a promissory
note payable on demand could not be treated as overdue merely by lapse of time so long as
payment had not been demanded, because such a note “is intended to be a continuing
security”. A demand note is thus not “overdue” for the purposes of section 59 until demand
is made and refused. (Analysed in Part IV.)

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PART III — SUPPLEMENTARY SECTIONS

Other provisions referred to in the syllabus and course resources

The provisions below are not among those specifically listed for concentrated study, but
they appear in the prescribed units, in the slide material, or are structurally necessary to
work the problem questions. They are stated compactly for reference and cross-citation.

Unit 1 — Definitional and foundational provisions

SECTION SUBSTANCE

s. 1 Extent and commencement; saving of local usage relating to instruments in

an oriental language — the statutory basis for the hundi.

s. 10 Payment in due course — payment in accordance with the apparent tenor

of the instrument, in good faith and without negligence, to a person in
possession under circumstances not affording reasonable ground for
believing he is not entitled. This is the gateway to the paying banker’s
protection.

s. 11 Inland instrument — drawn or made in India and made payable in, or

drawn upon a person resident in, India.

s. 12 Foreign instrument — any instrument not so drawn, made or payable. The

distinction governs the necessity of protest.

s. 14 Negotiation — when a promissory note, bill or cheque is transferred to any

person so as to constitute that person the holder thereof.

s. 18 Where the amount is stated differently in figures and words, the amount
stated in words shall be the amount undertaken or ordered to be paid.

s. 19 Instruments payable on demand — where expressed to be so payable, or

where no time for payment is specified.

Unit 2 — Negotiation and endorsement

SECTION SUBSTANCE

s. 46 Delivery — the making, acceptance or endorsement of an instrument is

completed by delivery, actual or constructive.

s. 47 Negotiation by delivery — a bearer instrument is negotiable by delivery

alone.
s. 48 Negotiation by endorsement — an order instrument is negotiable by the
holder by endorsement and delivery.
s. 49 A holder taking under a blank endorsement may, without signing, convert it
into an endorsement in full.

s. 51 Who may negotiate — every sole maker, drawer, payee or endorsee, or all of
several jointly, may endorse and negotiate.

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SECTION SUBSTANCE

s. 55 Conversion of an endorsement in blank into an endorsement in full.

s. 56 Partial endorsement — an endorsement purporting to transfer only a part

of the amount does not operate as a negotiation.

s. 60 An instrument may be negotiated until payment or satisfaction by the maker,

drawee or acceptor at or after maturity.

Unit 3 & 4 — Cheques, crossing and banker protection

SECTION SUBSTANCE

ss. 31, 32 Liability of the drawee of a cheque to the drawer for wrongful dishonour;
liability of maker and acceptor.

s. 85 Protection of the paying banker on an order cheque endorsed by or on

behalf of the payee, and on a bearer cheque — “once a bearer cheque, always
a bearer cheque”.

s. 89 Protection where a cheque or draft has been materially altered but the
alteration is not apparent, and payment is made in due course.

s. 118 Presumptions as to consideration, date, time of acceptance, time of transfer,

order of endorsements, stamp, and that the holder is a holder in due course
(s. 118(g)).

s. 123 General crossing — two transverse parallel lines, with or without the words
“and company”; payment only through a banker.

s. 124 Special crossing — the name of a banker across the face; payable only to
that banker or his agent for collection.

s. 125 Who may cross, and when a crossing may be added after issue.

s. 126 Payment of a crossed cheque — the banker must pay only to a banker
(general) or to the named banker (special).

s. 127 Payment of a doubly crossed cheque — the banker must refuse payment
unless the second crossing is to an agent for collection.

s. 128 Payment in due course of a crossed cheque discharges the paying banker.
s. 129 Liability of the banker paying a crossed cheque otherwise than in accordance
with ss. 126–128.

s. 130 A crossing is a material part of the cheque and may not be obliterated.

s. 131 Statutory protection of the collecting banker who, in good faith and without
negligence, receives payment for a customer of a crossed cheque.

s. 131A Application of the crossing provisions to drafts.

s. 138 Dishonour of a cheque for insufficiency of funds — the penal provision, with
ss. 139–147 governing presumption, notice, limitation and compounding.
Standard Chartered Bank v State of Maharashtra, (2016) 6 SCC 275 is prescribed for the
crossing and dishonour topics, and is digested in Part IV.

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Units 5 & 6 — Presentment, dishonour, liability and discharge

SECTION SUBSTANCE

ss. 61–65 Presentment for acceptance, for sight, and for payment; hours and place of
presentment.
ss. 91–93 Dishonour by non-acceptance and non-payment; notice of dishonour.

ss. 99–104A Noting and protest; protest for better security; foreign bills must be
protested.

ss. 105–107 Reasonable time for giving notice of dishonour.

ss. 108–116 Acceptance and payment for honour; drawee in case of need; reference in
case of need.

ss. 120–122 Estoppels — against denying the original validity of the instrument, the
capacity of the payee to endorse, and the signature or capacity of prior
parties.

ss. 82–90 Discharge from liability — by cancellation, release, payment, and by allowing
more than 48 hours to accept.

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PART IV — CASE LAW DIGEST

Every authority analysed in F.I.L.A.C. form

“Precedents identified with citation and applied to the hypothetical problem.” — CIA-3 rubric, highest
band

CASE 1 · R. Pillai v S. Ayyar

(1920) 43 Mad 816 | Section 6 — “Cheque” must be drawn on a banker

F. Facts
A District Board kept its funds not with a bank but in a Government Treasury. Whenever
the Board needed to withdraw money it issued written orders on the Treasury drawn in the
form of a cheque. The legal character of these instruments came into question: were they
cheques within the meaning of section 6 of the Negotiable Instruments Act, 1881, or were
they something else?

I. Issue
Whether an order drawn upon a Government Treasury, though drawn in the form of a
cheque, is a cheque within section 6 — which in turn depends on whether a Treasury is a
“banker” within section 3.

L. Law
Section 6 defines a cheque as a bill of exchange drawn on a specified banker and not
expressed to be payable otherwise than on demand. Section 3 defines “banker” inclusively.
Section 5 defines a bill of exchange, which requires only that the order be addressed to “a
certain person”, not necessarily a banker.

The working test adopted was Hart’s definition: “a banker is one who in the ordinary
course of his business honours cheques drawn upon him by persons from and for whom he
receives money on current accounts.” The two elements are (i) receiving money on current
account, and (ii) honouring cheques drawn against it in the ordinary course of business.

A. Analysis
Ayyar J applied the Hart test to the Treasury. A Government Treasury does not carry on the
business of receiving money on current account from members of the public, nor does it
honour cheques drawn upon it by such persons in the ordinary course of a banking business.
It is a department of government holding public funds under statutory and departmental
rules, not a commercial institution offering banking services. The learned Judge accordingly
held that “a Treasury is not a bank”.

It followed that the essential element of section 6 — a drawee who is a banker — was
absent. The form of the instrument was irrelevant; the Act looks to substance. But the
instruments did not thereby become nullities. They satisfied every requirement of section
5: they were in writing, contained an unconditional order signed by the maker, directed a

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certain person (the Treasury Officer) to pay a certain sum of money only, to a certain person.
They were therefore bills of exchange.

C. Conclusion & Ratio

The orders were held not to be cheques under section 6 but bills of exchange under section
5.

Ratio: the identity of the drawee as a “banker”, tested by the Hart definition, is a
jurisdictional fact for section 6. Drawing an instrument in the form of a cheque cannot make
the drawee a banker. Consequently the specialised law of cheques — crossing, statutory
protection of the paying and collecting banker, and section 138 — has no application to such
an instrument, whereas the general law of bills, including the requirement of acceptance and
the allowance of days of grace, does.

CASE 2 · Brooks v Mitchell

(1841) 152 ER 7, per Parke B | Sections 9 and 59 — when demand paper becomes “overdue”

F. Facts
A promissory note was made in 1824. It was payable on demand. The defendant received
the note in 1838 — some fourteen years later. He acted in good faith and gave value for it.
In an action against him to recover the note, it was argued that a bill or note payable on
demand must not be kept locked up for an unreasonable length of time, and that after so
long an interval the instrument must be treated as overdue, so that the defendant took it
subject to all equities.

I. Issue
Whether a promissory note payable on demand becomes overdue by the mere effluxion of
time, so as to deprive a subsequent taker for value and in good faith of the status of a holder
in due course.

L. Law
Section 9 requires a holder in due course to have obtained the instrument before the
amount mentioned in it became payable. Section 59 provides that one who acquires an
instrument after maturity has only the rights of his transferor. The question is what
constitutes “maturity” for an instrument payable on demand — there being no fixed date on
its face. Section 19 declares such instruments payable on demand; section 22 allows no
days of grace on them.

A. Analysis
Parke B reasoned from the commercial function of a demand note. Unlike a time bill, which
is drawn to be met on a fixed day and which therefore becomes stale the moment that day
passes, a note payable on demand is not intended to be presented immediately. It is, in his
words, “intended to be a continuing security” — it operates as a standing obligation which

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the holder may call up whenever he chooses, and which may properly remain outstanding
for years while interest runs.

It follows that the event which makes such a note overdue is not the passage of time but the
making of a demand and its refusal. Until demand, there is nothing to put a taker on
inquiry: the instrument is not dishonoured, no equity has arisen, and no party has defaulted.
The defendant, having taken the note in good faith and for value at a time when no demand
had been made, was therefore a holder in due course notwithstanding the fourteen-year
interval.

The contrast with a cheque should be noted. Although a cheque is also payable on demand,
it is given for immediate payment and is not intended for circulation; a cheque becomes stale
after a reasonable period (in Indian banking practice, three months) and a person taking a
stale cheque is put on inquiry.

C. Conclusion & Ratio

The defence failed. A promissory note payable on demand is not overdue merely because it
has been outstanding for a long time; it becomes overdue only when payment has been
demanded and refused.

Ratio: a demand promissory note is a continuing security; lapse of time alone does not
constitute maturity for the purposes of sections 9 and 59.

CASE 3 · Hogarth v Latham & Company

(1878) 3 QBD 643 | Section 9 — the instrument must be complete and regular on its face

F. Facts
The plaintiff took two bills of exchange which, at the time he received them, bore no
drawer’s name. He completed the bills himself by filling in the drawer’s name, and then
sued upon them. He knew, when he took them, that the bills had been accepted while no
drawer’s name appeared upon them.

I. Issue
Whether a person who takes a bill knowing it to be incomplete in a material particular, and
who himself supplies the omission, can claim the protection of a holder in due course and
recover upon the bill.

L. Law
Section 9 requires that a holder in due course take the instrument without sufficient cause
to believe that any defect existed in the title of his transferor; the settled gloss upon this
requirement is that the instrument must be complete and regular on its face. Section 20
permits the completion of an inchoate stamped instrument, but only where the signatory
has delivered it for that purpose, and the authority so conferred is only prima facie.

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A. Analysis
The court fastened upon the plaintiff’s knowledge. Where a bill is presented for acceptance
without a drawer’s name, the acceptor’s assent is given to a document whose complete tenor
is not yet fixed. A person who takes such a bill with knowledge of the omission cannot say
that he relied upon the face of the instrument, for the face of the instrument was incomplete
in one of its most material particulars — the identity of the very party whose order the
acceptor undertook to obey.

The court stated the principle bluntly: “Anybody who takes such an instrument as this,
knowing that when it was accepted the bill had no name of any drawer upon it, takes it at
his peril.” The knowledge that the instrument was materially incomplete when accepted was
itself sufficient cause to inquire; having failed to inquire, the plaintiff could not claim to have
taken without notice of defect.

The requirement of regularity is not confined to blanks. An instrument may also be

incomplete or irregular because it is not properly dated or stamped, or because an
endorsement does not correspond exactly with the name of the payee. But it should be
noted, by way of limitation, that a bill of exchange does not require acceptance in order to
be complete and regular — the absence of an acceptance is not an irregularity on the face of
the bill.

C. Conclusion & Ratio

The plaintiff could not recover upon the bills.

Ratio: a material blank on the face of an instrument, known to the taker, destroys the
“complete and regular” requirement of holder-in-due-course status; the taker completes it
at his own peril.

CASE 4 · Miller v Race

(1758) 1 Sm LC 524 | Section 9 — good faith as honesty in fact; currency of negotiable paper

F. Facts
A bank note was sent through the general post. The mail was robbed and the note was taken
and carried away by the robber. The very next day the same note came into the hands of the
plaintiff, an innkeeper. He received it for full and valuable consideration, in the usual course
of his business, and without any notice that the note had been taken out of the mail. The
bank, having been alerted to the robbery, refused payment, and the innkeeper sued.

I. Issue
Whether a person who takes a stolen bank note honestly, for full value, and in the ordinary
course of business, acquires a good title against the true owner from whom it was stolen.

L. Law
The case is the fountainhead of the doctrine now embodied in sections 9, 53 and 58 of the
Act: an instrument obtained by an offence confers no title on the offender or those claiming

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through him, unless the claimant is a holder in due course, in which case he takes free of the
defect. The general rule nemo dat quod non habet yields to the necessity of commercial
currency.

A. Analysis
The court reasoned that bank notes are treated in the ordinary course of business as money,
not as ordinary chattels or choses in action. If a person taking such an instrument honestly
and for value could be defeated by a defect in his transferor’s title, no one could safely accept
currency in trade, and the whole utility of negotiable paper would be destroyed.

The court then examined the innkeeper’s conduct against the standard of good faith
understood as honesty in fact. It observed that here an innkeeper took the note bona fide,
in his business, from a person who made the appearance of a gentleman; that there was no
pretence or suspicion of collusion with the robber; and that he took it for full and valuable
consideration and in the course of business. Nothing in the circumstances gave him cause to
suspect.

The importance of this standard is that it is subjective: it asks whether the taker was in fact
honest, and does not impose a duty of investigation. As will appear from Gill v Cubitt, this
permissive standard was later found to be too generous to careless takers, and the law
moved towards requiring reasonable caution — a movement which section 9 reflects in the
words “without having sufficient cause to believe”.

C. Conclusion & Ratio

The innkeeper was entitled to recover on the note; his honest taking for value in the ordinary
course of business gave him a good title notwithstanding the robbery.

Ratio: negotiable instruments pass as currency; a bona fide taker for value without notice
obtains a good title even from a thief. Good faith, on this authority, means honesty in fact.

CASE 5 · Gill v Cubitt

(1824) 3 B & C 466 | Section 9 — good faith as due care and caution

F. Facts
A bill broker had standing instructions to his assistant to discount bills for anyone whose
features were familiar to him. A stolen bill was brought to the office by a person of
respectable appearance whose features were familiar. The assistant discounted the bill
without inquiring the man’s name or address, and without making any inquiry as to how he
came by the bill. The true owner sued, and the question was whether the broker had taken
the bill in good faith.

I. Issue
Whether a taker who is subjectively honest, but who omits the inquiries a prudent man of
business would make, can be said to have taken the instrument in good faith.

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L. Law
The point at issue is the content of the good-faith requirement now expressed in section 9
— that the holder must take “without having sufficient cause to believe that any defect
existed in the title of the person from whom he derived his title”. The phrase is objective in
form: it asks not merely what the holder believed, but whether the circumstances furnished
sufficient cause for belief.

A. Analysis
The court declined to follow the purely subjective standard of Miller v Race. It reasoned
that the courts have a duty to lay down such rules as will tend to prevent fraud and robbery
and not to give encouragement to them. A rule which protects a discounter who asks no
questions of a stranger offering valuable paper positively assists the thief, because it
guarantees him a market.

From this the court derived the requirement that no person should take a security of this
kind from another without using reasonable caution. On the facts, the omission to ask even
the name and address of a stranger presenting a bill for discount fell below that standard.
Familiarity of features is no substitute for inquiry; it establishes nothing about title.

The two standards should be reconciled rather than treated as irreconcilable. Miller v Race
protects the taker who has no reason to suspect; Gill v Cubitt denies protection to the taker
who had reason to suspect and deliberately or negligently refrained from inquiring. Section
9 adopts the latter formulation, and it is the section 9 formulation — “sufficient cause to
believe” — that must be applied in Indian problems. Gross negligence is evidence from
which want of good faith may be inferred, though it is not conclusive.

C. Conclusion & Ratio

The broker was held not to have acted in good faith and could not recover.

Ratio: good faith imports reasonable caution; a taker who neglects the inquiries a prudent
man of business would make cannot claim the status of holder in due course.

CASE 6 · Arab Bank Ltd v Ross

[1952] 2 QB 216 (decided 1954 in the Indian texts) | Section 9 — regularity of endorsement;
misdescription of the payee

F. Facts
The plaintiff bank discounted for value two promissory notes given by the defendant. The
notes had been made out in the name of “F. and F.N. Co.” as payees. One of the partners, in
fraud of the others, endorsed the notes to the bank, but signed the endorsement as “F. and
F.N.” — the word “Company” being omitted. The bank sued the maker as a holder in due
course.

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I. Issue
Whether an endorsement which omits a word from the payee’s name renders the
instrument irregular on its face, so as to deny the endorsee the status of holder in due
course; and whether the endorsee may nevertheless recover on some other footing.

L. Law
Section 9 requires that the instrument be complete and regular on its face. Regularity is
distinct from validity: an endorsement may be perfectly valid as a transfer and yet irregular
in appearance. Section 58 bars a claimant who is not a holder in due course only where the
instrument was lost or obtained by offence, fraud or unlawful consideration — the party
alleging such a defect must prove it.

A. Analysis
The court held that the omission of the word “Company” was sufficient to give rise to
reasonable doubt whether the payee and the endorsers were necessarily the same person.
A bank taking the notes was confronted, on the face of the documents, with a payee
described one way and an endorser describing himself another way. Because a discrepancy
in the description of the payee is precisely the kind of discrepancy that ordinarily signals a
defective chain of title, the instruments were not complete and regular on the face of them,
and the bank could not succeed as holders in due course.

That, however, was not the end of the matter, and this is the practically important part of
the decision. Failing to be a holder in due course does not automatically mean failing to
recover. It means only that the holder loses the special protection against defects; he
remains a holder for value, entitled to sue on the instrument unless the defendant
establishes a defect in the title of some previous party. Here the defendant maker failed to
show any such defect. The plaintiffs were therefore permitted to recover on that ground.

C. Conclusion & Ratio

The bank was not a holder in due course, because the endorsement was irregular; but it was
permitted to recover because the defendant had failed to show any defect in the title of any
previous party.

Ratio: (i) an endorsement that does not correspond exactly with the payee’s name as
written on the instrument makes the instrument irregular on its face; (ii) loss of holder-in-
due-course status is not loss of the right to sue — it merely re-opens the defences, and the
burden of establishing a defect remains on the party asserting it.

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CASE 7 · Acheson v Fountain

(1723) 1 Stra 557 | Section 16 — endorsement in full without the words “or order”

F. Facts
An instrument was endorsed in the form “pay the contents to L.A.” The words “or order”
were not added. The question arose whether L.A. could further negotiate the instrument, or
whether the omission of the words of negotiability confined payment to L.A. personally.

I. Issue
Whether an endorsement in full naming an endorsee, but omitting the words “or order”,
restricts further negotiation by that endorsee.

L. Law
Section 16(1) provides that where the endorser adds to his signature a direction to pay the
amount to, or to the order of, a specified person, the endorsement is “in full”. Section 13,
Explanation (i) provides that an instrument expressed to be payable to a particular person
is payable to order unless it contains words prohibiting transfer or indicating an intention
that it shall not be transferable. Section 50 permits restriction only by express words.

A. Analysis
The court held that L.A. could have endorsed the instrument to another, and that the party
liable could not object to any such endorsement. The reasoning rests on the presumption of
negotiability. Negotiability is the normal incident of these instruments; its exclusion is the
exception, and the exception must be expressed. Silence is not restriction. The omission of
the words “or order” is merely a shorter form of the same thing, not a prohibition of transfer.

The modern statement of the rule is that an endorsement to “A” is equivalent to an

endorsement to “A or order”. To restrict negotiation, the endorser must use express words
of restriction — “Pay C only”, “Pay C for my use”, “Pay C or order for the account of B”, “The
within must be credited to C” — as the illustrations to section 50 demonstrate.

C. Conclusion & Ratio

L.A. was entitled to endorse the instrument further, and the party liable could not object.

Ratio: negotiability is presumed; an endorsement in full without the words “or order” is not
a restrictive endorsement, and restriction requires express words.

CASE 8 · Punjab and Sindh Bank v Vinkar Sahakari Bank Ltd

AIR 2001 SC 3641 : (2001) 7 SCC 721 : 2002 CrLJ 93 | Sections 6 and 17 — demand draft as a
cheque; the holder’s election

F. Facts
The question before the Supreme Court was whether a demand draft could be construed
as a cheque for the purposes of the Act, the complainant bank having elected to treat the
instrument as a cheque and having proceeded accordingly.

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I. Issue
Whether a demand draft answers the characteristics of a cheque under section 6; and, if the
instrument is capable of being construed either as a promissory note or as a bill of exchange,
whether the holder may elect how to treat it under section 17.

L. Law
Section 6 — a cheque is a bill of exchange drawn on a specified banker and payable on
demand. Section 5 — bill of exchange. Section 4 — promissory note. Section 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.”

A. Analysis
The Court held that a demand draft qualifies the characteristics of a cheque. A demand draft
is an order by one branch or office of a bank upon another to pay a specified sum on demand;
it is drawn upon a banker and is payable on demand, and thus answers section 6 in
substance. The peculiarity of a draft is that the drawer and the drawee are the same
institution, which is what generates the ambiguity — such an instrument can be viewed as
an undertaking by the bank (a promissory note) or as an order by the bank upon itself (a bill
of exchange).

The Court resolved the ambiguity by resort to section 17. It observed that even if it were
possible to construe the draft either as a promissory note or as a bill of exchange, the law
has given the option to the holder to treat it as he chooses. The Court then emphasised the
finality of the election: “the instrument shall be thenceforward treated accordingly.” This
means that once the holder — in that case the complainant bank — has elected to treat the
instrument as a cheque, it cannot but be treated as a cheque thereafter.

The practical consequence is substantial: by electing to treat a draft as a cheque, the holder
brings into play the entire cheque regime, including the crossing provisions and the penal
consequences of dishonour under section 138.

C. Conclusion & Ratio

A demand draft possesses the characteristics of a cheque; and by virtue of the holder’s
election under section 17, once so treated it must thereafter be treated as a cheque.

Ratio: section 17 confers on the holder a right of election between the possible
characterisations of an ambiguous instrument, and that election, once made, binds all
parties thenceforward.

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CASE 9 · Hitenbhai Parekh, Proprietor v State of Gujarat

2010 CrLJ (NOC) 455 Guj : 2009 GLH (3) 742 | Dishonour of cheque — proof of legally
enforceable debt

F. Facts
The complainant and the accused had business relations under which pharmaceutical raw
materials were supplied by the appellant. A cheque given by the respondent was
dishonoured by the bank for insufficiency of funds. Statutory notice was issued; upon
non-compliance, a complaint was filed.

In reply to the statutory notice, the accused denied issuance of the cheque, alleged misuse
of the cheque, and contended that the goods sold and supplied to her firm had been returned
and that there were other disputes between the parties. During the trial no witness was
examined in defence. The accused relied upon a delivery challan under which the goods
were said to have been sent back through a transporter to the complainant, and upon
statements made by the complainant in cross-examination, putting up the defence that the
complainant had failed to prove an enforceable debt against her.

I. Issue
Whether the complainant had established that the dishonoured cheque was issued in
discharge of a legally enforceable debt or liability, and whether the accused had discharged
the burden of rebutting the statutory presumption in her favour by mere assertion and
documentary reliance without leading defence evidence.

L. Law
Section 138 penalises the dishonour of a cheque for insufficiency of funds where the cheque
was drawn for the discharge, in whole or in part, of a legally enforceable debt or other
liability. Section 139 raises a presumption that the holder received the cheque for the
discharge of such a debt, and section 118(a) presumes consideration. Both presumptions
are rebuttable, but the burden of rebuttal lies on the accused and must be discharged on the
preponderance of probabilities by cogent material.

A. Analysis
The trial Court relied upon the oral and documentary evidence produced by the
complainant. It came to the conclusion that the cheque was issued against the invoice for
the supply of goods worth Rs 1,48,668, to which other amounts debited to her account were
added, and that the total amount of the cheque, Rs 2,08,074, was proved to be due by the
invoice, the debit notes and the other charges.

The defence, by contrast, rested on assertion. The accused examined no witness. The
delivery challan on which she relied showed at most that some goods had moved, but did
not establish that the entire consideration for the cheque had failed, nor did it account for
the debit notes and other charges which made up the balance of the cheque amount. Denial
of issuance and an allegation of misuse, unsupported by evidence, cannot displace the

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presumptions under sections 118(a) and 139; nor can reliance on stray answers in cross-
examination substitute for proof of the defence case.

The correct analytical sequence is therefore: (i) the complainant proves issuance,
presentment, dishonour, notice and non-payment; (ii) the presumptions under sections
118(a) and 139 then arise in his favour; (iii) the evidential burden shifts to the accused to
bring material on record making the non-existence of the debt probable; (iv) if she fails, the
presumption stands and conviction follows.

C. Conclusion & Ratio

The trial Court, on the oral and documentary evidence, recorded a conviction of the
accused.

Ratio: where the complainant establishes the debt by invoices, debit notes and account
particulars, and the accused leads no defence evidence, the statutory presumptions under
sections 118(a) and 139 remain undisplaced and the offence under section 138 is made out.

CASE 10 · Standard Chartered Bank v State of Maharashtra

(2016) 6 SCC 275 | Section 138 — territorial jurisdiction and the payee’s bank branch

F. Facts
The case arose out of proceedings relating to the dishonour of cheques and the question of
which criminal court could try the complaint, at a time when conflicting practices had grown
up between the place where the cheque was drawn, the place where it was presented, the
place where the statutory notice was issued, and the place where the drawer resided.

I. Issue
Where a complaint under section 138 of the Negotiable Instruments Act, 1881 is to be filed
and tried — and consequentially, how multiple complaints arising from cheques issued as
part of a single transaction are to be dealt with.

L. Law
Section 138 with sections 142 and 142A of the Act, as amended by the Negotiable
Instruments (Amendment) Act, 2015, which fixed jurisdiction with reference to the branch
of the payee’s bank where the cheque is delivered for collection (or, in the case of over-the-
counter presentation, the branch of the drawee bank), and provided for the transfer and
consolidation of complaints.

A. Analysis
The decision gives effect to the legislative object of the 2015 amendment, which was to end
forum-shopping and the harassment of drawers by complaints filed in scattered
jurisdictions, while at the same time protecting the payee, who should not be compelled to
litigate at the drawer’s convenience. By anchoring jurisdiction to the branch of the bank
where the payee presents the cheque for collection, the Act supplies a single, ascertainable
and commercially sensible forum.

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The consolidation principle follows from the same object: where several cheques arising out
of the same transaction are dishonoured, all complaints are to be tried together by the court
of competent jurisdiction, so that a single course of dealing does not generate a multiplicity
of prosecutions in different places.

For the purposes of Unit 3 and Unit 4 the case is significant because it shows how the
collecting branch — the branch of the payee’s bank — has become the pivot of the section
138 regime, complementing the substantive protection given to the collecting banker by
section 131.

C. Conclusion & Ratio

Jurisdiction under section 138 lies with the court within whose local limits the branch of the
payee’s bank where the cheque was delivered for collection is situated, and complaints
arising from the same transaction are to be tried together.

Ratio: the place of presentation for collection by the payee fixes the forum for a prosecution
under section 138.

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PART V — PROBLEM QUESTIONS

Twenty specimen answers in the prescribed F.I.L.A.C. format

Each answer below follows the structure of the specimen circulated on Google Classroom:
the facts are restated analytically (including each party’s defence), the issues are framed as
questions of law, the law states the section with its content and not merely its number, the
analysis applies that law to every relevant factual detail and adjudicates each defence
separately, and the conclusion states plainly whose claim is valid and what the remedy is.

PROBLEM 1 · Accommodation bill; transfer after maturity

Sections 43 and 59 — accommodation bills and post-maturity transfers

A draws a bill of exchange payable to himself on X, who accepts the bill without consideration
purely to accommodate A. A transfers the bill to P for good consideration. P subsequently files a
claim against X and A to recover the amount due on the bill. X denies liability, contending that
the instrument was accepted without consideration. A further contends that P acquired the bill
after its maturity date and is therefore barred from recovering the amount. Analyse the validity
of the claims of P, X and A.

F. Facts
The facts present a classic negotiable instruments dispute involving an accommodation
bill of exchange. A draws a bill of exchange payable to himself upon X. X accepts the bill
purely to accommodate A, meaning that X receives no monetary consideration or value
whatever for doing so. A subsequently transfers and negotiates the bill to P for good and
valuable consideration. Upon non-payment, P initiates proceedings against both the
acceptor X and the drawer A to recover the amount due on the instrument.

Acceptor X’s defence: X denies liability on the foundational ground that the bill was
accepted without consideration (nudum pactum), arguing that an instrument lacking
consideration creates no enforceable contractual obligation.

Drawer A’s defence: A contends that P acquired the bill after its date of maturity and is
consequently barred from recovering the amount due under the instrument.

I. Issues
Issue 1: Whether an accommodation acceptor who accepts a bill without consideration can
set up the defence of lack of consideration against a holder who has given valuable
consideration.

Issue 2: Whether the negotiation of an accommodation bill after its maturity deprives a
holder for value of the right to recover against prior parties.

L. Law
Section 43 provides that a negotiable instrument made, drawn, accepted, endorsed or
transferred without consideration creates no obligation of payment between the parties to

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the transaction; but that if any such party has transferred the instrument to a holder for
consideration, such holder and every subsequent holder deriving title from him may recover
the amount due from the transferor for consideration or from any prior party.

Section 59 provides that a holder who acquires an instrument after dishonour with notice,
or after maturity, has only the rights of his transferor — subject to the proviso that a person
who in good faith and for consideration becomes the holder, after maturity, of a note or bill
made, drawn or accepted without consideration for the purpose of enabling some party to
raise money on it, may recover the amount from any prior party.

The general principle of accommodation bills: an accommodation bill is an instrument

signed, drawn, accepted or endorsed by a person without receiving value, solely to lend his
name and credit to another so that the latter may raise funds. Between the accommodation
party and the accommodated party no obligation arises; as against a holder for value the
accommodation party is fully bound and cannot plead absence of consideration.

A. Analysis
Application of section 43. The general rule operates first between the immediate parties:
no consideration passed between A and X, and therefore A could never have enforced the
bill against X directly. But the exception in the second limb of section 43 governs the moment
the instrument leaves A’s hands for value. When A negotiated the bill to P for valuable
consideration, P became a holder for value. Section 43 then confers upon P an express
statutory right to recover the amount due on the instrument from the transferor for
consideration (A) and from any prior party thereto, which necessarily includes the
accommodation acceptor X. X’s want of consideration is a defence available only against A;
it is not available against P.

Application of section 59. The general rule under section 59 is an application of nemo dat
quod non habet: a person acquiring an instrument after maturity takes it subject to all
defects of title and equities that affected his transferor. But the proviso carves
accommodation instruments out of that rule as regards equities. The rationale is that the
absence of consideration in an accommodation bill is not a defect of title or an overdue
equity at all — it is the very nature and purpose of the instrument. The bill exists precisely
so that the accommodated party may raise money on it; to allow want of consideration to be
pleaded against a post-maturity holder for value would defeat the object of the transaction.
P having taken in good faith and for consideration, the post-maturity transfer does not
defeat him.

Adjudication of X’s defence. X accepted the bill to accommodate A. While X owed no duty
to A, X voluntarily lent his credit to the bill and put it into circulation as apparently good
paper. Once P gave consideration for it, section 43 fastened liability upon X. X’s plea of want
of consideration is legally unsustainable and invalid.

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Adjudication of A’s defence. A received valuable consideration from P upon transferring

the instrument, and cannot rely on the post-maturity transfer to evade liability, the proviso
to section 59 preserving P’s right. Moreover, as the primary beneficiary of the
accommodation and as drawer and endorser, A remains directly liable under sections 30
and 35. A’s contention is invalid.

C. Conclusion
Both defences fail. The claims of X and A are wholly invalid; P’s claim is valid.

P is a holder for consideration and is legally entitled to recover the full amount due on the
bill of exchange, together with applicable interest, jointly and severally from the drawer A
and the accommodation acceptor X.

PROBLEM 2 · Maturity — 120 days after date falling on a public holiday

Sections 22, 23, 24 and 25 — computation of maturity

A bill of exchange dated 1st June 2005, payable 120 days after date, is presented for payment.
The holder claims payment on 1st October 2005. The drawer denies liability on that date,
contending that the 120-day period plus 3 days of grace falls on 2nd October 2005 and that
presentation on 1st October is therefore premature. The holder counter-claims that since 2nd
October is a declared public holiday, the instrument legally falls due on the preceding business
day.

F. Facts
A bill of exchange bears the date 1st June 2005 and is payable 120 days after date. The holder
presents it for payment on 1st October 2005.

Drawer’s defence: presentment is premature, because on a correct computation the 120

days together with three days of grace expire on 2nd October 2005.

Holder’s contention: 2nd October is a declared public holiday (Gandhi Jayanti), and
therefore the instrument matures on the next preceding business day, namely 1st October
2005.

I. Issues
How the date of maturity of a bill payable a stated number of days after date is to be
computed; and what the legal consequence is when the day so arrived at is a public holiday.

L. Law
Section 24 — in calculating the date at which an instrument made payable a stated number
of days after date is at maturity, the day of the date shall be excluded.

Section 22 — every instrument not 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; that is, three
days of grace are added.

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Section 23 — governs computation where the period is expressed in months (not directly
applicable here, since the period is expressed in days, but relevant to complete the scheme).

Section 25 — when the day on which an instrument is at maturity is a public holiday, the
instrument shall be deemed to be due on the next preceding business day.

A. Analysis
Step 1 — exclude the day of the date (s. 24). 1st June 2005 is excluded from the
computation. Counting therefore begins on 2nd June.

Step 2 — count 120 days. June contributes 29 days (2nd to 30th June); July contributes 31;
August contributes 31; that totals 91. The remaining 29 days fall in September, bringing the
count to 120 on 29th September 2005.

Step 3 — add three days of grace (s. 22). Adding 3 days to 29th September gives 2nd
October 2005 as the nominal date of maturity. To this extent the drawer’s computation is
entirely correct, and the holder’s bare assertion that the bill fell due on 1st October is,
standing alone, wrong.

Step 4 — apply section 25. 2nd October is Gandhi Jayanti, a public holiday declared by the
Central Government. Section 25 provides that where the maturity date is a public holiday
the instrument is deemed due on the next preceding business day. The movement is
backwards, not forwards. The bill therefore matured on 1st October 2005.

Adjudication. The drawer’s arithmetic is right but his law is incomplete: he stops at section
22 and ignores section 25. The holder reaches the right destination by the right route — he
does not deny that the nominal maturity is 2nd October, but relies on the statutory
displacement worked by section 25. Presentment on 1st October was therefore made on the
true date of maturity and was not premature.

C. Conclusion
The holder’s claim is valid; the drawer’s claim is invalid.

The bill matured on 1st October 2005, and the holder was entitled to demand payment on
that day. Refusal on that date constitutes dishonour by non-payment, with the usual
consequences of notice of dishonour and recourse against the drawer and endorsers.

PROBLEM 3 · Striking out intermediate endorsements without consent

Sections 39 and 40 — suretyship and impairment of the endorser’s remedy

N is the holder of a bill of exchange payable to the order of P, bearing successive blank
endorsements from P, Q, R and S. N strikes out the endorsements made by Q and R without
obtaining S’s consent. When the bill is dishonoured, N files a claim against S. S denies liability,
contending that by striking out the endorsements of prior parties without his consent N
destroyed his remedy against prior parties who acted as principal debtors. N counter-claims that
as holder he has an absolute right to strike out intermediate endorsements.

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F. Facts
N holds a bill of exchange payable to the order of P. The bill bears successive endorsements
in blank by P, then Q, then R, then S, and has thus come to N. N strikes out — that is, cancels
— the endorsements of Q and R. He does so without obtaining S’s consent. Upon dishonour
of the bill at maturity, N sues S.

S’s defence: by cancelling the endorsements of Q and R, N destroyed the recourse S would
have had against them had S been compelled to pay; S is therefore discharged.

N’s contention: as the holder of an instrument endorsed in blank he has an absolute right
to strike out intermediate endorsements, since such endorsements are unnecessary to his
title.

I. Issues
Whether a holder who strikes out the endorsements of prior parties, without the consent of
a subsequent endorser, discharges that subsequent endorser from liability, and if so to what
extent.

L. Law
Section 39 recognises the suretyship structure of a negotiable instrument and permits a
holder who compounds with the acceptor to reserve expressly his rights against the other
parties.

Section 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.

The underlying principle is drawn from the law of suretyship (ss. 134–141, Indian Contract
Act, 1872): a surety who is deprived of the securities or remedies to which he would be
subrogated upon payment is discharged to that extent.

A. Analysis
The relationship between the endorsers. As between prior and subsequent endorsers,
the parties are not co-equal debtors. The prior endorsers Q and R stand as principal debtors
in relation to S; S, the subsequent endorser, stands as their surety. This is because if S had
been compelled to pay the holder, S would in turn have been entitled to recover the whole
amount from Q and R as parties prior to him. That right of recourse is the substance of S’s
position, and it is what makes his liability tolerable.

The effect of N’s act. N’s cancellation of the endorsements of Q and R extinguished their
liability upon the instrument. Since S’s recourse ran against Q and R precisely as endorsers,
the cancellation removed the parties against whom S could have proceeded. N thereby
destroyed, and did not merely impair, S’s remedy against prior parties.

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Application of section 40. The section is engaged by three elements, all present here: (i)
an act of the holder — N cancelled the endorsements; (ii) the act destroyed or impaired
the endorser’s remedy against a prior party — S lost his recourse against Q and R
entirely; and (iii) the act was done without the consent of the endorser — S was never
asked. The consequence prescribed by the section follows automatically: S is discharged “to
the same extent as if the instrument had been paid at maturity”. Since the destruction was
total, the discharge is total.

Adjudication of N’s counter-claim. N is right that a blank endorsement makes the

instrument payable to bearer and that intermediate endorsements are, for the purpose of
title, unnecessary; a holder need not derive title through them. But it does not follow that
the holder may cancel them at will. Title and liability are different things. Section 49 permits
the holder to convert a blank endorsement into a full one; nothing in the Act permits him to
obliterate parties’ liabilities to the prejudice of a surety. N’s asserted absolute right does not
exist.

C. Conclusion
S’s claim is valid; N’s claim is invalid.

S stands completely discharged from liability to N under section 40, N having destroyed
S’s remedy against the prior parties Q and R without S’s consent.

PROBLEM 4 · Finder of a bearer cheque; agent holding an unendorsed instrument

Section 8 — who is a “holder”

M finds a cheque payable to bearer lying on a public road, retains possession of it, and demands
payment from the drawer. In a separate instance, B, acting as agent for C, receives an unendorsed
instrument payable to C. When B attempts to enforce the instrument in his own name, the maker
denies liability, claiming B is not a “holder”. M and B counter-claim that physical possession
entitles them to recover the proceeds as legal holders.

F. Facts
First instance: M finds a cheque payable to bearer lying on a public road. He retains
possession of it and demands payment from the drawer.

Second instance: B, acting as an agent for his principal C, receives an instrument payable
to C. The instrument has not been endorsed to B. B attempts to enforce it in his own name
and the maker denies liability on the ground that B is not a holder.

Common counter-claim: M and B both contend that physical possession of a negotiable

instrument entitles the possessor to recover the proceeds as a legal holder.

I. Issues
Who qualifies as a “holder” entitled to sue in his own name under the Act; and specifically
whether mere physical possession, whether acquired by finding or by agency, confers that
status.

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L. Law
Section 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. Where the instrument is lost or
destroyed, its holder is the person so entitled at the time of such loss or destruction.

The definition imposes two cumulative requirements: entitlement to possession in one’s

own name, and entitlement to receive or recover the amount. Bare possession satisfies
neither.

Section 58 further bars a person claiming through a finder from receiving the amount due,
unless he or someone through whom he claims was a holder in due course.

A. Analysis
M — the finder. A cheque payable to bearer is, it is true, transferable by delivery, and the
bearer may be a holder. But delivery for this purpose means a transfer made with the
intention of negotiating the instrument (s. 46); a cheque that falls unnoticed on a public road
is not delivered to the person who picks it up. M’s possession is that of a finder, and a finder’s
possession is wrongful as against the true owner. He is therefore not entitled to possession
in his own name, and the first limb of section 8 fails at the threshold. The second limb fails
with it, since he can have no right to recover money on an instrument he is not entitled to
hold. Section 58 puts the matter beyond argument: no possessor claiming through a finder
may receive the amount due unless he is a holder in due course, and M, having given no
consideration and taken with obvious cause for suspicion, is plainly not one.

B — the agent. B’s possession is not wrongful; it is entirely lawful. But lawfulness is not the
test. B possesses the instrument on behalf of C, in a representative and not a personal
capacity. He is entitled to possession in C’s name, not in his own. Furthermore, the
instrument is payable to C and has not been endorsed to B. Under sections 15 and 48 the
property in an order instrument passes only by endorsement completed by delivery;
without an endorsement, no title has vested in B, and he has no right of action in his own
name. B may sue for C, on C’s behalf, or upon C endorsing the instrument to him; he cannot
sue as holder.

Adjudication of the common counter-claim. The proposition that physical possession

confers the status of holder is a misreading of the Act. Section 8 speaks of entitlement, not
of custody; and the closing words of the section, which treat the person entitled at the
moment of loss as continuing to be the holder even after he has lost possession, demonstrate
conclusively that possession is neither necessary nor sufficient.

C. Conclusion
The claims of M and B are invalid; the makers’ denials are valid.

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Neither M nor B qualifies as a “holder” under section 8. M is a finder in wrongful possession

and cannot enforce the cheque; B is an agent holding an unendorsed instrument and cannot
sue in his own name, though C, the payee, remains fully entitled.

PROBLEM 5 · Bill drawn in a fictitious name

Section 42 — acceptor of a bill drawn in a fictitious name

X draws a bill of exchange on Y, signing it in the fictitious name of Z, and makes it payable to the
order of Z. The bill is endorsed in the name of Z by the same hand that drew it and is accepted by
Y. M acquires the bill from X for value in good faith, becoming a holder in due course. When M
presents the bill for payment, Y refuses to pay, contending that the drawer Z is fictitious and the
bill is a nullity. M counter-claims that an acceptor cannot plead the fictitious nature of the
drawer against a holder in due course.

F. Facts
X draws a bill of exchange upon Y, but signs it as drawer in the fictitious name of Z, and
makes the bill payable to the order of Z. The first endorsement, purporting to be that of Z, is
written by the same hand that signed as drawer — that is, by X. Y accepts the bill. M then
acquires the bill from X for value and in good faith, and thereby becomes a holder in due
course.

Y’s defence: the drawer Z is fictitious, the bill is therefore a nullity, and no liability attaches
to the acceptance.

M’s contention: an acceptor is precluded from setting up the fictitious character of the
drawer against a holder in due course.

I. Issues
Whether an acceptor may deny liability to a holder in due course on the ground that the
name of the drawer is fictitious.

L. Law
Section 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.

The section operates as a statutory estoppel against the acceptor and requires three
conditions: (i) the bill is drawn in a fictitious name; (ii) it is payable to the drawer’s order;
and (iii) the first endorsement purports to be by the drawer and is in the same handwriting
as the drawer’s signature.

Compare section 41 (acceptor bound where an endorsement is forged) and the estoppels
in sections 120–122.

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A. Analysis
Satisfaction of the statutory conditions. Each of the three conditions is met on the facts.
The bill was drawn in the fictitious name of Z. It was made payable to the order of Z, that is,
to the drawer’s order. And the endorsement in the name of Z was written by the very hand
that signed as drawer, namely X’s. The section therefore applies in terms.

Why the acceptor is estopped. By accepting a bill, the drawee admits the existence of the
drawer and the genuineness of his signature. Y examined the bill, saw a drawer’s signature
purporting to be that of Z, and chose to accept. Having by that act held the instrument out to
the commercial world as a bill upon which he would pay, he cannot afterwards turn round
and say that the drawer he acknowledged never existed. M parted with value on the faith of
that acceptance.

The allocation of loss. The question is which of two parties, each in some sense innocent
of the fraud in its result, should bear the loss. The Act answers it consistently in favour of
commercial currency: the loss falls on the party whose act gave the instrument its apparent
validity and put it into circulation. That party is the acceptor.

Adjudication of Y’s defence. Y’s argument that the bill is a “nullity” confuses fictitiousness
with forgery. A forged signature is a nullity because it purports to be the signature of a real
person who never signed; a fictitious name is not a nullity in this sense, because there is no
real person whose signature has been misappropriated, and the drawing and the first
endorsement are both genuinely the acts of X. Section 42 exists precisely to prevent an
acceptor from converting the first situation’s logic into a defence in the second. Y’s defence
is therefore invalid.

Limits of the section. It should be noted that section 42 protects only a holder in due
course, and only where the handwriting condition is fulfilled. Had M taken the bill with
notice, or had the endorsement been in a different hand, the answer would be otherwise.

C. Conclusion
M’s claim is valid; Y’s claim is invalid.

Y remains bound by his acceptance and cannot avoid payment. M, as holder in due course,
is entitled to recover the amount of the bill from Y.

PROBLEM 6 · Promise to pay fifteen days after the death of A

Section 4 — unconditional undertaking; certain and inevitable events

A debtor executes an instrument stating: “I promise to pay Rs. 3,000 to Ravi after 15 days of the
death of A.” Upon A’s death, Ravi files a claim to enforce payment as a valid promissory note. The
maker denies liability, contending that an undertaking linked to a person’s death is conditional
and uncertain. Ravi counter-claims that death is an inevitable certainty, making the promise
unconditional.

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F. Facts
A debtor executes a written instrument in these terms: “I promise to pay Rs. 3,000 to Ravi
after 15 days of the death of A.” A dies, and Ravi sues on the instrument as a promissory
note.

Maker’s defence: an undertaking linked to a person’s death is conditional and uncertain,

and the instrument is therefore not a valid promissory note.

Ravi’s contention: death is an inevitable certainty; the promise is therefore unconditional.

I. Issues
Whether a promise to pay a sum of money at a stated interval after the death of a specified
person is a conditional promise, so as to fall outside section 4.

L. Law
Section 4 requires a promissory note to contain an unconditional undertaking to pay a
certain sum of money. The essence of the requirement is that payment must not depend
upon a contingency — an event that may or may not happen.

It is settled in the law of negotiable instruments that an event which is bound to happen,
though the time of its happening is uncertain, is not a contingency. The distinction is
between certainty of the event and certainty of the date. Section 5 of the Act contemplates
instruments payable “on the happening of an event which is certain to happen, though the
time of its happening may be uncertain” (see also s. 134 of the Indian Contract Act on
contingent contracts).

A. Analysis
Identifying the true nature of the stipulation. The instrument does not make payment
depend upon whether A dies. It fixes the time of payment by reference to A’s death. That is
a stipulation as to time, not as to liability. The maker is bound from the moment of execution;
only the date of performance awaits ascertainment.

Certainty of event versus certainty of date. Death is the paradigm of an event certain to
occur. The exact date is unknown, but the occurrence is not in doubt. The requirement of
section 4 is that the promise be unconditional, not that the date be calendar-certain; the
Act elsewhere expressly contemplates instruments payable after an event certain to happen
at an uncertain time. If uncertainty of date were fatal, an instrument payable “at sight” —
where the date depends on when presentment happens to be made — would equally fail,
which is plainly not the law.

Contrast with a true contingency. The position would be entirely different if the
instrument read “I promise to pay Rs. 3,000 to Ravi if A dies before 1st January” or “30 days
after B’s marriage to C”. In each of those cases the event may never occur at all, the promise
is contingent, and the instrument is void as a note from its inception.

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Adjudication of the maker’s defence. The maker conflates the uncertainty of timing with
conditionality of obligation. His plea is therefore misconceived, and Ravi’s counter-claim
states the correct principle: death being inevitable, the undertaking is unconditional. The
sum (Rs. 3,000), the payee (Ravi) and the maker are all certain, and the instrument satisfies
every other requirement of section 4.

C. Conclusion
Ravi’s claim is valid; the maker’s claim is invalid.

The instrument is a valid promissory note, and Ravi is entitled to recover Rs. 3,000,
payment having become due fifteen days after A’s death.

PROBLEM 7 · Transferee with notice of fraud taking from a holder in due course
Section 53 — holder deriving title from a holder in due course

B obtains A’s acceptance to a bill of exchange through fraudulent misrepresentation. B endorses

the bill to C, who takes it for value in good faith as a holder in due course. C subsequently endorses
the bill to D, who is fully aware of B’s initial fraud but was not a party to it. When D demands
payment upon maturity, A denies liability, claiming D’s title is tainted by knowledge of the fraud.
D counter-claims that deriving title from a holder in due course cleanses the instrument of prior
defects.

F. Facts
B obtains A’s acceptance to a bill of exchange by fraudulent misrepresentation. B endorses
the bill to C. C takes it for value and in good faith, and is accordingly a holder in due course.
C then endorses the bill to D. D is fully aware of B’s original fraud, but was in no way a party
to it. Upon maturity D demands payment from A.

A’s defence: D’s title is tainted by his knowledge of the fraud.

D’s contention: a person deriving title from a holder in due course takes the rights of that
holder in due course, the instrument having been cleansed of prior defects.

I. Issues
Whether a transferee who has notice of a prior fraud can enforce an instrument where he
derives his title from a holder in due course.

L. Law
Section 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. This is the shelter principle.

Section 58 — an instrument obtained by fraud confers no right on a possessor claiming

through the person who so obtained it, unless he or some person through whom he claims
was a holder in due course.

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Section 9 defines the holder in due course. The settled limitation upon section 53 is that a
person who was himself a party to the fraud or illegality cannot improve his position by
taking the instrument back after it has passed through a holder in due course.

A. Analysis
The instrument at the moment C acquires it. When B held the bill, his title was defective:
A’s acceptance had been procured by fraud, and as between A and B the acceptance was
voidable and unenforceable. But when C took the bill for value, in good faith, before maturity
and without notice, C satisfied every requirement of section 9. At that moment the defect
ceased to be available against the holder. The instrument, in the settled metaphor, was
cleansed.

The transfer from C to D. Section 53 provides that D, deriving his title from C, has the rights
of C. This is not a fiction of convenience but a commercial necessity: if a holder in due course
could not pass on the full value of what he holds, his own protection would be worthless,
since he could sell his paper to no one who knew its history. The marketability of the
instrument in the hands of the holder in due course would be destroyed.

The effect of D’s knowledge. D’s knowledge of the fraud is legally irrelevant on these facts.
Knowledge would have mattered had D taken directly from B, for it would have prevented
him from becoming a holder in due course in his own right. But D does not claim as a holder
in due course; he claims through one. Section 53 asks only where his title came from, not
what he knew.

The limitation, and why it does not apply. The one exception is that a guilty party cannot
launder his own defective title through an innocent intermediary — B himself, had he re-
acquired the bill from C, could not have sued A. D, however, was not a party to the fraud. He
is a stranger to it who happens to know of it. The exception is therefore not attracted.

Adjudication of A’s defence. A’s plea conflates notice with participation. Section 53 does
not require the derivative holder to be innocent of knowledge; it requires only that he derive
title from a holder in due course and that he not be the wrongdoer. A’s defence is invalid.

C. Conclusion
D’s claim is valid; A’s claim is invalid.

D, deriving title from C, a holder in due course, enjoys all the rights of a holder in due course
and is entitled to recover the amount of the bill from A.

PROBLEM 8 · Joint promissory note by a major and a minor

Section 26 — capacity of parties; minority

A (a major) and B (a minor) jointly execute a promissory note in favour of C for value received.
Upon maturity, C demands payment from both. B denies liability, contending that as a minor any
contract executed by him is void ab initio. A also denies liability, claiming that since the note is

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void against B the joint instrument fails entirely and releases both makers. C counter-claims that
a minor’s incapacity does not exempt major joint-signatories.

F. Facts
A, who is a major, and B, who is a minor, jointly execute a promissory note in favour of C
for value received. Upon maturity C demands payment from both.

B’s defence: as a minor, any contract executed by him is void ab initio.

A’s defence: since the note is void as against B, the joint instrument fails in its entirety and
both makers are released.

C’s contention: a minor’s incapacity does not exempt major joint-signatories from liability.

I. Issues
Whether the minority of one joint promisor discharges the other, major, joint promisor from
liability upon a promissory note.

L. Law
Section 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 negotiable instrument; and a minor may draw, endorse,
deliver and negotiate such instrument so as to bind all parties except himself.

Section 11 of the Indian Contract Act, 1872 renders a minor incompetent to contract, and
his agreement void ab initio (Mohori Bibee v Dharmodas Ghose).

Read together, the Act preserves the minor’s personal immunity while insulating the
instrument, and every other party to it, from the consequences of that immunity.

A. Analysis
B’s position. B is incompetent to contract and cannot incur contractual liability upon the
instrument. His plea of minority is a complete and good defence, and C can obtain no decree
against him. To that extent B’s contention must be accepted.

The critical question — does B’s immunity travel? The whole thrust of the second limb
of section 26 is that it does not. The minor is expressly permitted to deal with instruments
“so as to bind all parties except himself”. The language is deliberate and exclusive: the
immunity is personal to the minor, and the instrument remains fully effective as against
everyone else who is sui juris.

A’s position. A is a major and a joint maker. Under section 32 the maker of a promissory
note is bound to pay the amount at maturity according to the apparent tenor of the note. As
a joint promisor he is liable, and under section 43 of the Indian Contract Act the promisee
may compel any one of several joint promisors to perform the whole of the promise. A
signed the note; he received (or the note recites) value; nothing in the instrument makes his

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obligation conditional upon B’s enforceability. His liability is therefore that of a principal
promisor for the whole amount.

Why A’s argument fails. A’s argument assumes that the joint promise is a single indivisible
obligation which fails altogether if one promisor cannot be bound. That is not the law of
negotiable instruments. Section 26 severs the minor’s obligation from the rest of the
instrument. Were it otherwise, the presence of a minor’s signature anywhere on an
instrument would destroy it for everyone — a result that would make negotiable paper
unsafe to take and would defeat the very object of the Act.

Practical note. A cannot claim contribution from B under section 43 of the Contract Act,
since B never incurred a liability to contribute. The commercial risk of taking a minor as co-
promisor thus falls on the adult who signed with him.

C. Conclusion
B’s claim of non-liability is valid; A’s claim is invalid; C’s claim succeeds against A.

C can enforce payment of the full amount against A alone. No decree can be passed against
B.

PROBLEM 9 · Qualified acceptance — “Accepted for Rs. 2,000 only”

Sections 7, 17 and 86 — qualified acceptance and discharge of prior parties

A bill of exchange is drawn for Rs. 5,000. Upon presentation to the drawee for acceptance, the
drawee writes across the bill: “Accepted for Rs. 2,000 only.” The holder treats the instrument as
accepted and attempts to enforce it against prior parties upon dishonour. The prior parties deny
liability, contending that accepting a sum less than the bill’s face value constitutes a qualified
acceptance that discharges all prior non-consenting parties. The holder counter-claims that a
partial acceptance remains a valid general acceptance for the reduced amount.

F. Facts
A bill of exchange is drawn for Rs. 5,000. On presentment for acceptance the drawee writes
across the bill: “Accepted for Rs. 2,000 only.” The holder takes the bill in that state, treats it
as accepted, and upon dishonour seeks to enforce it against the prior parties — the drawer
and the endorsers.

Prior parties’ defence: acceptance for a sum less than the amount drawn is a qualified
acceptance, and the holder’s acquiescence in it without their consent discharges them.

Holder’s contention: a partial acceptance is nonetheless a valid general acceptance for the
reduced amount.

I. Issues
What is the legal effect, upon non-consenting prior parties, of a holder’s acquiescence in a
qualified (partial) acceptance?

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L. Law
Section 7 defines the acceptor and, by implication, distinguishes a general acceptance —
which assents without qualification to the order of the drawer — from a qualified
acceptance, which varies the effect of the bill as drawn. An acceptance for part only of the
sum is the classic instance of a qualified acceptance.

Section 17 provides for the holder’s election where an instrument is ambiguous in

character; it confirms that the legal character of an instrument, once elected upon, governs
thereafter.

Section 86 provides that if the holder acquiesces in a qualified acceptance, 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 they assent. The holder is entitled to
insist upon a general acceptance and to treat a qualified acceptance as a dishonour by non-
acceptance.

A. Analysis
Characterising the acceptance. The drawer ordered payment of Rs. 5,000. The drawee
assented to pay Rs. 2,000. That is not assent to the order; it is assent to a different and
smaller order of the acceptor’s own devising. It therefore varies the effect of the bill as drawn
and is a qualified acceptance — indeed the textbook example of one.

The rights and duties of the holder. On being met with a qualified acceptance the holder
had two courses. He could have refused it, treated the bill as dishonoured by non-
acceptance, given notice of dishonour, and preserved his recourse against the drawer and
endorsers for the full Rs. 5,000. Or he could have taken it, but only after obtaining the
consent of the prior parties. He did neither: he simply acquiesced.

The consequence of acquiescence. The prior parties engaged themselves on the footing
that the drawee would either accept the order as given or refuse it, and that they would
receive prompt notice of any refusal. By accepting a variation without reference to them, the
holder altered the contract to which they were sureties and deprived them of the
opportunity to protect themselves — for example by arranging payment, obtaining security
from the drawee, or stopping further dealings. The law therefore treats them as discharged.
This is the same suretyship logic that underlies section 40.

Adjudication of the holder’s counter-claim. The holder’s argument — that a partial

acceptance is “general” as to the reduced sum — is a contradiction in terms. Generality is
measured against the drawer’s order, not against the acceptor’s counter-offer. Accepting Rs.
2,000 out of Rs. 5,000 is by definition a variation. The counter-claim fails.

What the holder retains. The discharge operates in favour of the non-consenting prior
parties. It does not release the acceptor, who remains bound by his own acceptance to the
extent of Rs. 2,000; the holder may enforce that sum against him. Nor does it affect any prior
party who, on notice, assented.

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C. Conclusion
The prior parties’ claim is valid; the holder’s claim is invalid.

All prior parties who did not consent to the qualified acceptance are discharged from
liability on the bill. The holder is left with a claim against the acceptor for Rs. 2,000 only.

PROBLEM 10 · Three days after sight — exclusion of the day of presentment

Sections 21, 22 and 24 — computation of time after sight

Bharat executes a promissory note in favour of Bhushan for Rs. 5 crores, payable “three days
after sight.” Bhushan presents the note for sight on 1st January 2008. Bharat makes payment on
4th January 2008. Bhushan demands additional interest for one day, contending that the three-
day period includes the day of presentation and thus payment was due on 3rd January. Bharat
counter-claims that the day of presentation must be excluded.

F. Facts
Bharat executes a promissory note in favour of Bhushan for Rs. 5 crores, payable three days
after sight. Bhushan presents the note for sight on 1st January 2008. Bharat pays on 4th
January 2008.

Bhushan’s claim: the three-day period includes the day of presentation, so that payment
fell due on 3rd January; he demands one additional day’s interest.

Bharat’s contention: the day of presentation must be excluded in computing maturity, so

that payment on 4th January was timely.

I. Issues
How time is computed for an instrument payable a stated number of days “after sight”, and
in particular whether the day of presentment for sight is included or excluded.

L. Law
Section 21 — the expression “after sight” means, in a promissory note, after presentment
for sight; and in a bill of exchange, after acceptance or noting or protest for non-acceptance.
Time therefore runs, for this note, from the date of presentment for sight.

Section 24 — in calculating the date of maturity of an instrument payable a stated number

of days after date or after sight, the day of the date, or of presentment for acceptance or
sight, shall be excluded.

Section 22 — three days of grace are added to instruments not payable on demand, at sight
or on presentment.

A. Analysis
Fixing the starting point. The note is payable three days after sight. Under section 21, “after
sight” in a promissory note means after presentment for sight. The starting event is
therefore the presentment of 1st January 2008.

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Applying the exclusion rule. Section 24 is categorical: the day of presentment for sight is
excluded. Counting therefore begins on 2nd January. The three-day period runs through
2nd, 3rd and 4th January 2008, and expires at the close of 4th January.

Adjudication of Bhushan’s claim. Bhushan’s computation includes 1st January and so

arrives at 3rd January. That computation is contrary to the express direction of section 24.
His demand for an additional day’s interest therefore rests on a wrong starting point and
must fail. Payment on 4th January was made on the last day of the stipulated period and was
punctual.

A note on days of grace. Strictly, section 22 would add three days of grace to a note payable
three days after sight, since such a note is not payable on demand, at sight or on
presentment; on that footing maturity would fall on 7th January and payment on 4th January
would be early rather than late. Either way, Bharat is not in default, and the conclusion is
unaffected. The essential point tested by the problem, and the one to state first, is the
exclusion rule in section 24.

C. Conclusion
Bharat’s claim is valid; Bhushan’s claim for interest is invalid.

Excluding the day of presentment, the note fell due on 4th January 2008 at the earliest, and
payment on that date was timely. No additional interest is payable.

PROBLEM 11 · Endorsement “without recourse” and negotiation back

Section 52 — endorser excluding his own liability; circuity of action

M, the holder of a bill of exchange, endorses it “without recourse” to N. N endorses it to P, P to Q,

Q to R, and R endorses it back to M. Upon dishonour at maturity, M files a claim to recover the
bill amount from the intermediate endorsers N, P, Q and R. They deny liability, contending that
a re-endorsee cannot sue intermediate parties to whom he was previously liable. M counter-
claims that his original “sans recours” endorsement excluded his liability, leaving all
intermediate parties bound to him.

F. Facts
M, the holder of a bill of exchange, endorses it to N “without recourse” (sans recours). N
endorses it to P, P to Q, Q to R, and R endorses it back to M. The bill is dishonoured at
maturity, and M sues N, P, Q and R.

Intermediate endorsers’ defence: under the doctrine of negotiation back, a party who re-
acquires an instrument cannot sue intermediate parties to whom he was himself previously
liable.

M’s contention: his original endorsement was without recourse, so he never became liable
to any of them, and they all remain bound to him.

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I. Issues
Whether a prior party who re-acquires an instrument may sue the intermediate endorsers,
where his own original endorsement was made sans recours.

L. Law
Section 52 — the maker, drawer or endorser of a negotiable instrument may, by express
words in the instrument, exclude his own liability thereon, or make such liability or the
holder’s right depend upon a specified event.

Section 35 imposes liability on an endorser to every subsequent holder in case of

dishonour, in the absence of a contract to the contrary — and a “without recourse”
endorsement is exactly such a contract to the contrary.

The doctrine of negotiation back rests on the rule against circuity of action: where a party
re-acquires an instrument on which he was himself liable to the intermediate parties, the
law will not permit him to sue them, since they could immediately recover the same sum
back from him.

A. Analysis
The ordinary rule and its foundation. Normally, when an instrument returns to a prior
endorser, the circulating liabilities cancel out. If M had endorsed in the ordinary way, and
then sued N, N would upon paying immediately be entitled to sue M as a prior endorser; the
litigation would travel in a circle and end where it began. The law cuts the circle at the outset
by denying M the action.

Why the foundation is absent here. The rule against circuity presupposes that the re-
acquiring party was liable to the parties he seeks to sue. By endorsing “without recourse”,
M exercised his statutory right under section 52 to exclude his own liability by express
words on the instrument. He therefore never became liable to N, and consequently never
became liable to P, Q or R either, since their claims against him could only have been derived
through the endorsement he qualified. No circuity can arise, because there is no return
claim.

The position of the intermediate endorsers. N, P, Q and R each endorsed in the ordinary
way, without qualification. Each is therefore liable under section 35 to every subsequent
holder upon dishonour. M, having re-acquired the bill from R, is now the holder. He is a
subsequent holder in relation to every one of them, and the fact that he was also a prior
party is immaterial once the circuity objection is removed.

Adjudication. The intermediate endorsers state the general rule correctly but overlook its
condition. Their defence assumes that M “was previously liable” to them; the express words
of the endorsement show that he was not. Every party who took the bill did so with the
words “without recourse” visible on its face and with notice that M had disclaimed liability.
They cannot now complain of the very stipulation they accepted.

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C. Conclusion
M’s claim is valid; the intermediate endorsers’ claims are invalid.

M, holding the bill with all the rights of a holder, may enforce payment against N, P, Q and
R, each of whom remains bound to him.

PROBLEM 12 · Drawee identified by address and not by name

Sections 7 and 33 — certainty of the drawee; who may accept

A bill of exchange is drawn payable at “No. 19J, Pkt-2, Mayur Vihar, New Delhi,” but fails to state
the drawee’s name. Mr. Mehta, who resides at that specified address, writes his acceptance on
the bill. Upon maturity, Mr. Mehta refuses to pay, contending that the bill is invalid because the
drawee was not explicitly named in the body of the bill. The holder counter-claims that describing
the place of residence indicates the drawee with reasonable certainty, and that acceptance
confirms liability.

F. Facts
A bill of exchange is drawn payable at “No. 19J, Pkt-2, Mayur Vihar, New Delhi”. The body of
the bill does not name the drawee. Mr. Mehta, who resides at that address, writes his
acceptance on the bill. At maturity he refuses to pay.

Mr. Mehta’s defence: the bill is invalid as an instrument because the drawee was not
explicitly named.

Holder’s contention: the description of the place of residence indicates the drawee with
reasonable certainty, and in any event the acceptance confirms liability.

I. Issues
Whether a bill is valid where the drawee is identified only by a residential address and not
by name; and what the effect is of acceptance by the person residing at that address.

L. Law
Section 7 requires that the person directed to pay — the drawee — be certain. Certainty is
a question of identification, not of nomenclature: the section does not require that the
drawee be named, only that he be indicated with reasonable certainty.

Section 5 similarly requires an order directing “a certain person” to pay.

Section 33 — no person except the drawee of a bill, or all or some of several drawees, or a
drawee in case of need, or an acceptor for honour, can bind himself by an acceptance.

Section 32 fixes the acceptor with liability to pay according to the apparent tenor of his
acceptance; and the estoppels in sections 120–122 preclude an acceptor from denying the
validity of the instrument as drawn.

A. Analysis
Certainty by description. The purpose of requiring a certain drawee is to enable the holder
to know upon whom to call for acceptance and payment. That purpose is fully served where

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the bill specifies a unique address at which the person to be called upon resides. A
description that admits of only one answer is as certain as a name. The address “No. 19J, Pkt-
2, Mayur Vihar, New Delhi” identifies a single dwelling and hence its occupant. The
requirement of section 7 is therefore satisfied.

The effect of the acceptance. Whatever residual doubt might have existed was removed
by Mr. Mehta’s own act. Under section 33, only the drawee can bind himself by an
acceptance. By writing his acceptance on the bill, Mr. Mehta necessarily asserted that he was
the person to whom the direction was addressed. He cannot now be heard to say both that
he validly accepted and that he was not the drawee — the two propositions are inconsistent,
and the second destroys the first.

Estoppel and reliance. The holder took the bill on the faith of the acceptance appearing on
it. Sections 120 to 122 embody the principle that a party whose signature gives the
instrument its currency cannot afterwards deny the state of affairs he represented. Mr.
Mehta represented, by accepting, that the bill was a good bill addressed to him.

Adjudication of Mr. Mehta’s defence. His argument is one of pure form and would, if
accepted, allow a person to take the benefit of a technical omission which he himself cured
by accepting. The Act does not require the drawee to be named; it requires him to be certain;
and Mr. Mehta was both certain by description and identified by his own acceptance. The
defence is invalid.

C. Conclusion
The holder’s claim is valid; Mr. Mehta’s claim is invalid.

The bill is a valid bill of exchange, and Mr. Mehta is liable upon his acceptance to pay the
amount according to its apparent tenor.

PROBLEM 13 · Signed blank crossed cheque filled in beyond authority

Sections 9 and 20 — inchoate stamped instruments and the holder in due course

W draws a blank crossed cheque and hands it to his clerk with instructions to fill in a specific
amount and payee name. The clerk inserts an amount in excess of her authority and delivers it
to P in satisfaction of her personal debt. When the cheque is presented, W countermands payment
and denies liability, contending the clerk exceeded her authority. P counter-claims that under the
doctrine of inchoate stamped instruments W is bound by the amount filled in.

F. Facts
W signs and draws a blank crossed cheque and hands it to his clerk, instructing her to fill
in a specific amount and the name of a payee. The clerk instead inserts an amount in excess
of her authority and delivers the cheque to P in satisfaction of her own personal debt.
On presentment, W countermands payment.

W’s defence: the clerk exceeded her authority, and he is not bound by the amount inserted.

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P’s contention: under the doctrine of inchoate stamped instruments, W is bound by the
amount filled in.

I. Issues
Whether the drawer of an inchoate instrument is bound by an amount filled in beyond the
authority he conferred, where the instrument is delivered to a third party in payment of the
agent’s own private debt.

L. Law
Section 20 — where a person signs and delivers a stamped paper, wholly blank or
containing an incomplete negotiable instrument, he gives prima facie authority to the holder
to complete it as a negotiable instrument for any amount not exceeding the amount covered
by the stamp; and he is liable upon it, in the capacity in which he signed, to any holder in
due course for such amount. The proviso is decisive: no person other than a holder in
due course shall recover from the person delivering the instrument anything in excess of
the amount intended by him to be paid thereunder.

Section 9 — a holder in due course must take for consideration, before maturity, and
without having sufficient cause to believe that any defect existed in the title of the
person from whom he derived his title.

The general law of agency: a third party who receives his debtor-agent’s principal’s property
in discharge of the agent’s own debt is on notice of a probable breach of duty.

A. Analysis
The threshold conditions of section 20 are met. W signed the cheque; he delivered it
voluntarily to the clerk; and it was incomplete when delivered. The section therefore
applies, and the clerk had prima facie authority to fill it up. Had the instrument been stolen
from W’s drawer, section 20 would have had no application at all, and the analysis would
have ended there.

The two regimes created by the proviso. Section 20 does not make the signatory liable to
everyone for whatever is filled in. It creates a sharp division. Against a holder in due course
the signatory is liable for the full amount inserted, up to the stamp cover, even though it
exceeds his actual authority — the loss falling on the man who put a signed blank into
circulation. Against any other holder, recovery is limited to the amount he actually
intended to pay. Everything therefore turns on P’s status.

Is P a holder in due course? He is not. Two features of the transaction put him on notice.
First, he received the cheque from an agent in satisfaction of that agent’s own private debt.
A cheque drawn by W, delivered by W’s clerk, and used to pay the clerk’s personal creditor
is on its face a misapplication of the principal’s instrument; the circumstances furnish
“sufficient cause to believe” that a defect existed in the clerk’s title. Secondly, the cheque was
crossed, which is a direction that it be collected through a banker and which signals that the
instrument was not intended for informal over-the-counter dealing between strangers.

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Consequence. P having failed the good-faith and notice requirement of section 9, the
proviso to section 20 confines him to the amount W actually intended — and since the
cheque was diverted to a purpose W never authorised at all, and W has countermanded
payment, P can enforce nothing against W. P’s remedy, if any, lies against the clerk
personally.

Adjudication. W’s defence is not merely that his agent exceeded her authority — which by
itself would be no answer to a holder in due course — but that the person suing him took
the instrument in circumstances which deprived him of that protection. That is a complete
answer.

C. Conclusion
W’s claim is valid; P’s claim is invalid.

P is not a holder in due course and cannot enforce the unauthorised excess, or indeed the
cheque, against W. W is not liable to P.

PROBLEM 14 · Acknowledgment of debt described as a promissory note

Section 4 — express undertaking to pay

An instrument executed by a borrower reads: “I of my own free will and accord approached B
and borrowed from him the sum of Rs. 100 bearing interest… I have therefore executed these few
presents by way of a promissory note so that it may serve as evidence.” B files a claim to enforce
the document as a valid promissory note. The borrower denies liability, contending that a mere
acknowledgment of a debt does not constitute an express undertaking to pay. B counter-claims
that describing the document as a “promissory note” implies a promise to repay.

F. Facts
A borrower executes a document reciting that he of his own free will approached B and
borrowed from him the sum of Rs. 100 bearing interest, and that he has therefore executed
“these few presents by way of a promissory note so that it may serve as evidence”. B
sues upon the document as a promissory note.

Borrower’s defence: a mere acknowledgment of debt does not constitute an express

undertaking to pay.

B’s contention: the description of the document as a promissory note implies a promise to
repay.

I. Issues
Whether a document which acknowledges a loan and describes itself as a promissory note,
but contains no express words of promise, is a valid promissory note under section 4.

L. Law
Section 4 — 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.

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The settled construction of the section is that the essential element is an express promise
to pay; a mere acknowledgment of indebtedness, without an express promise to pay the
debt, is not a promissory note.

The test is the intention of the parties, gathered from the substance of the document, the
surrounding circumstances of execution, and whether the document was meant to be
negotiable in the ordinary mercantile sense — or merely a receipt or an acknowledgment.

A. Analysis
Reading the operative words. The document records three things: that the borrower
approached B; that he borrowed Rs. 100 with interest; and that he executed the writing so
that it may serve as evidence. There is no sentence in which the borrower says he will pay,
promises to pay, or undertakes to pay. Every operative verb is in the past tense and
descriptive of what has already happened.

The stated purpose is fatal. The closing words declare the object of the document to be
evidentiary — “so that it may serve as evidence”. That is the language of a receipt or
acknowledgment, not of a negotiable engagement. A document executed to prove a debt is
different in kind from a document executed to create an obligation capable of circulating
in commerce.

The label does not control the substance. B’s reliance on the phrase “by way of a
promissory note” cannot succeed. It is elementary that the nomenclature the parties adopt
does not determine the legal character of an instrument; the court looks to substance.
Conversely, a document primarily intended as a receipt or bond, and not intended to be
negotiable in the ordinary mercantile sense, does not become a promissory note merely
because it is so called. If the label sufficed, every acknowledgment could be converted into
negotiable paper by adding six words.

Comparison with the accepted forms. The line is drawn precisely by the illustrations. “I
have received Rs. 1,000 which I borrowed of you, and I have to be accountable to you for the
same with interest” is not a note. “Received from X Rs. 1,000 which I promise to pay on
demand with interest” is a note. The two differ in nothing but the presence of the words “I
promise to pay”. The present document falls on the first side of the line.

Adjudication. The borrower’s defence is well founded. B’s counter-claim asks the court to
imply a promise from a label, which the section does not permit.

C. Conclusion
The borrower’s claim is valid; B’s claim is invalid.

The document is not a valid promissory note. It remains, however, a written

acknowledgment of debt, and B is not without remedy: he may sue on the underlying loan
and rely on the document as evidence of it, subject to the law of limitation.

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PROBLEM 15 · Promise to pay thirty days after marriage

Section 4 — conditionality judged at the date of execution

An instrument executed by A states: “I promise to pay Rs. 1,000 to B, 30 days after his marriage
with C.” Upon B’s marriage to C, B presents the instrument for payment. A refuses, contending
that the instrument was void from its inception because marriage is a contingent event. B
counter-claims that since the condition has been fulfilled, the note has matured into an
enforceable promissory note.

F. Facts
A executes a document stating: “I promise to pay Rs. 1,000 to B, 30 days after his marriage
with C.” B subsequently marries C and presents the instrument for payment.

A’s defence: the instrument was void from its inception, marriage being a contingent event
which renders the promise conditional.

B’s contention: the contingency having been fulfilled, the note has matured into an
enforceable promissory note.

I. Issues
Whether the subsequent occurrence of a contingent event validates an instrument which
was conditional at the time of its execution.

L. Law
Section 4 requires an unconditional undertaking. The character of an instrument is
determined at the moment of its execution, not by later events.

A contingency is an event which may or may not happen. This is to be contrasted with an
event certain to happen at an uncertain time (such as death), which does not make a promise
conditional.

The requirement of unconditionality serves the requirement of certainty: an instrument

meant for free circulation must be capable of being valued and relied upon by strangers at
the moment it is offered to them.

A. Analysis
Is marriage a contingency? Plainly yes. B may never marry C. He may marry someone else,
or no one; C may refuse, or predecease him. Unlike death, which is certain to occur although
its date is unknown, marriage between two named persons is an event of which neither the
occurrence nor the date can be predicated. It is therefore a true contingency.

The time at which conditionality is judged. This is the crux. The instrument must be
unconditional when made. At the moment A executed the document, no one could say
whether A would ever have to pay anything. A person to whom the note might have been
offered for discount on the day after execution could not have valued it, because its
enforceability depended on an uncertain future event. That is precisely the vice section 4
excludes.

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Why later fulfilment does not cure the defect. An instrument which is not a promissory
note at its inception does not become one by the happening of the contingency. The Act does
not provide for retrospective validation, and to allow it would defeat the object of the
requirement: negotiability depends on the instrument being good while it circulates, not
on its becoming good long afterwards. A document void as a note when made is void as a
note always.

Contrast with the death case. It is instructive to place this problem beside the instrument
payable “15 days after the death of A”. There the event was certain, only its date uncertain,
and the note was valid. Here the event itself was uncertain, and the note was void from the
outset. The examiner’s point is the distinction between certainty of the event and
certainty of the date.

Adjudication. A’s defence is well founded and B’s counter-claim, though superficially
attractive on grounds of fairness, is contrary to section 4.

C. Conclusion
A’s claim is valid; B’s claim is invalid.

The instrument is void as a promissory note. B has no right of action upon it as negotiable
paper, though the document may still be relied upon as evidence of an agreement
enforceable, if at all, under the general law of contract.

PROBLEM 16 · Forged acceptance and the holder in due course

Sections 9 and 58 — forgery as a nullity

A bill of exchange bearing X’s forged acceptance is acquired by A from a customer for value and
in good faith before maturity. Upon presenting the bill for payment, A demands the amount from
X as a holder in due course. X denies liability, contending that a forged signature is a complete
nullity that confers no title. A counter-claims that as a holder in due course who took the
instrument in good faith and for consideration, his title is protected against prior defects.

F. Facts
A bill of exchange bears an acceptance purporting to be that of X. The acceptance is forged.
A acquires the bill from a customer for value, in good faith, and before maturity, and thus
fulfils in his own person every attribute of a holder in due course. A presents the bill and
demands payment from X.

X’s defence: a forged signature is a complete nullity which confers no title upon anyone.

A’s contention: as a holder in due course who took in good faith and for consideration, his
title is protected against prior defects.

I. Issues
Whether a holder in due course can enforce payment upon an instrument bearing a forged
acceptance against the person whose signature was forged.

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L. Law
Section 9 defines the holder in due course. Section 58 provides that where an instrument
has been lost, or obtained by means of an offence or fraud or for unlawful consideration, no
possessor claiming through such a person is entitled to the amount due, unless he or
someone through whom he claims was a holder in due course.

Section 58 thus cures defects of title. It does not, and by its language cannot, supply title
where none exists.

The governing maxim, universally applied, is that a forgery is a nullity: a forged signature
is not the signature of the person whose name is written, it operates as nothing at all, and
no right can be founded upon it — not even by a holder in due course.

A. Analysis
Distinguishing defect from absence. The Act protects the holder in due course against
instruments that are tainted — obtained by fraud, coercion, undue influence or unlawful
consideration. In every such case there is a real signature by a real party who really meant
to sign, and the vice lies in the circumstances of obtaining. Section 58 removes that vice as
against an innocent taker for value. Forgery is categorically different. Where a signature is
forged, the person named never signed at all; there is no contract to be avoided, because
none was ever made.

Application to X. Liability upon a bill arises from a party’s own signature. X never signed.
Nothing X did gave the instrument its apparent validity, and no estoppel can be raised
against him, since he made no representation of any kind. The strength of A’s position —
value, good faith, taking before maturity — is measured against the wrong party: it perfects
A’s title as against defects in his transferor’s title, but it cannot create an obligation in a
stranger who never became a party to the instrument.

The allocation of loss. Where two innocent parties suffer from a third’s crime, the law
places the loss on the one who enabled it. In the fictitious-drawer case (s. 42) the acceptor
enabled the instrument by accepting, and so bears the loss. Here X did nothing whatever;
the enabling act was the forger’s, and A’s remedy is against the forger and against his own
transferor, who by endorsing warranted the genuineness of prior signatures (s. 35 and the
estoppel in s. 122).

Statutory qualifications, and why they do not assist A. Certain provisions mitigate the
harshness of the forgery rule in defined situations — section 41 binds an acceptor
notwithstanding a forged endorsement; section 42 covers the fictitious drawer; sections
85 and 89 protect the paying banker; section 131 protects the collecting banker. None of
them makes the person whose own signature was forged liable upon it, and none is attracted
on these facts.

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Adjudication. X’s defence is a complete answer. A’s counter-claim, though it correctly states
the protection conferred by section 58, seeks to extend that protection beyond its subject-
matter.

C. Conclusion
X’s claim is valid; A’s claim is invalid.

A cannot recover any money from X. His recourse lies against the forger and against his
immediate transferor.

PROBLEM 17 · Twenty days after sight — days of grace on “after sight” paper
Sections 21, 22, 23 and 24 — maturity of a bill payable after sight

A bill of exchange drawn on 15th October 2007 is made payable twenty days after sight. The bill
is presented for acceptance on 31st October 2007. The holder claims payment on 20th November
2007. The drawee denies liability, contending that the calculation must exclude the date of
presentment and include 3 days of grace. The holder counter-claims that days of grace do not
apply to bills payable “after sight”.

F. Facts
A bill of exchange is drawn on 15th October 2007 and made payable twenty days after
sight. It is presented for acceptance on 31st October 2007. The holder demands payment on
20th November 2007.

Drawee’s defence: payment is not yet due, because the computation must exclude the date
of presentment and must include three days of grace.

Holder’s contention: days of grace do not apply to bills payable “after sight”.

I. Issues
How maturity is calculated for a bill payable a stated number of days after sight; and
whether days of grace are allowed on such a bill.

L. Law
Section 21 — “after sight” means, in a bill of exchange, after acceptance, or noting or protest
for non-acceptance. Time therefore runs from presentment for acceptance, not from the
date of the bill.

Section 24 — the day of presentment for acceptance or sight is excluded in computing

maturity.

Section 22 — three days of grace are allowed on every instrument not expressed to be
payable on demand, at sight or on presentment. A bill payable a stated number of days
after sight is a time bill and is not payable on demand, at sight or on presentment.

Section 23 governs computation where the period is expressed in months.

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A. Analysis
The date of the bill is a distractor. The bill is dated 15th October, but it is payable after
sight, not after date. Under section 21 the relevant event is presentment for acceptance,
which occurred on 31st October 2007. The drawing date plays no part in the computation.

Excluding the day of presentment. Section 24 requires 31st October to be excluded.

Counting begins on 1st November. Twenty days from and including 1st November expire on
20th November 2007.

Adding the days of grace. Section 22 adds three days of grace, bringing maturity to 23rd
November 2007.

Adjudication of the holder’s contention. The holder’s proposition that days of grace do
not apply to “after sight” bills is wrong. Section 22 withholds grace only from instruments
payable on demand, at sight or on presentment. The expressions “at sight” and “on
presentment” mean on demand (s. 21) and denote instruments payable immediately upon
being shown. A bill payable twenty days after sight is not payable at sight; the words “after
sight” fix a starting point for a period, and the instrument is a time bill in the fullest sense.
Grace therefore applies. The holder has confused “at sight” with “after sight”.

Result of the computation. Presentment for payment on 20th November 2007 was made
three days before maturity and was accordingly premature. A premature presentment does
not constitute a valid demand, and refusal on that date is not a dishonour giving rise to
recourse against prior parties.

C. Conclusion
The drawee’s claim is valid; the holder’s claim is invalid.

The bill matured on 23rd November 2007. Presentment on 20th November was
premature, and the drawee was under no obligation to pay on that date.

PROBLEM 18 · Cheque endorsed by a minor

Section 26 — minor as a conduit of title

M, a broker, draws a cheque payable to N, a minor. N endorses the cheque to O, who endorses it
to P. Upon presentation, the bank dishonours the cheque. P files a claim against M, N and O. N
denies liability on grounds of minority. M denies liability, claiming that a minor’s endorsement
breaks the chain of negotiation, rendering the cheque void for subsequent endorsees. P counter-
claims that a minor’s endorsement binds all parties except the minor.

F. Facts
M, a broker, draws a cheque payable to N, who is a minor. N endorses the cheque to O; O
endorses it to P. On presentation the bank dishonours the cheque. P sues M, N and O.

N’s defence: he is a minor and cannot be made liable.

M’s defence: a minor’s endorsement breaks the chain of negotiation, so that the cheque is
void as regards subsequent endorsees and M is discharged.

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P’s contention: a minor’s endorsement binds all parties except the minor himself.

I. Issues
Whether an endorsement by a minor invalidates the instrument for subsequent holders and
discharges adult prior parties.

L. Law
Section 26 — every person capable of contracting may bind himself upon a negotiable
instrument; and a minor may draw, endorse, deliver and negotiate such instrument so
as to bind all parties except himself.

Section 30 — the drawer of a bill or cheque is bound, in case of dishonour by the drawee,
to compensate the holder, provided due notice of dishonour has been given.

Section 35 — an endorser is liable to every subsequent holder in case of dishonour, in the

absence of a contract to the contrary.

A. Analysis
N’s immunity. N is a minor and is incompetent to contract. He cannot be made liable upon
his endorsement, and his plea is a good defence. No decree can pass against him.

But the endorsement is effective as a transfer. This is the point on which M’s argument
founders. Section 26 does not say that a minor’s endorsement is a nullity; it says the minor
may endorse and negotiate “so as to bind all parties except himself”. The minor is therefore
treated as a conduit of title: his endorsement operates perfectly to transfer the property in
the instrument, and only his personal liability is excluded. Title passed from N to O, and from
O to P. P is the lawful holder.

M’s liability as drawer. M drew the cheque and thereby engaged, under section 30, that on
due presentment it would be paid, and that on dishonour he would compensate the holder.
Nothing in that engagement was conditional upon the payee being sui juris. M chose to make
his cheque payable to a minor; he cannot use the consequence of his own choice as a shield.
Upon dishonour and due notice, M is liable to P.

O’s liability as endorser. O is an adult who endorsed in the ordinary way. Under section 35
he is liable to every subsequent holder — including P — on dishonour.

Adjudication of M’s defence. M’s contention would produce a commercially absurd result:
any instrument that had at any time passed through a minor’s hands would be worthless in
the hands of every subsequent holder, and no one could safely take negotiable paper without
investigating the age of every party in the chain. Section 26 exists to prevent exactly that.
The defence is invalid.

C. Conclusion
P’s claim is valid; M’s claim is invalid; N’s claim of minority is valid.

P may recover from M (the drawer) and O (the endorser), but not from N (the minor).

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PROBLEM 19 · Three months from 31st August — the “no corresponding day”
rule
Sections 22 and 23 — maturity of instruments payable in months

A bill of exchange dated 31st August 2007 is made payable three months after date. The holder
presents the bill for payment on 3rd December 2007. The acceptor refuses payment, contending
that three months from 31st August ends on 30th November, and adding 3 days of grace makes
the bill due on 30th November itself or at most 1st December. The holder counter-claims that
when the month in which the period terminates has no corresponding day, the period terminates
on the last day of that month, moving maturity to 3rd December.

F. Facts
A bill of exchange is dated 31st August 2007 and is payable three months after date. The
holder presents it for payment on 3rd December 2007.

Acceptor’s defence: three months from 31st August ends on 30th November, and with
three days of grace the bill was due on 30th November itself, or at the latest on 1st
December.

Holder’s contention: since November has no day corresponding to the 31st, the period
terminates on the last day of that month, and with grace the maturity date is 3rd December.

I. Issues
How maturity is computed where an instrument is payable a stated number of months after
date and the terminal month has no corresponding day.

L. Law
Section 23 — in calculating the date at which an instrument made payable a stated number
of months after date or sight is at maturity, the period stated terminates on the day of the
month which corresponds with the day on which the instrument is dated (or presented for
sight); and where 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.

Section 22 — three days of grace are then added, the instrument not being payable on
demand, at sight or on presentment.

Section 25 would displace the date if it fell on a public holiday; it is not attracted here.

A. Analysis
Step 1 — find the corresponding day. The bill is dated the 31st. Three months from August
is November. November has only thirty days and therefore has no 31st. The corresponding-
day rule cannot operate literally.

Step 2 — apply the express saving in section 23. Where the terminal month has no
corresponding day, the period terminates on the last day of that month. The three-month
period therefore terminates on 30th November 2007.

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Step 3 — add three days of grace. Section 22 adds three days, and the bill matures on 3rd
December 2007.

Adjudication of the acceptor’s defence. The acceptor correctly identifies 30th November
as the end of the three-month period — indeed his premise is the same as the holder’s —
but he then errs in the arithmetic of grace. He says the bill was due on 30th November
“itself”, which ignores section 22 altogether; and in the alternative on 1st December, which
allows one day of grace instead of three. Section 22 is not discretionary and admits of no
partial application: three days are added to every time instrument, and the third day after
30th November is 3rd December.

Result. Presentment on 3rd December 2007 was made precisely on the date of maturity.
Refusal to pay on that date constitutes dishonour by non-payment, and the holder is entitled
to proceed against the acceptor and, on due notice of dishonour, against the drawer and
endorsers.

C. Conclusion
The holder’s claim is valid; the acceptor’s claim is invalid.

The bill matured on 3rd December 2007, and presentment on that date was correct and
timely.

PROBLEM 20 · Accommodation acceptor and part payment by the accommodated

party
Section 43 — the pro tanto reduction of liability

A accepts a bill of exchange for Rs. 10,000 drawn by B purely for B’s accommodation. B transfers
the bill to C for value. Upon maturity, B pays C Rs. 5,000 towards partial satisfaction of the bill.
Subsequently, C sues A for the full face value of Rs. 10,000. A denies liability for the full amount,
contending that an accommodation acceptor’s liability is reduced pro tanto by payments made
by the accommodated drawer. C counter-claims that as a holder for consideration he can recover
the entire bill amount from any prior party regardless of partial settlements.

F. Facts
A accepts a bill of exchange for Rs. 10,000 drawn by B, purely for B’s accommodation —
that is, A receives no consideration and lends his name to enable B to raise money. B
negotiates the bill to C for value. At maturity, B pays C Rs. 5,000 towards partial satisfaction
of the bill. C then sues A for the full face value of Rs. 10,000.

A’s defence: an accommodation acceptor’s liability is reduced pro tanto by payments made
by the accommodated drawer.

C’s contention: as a holder for consideration he may recover the entire bill amount from
any prior party, irrespective of partial settlements.

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I. Issues
Whether a holder for value may recover the full face value from an accommodation acceptor
after having already received part payment from the accommodated party.

L. Law
Section 43 — an instrument made or accepted without consideration creates no obligation
of payment between the parties to the transaction; but a holder for consideration, and every
subsequent holder deriving title from him, may recover the amount due on the instrument
from the transferor for consideration or from any prior party.

The words “the amount due on such instrument” are the operative words: the section
confers a right to recover what remains owing, not a right to recover the face value twice
over.

Section 82(c) and the general principle of satisfaction — payment in due course to the
holder discharges the instrument to the extent of the payment.

In substance, as between the accommodation party and the accommodated party, the
accommodated party is the principal debtor and the accommodation party is in the
position of a surety, with a right of indemnity against him.

A. Analysis
A is undoubtedly liable to C in principle. The first step must be conceded to C. Under
section 43, want of consideration is a defence available to A only against B, the
accommodated party. Once B negotiated the bill to C for value, A became bound to C and
cannot plead absence of consideration. As against C, A stands in the position of a primary
debtor on the instrument.

But liability is measured by the debt, not by the face value. Liability upon a bill is an
obligation to pay a debt, not a penalty measured by the sum written on the paper. Section
43 gives the holder for consideration the right to recover “the amount due on such
instrument”. Once part of that amount has been paid, the amount due is correspondingly
less. C received Rs. 5,000 from B; the debt on the instrument was thereby reduced pro tanto
to Rs. 5,000.

The identity of the payer matters, and it favours A. B is not a stranger who made a
gratuitous payment; B is the accommodated party, and therefore, in substance, the
principal debtor. Payment by the principal debtor to the creditor reduces the obligation for
which the surety stands. Had A been compelled to pay the whole Rs. 10,000, he would have
been entitled to full indemnity from B — who would then have paid Rs. 15,000 in all upon a
Rs. 10,000 bill. The circuity and the injustice are both obvious.

Rejection of C’s counter-claim. C’s proposition, taken to its conclusion, would permit a
holder to recover Rs. 10,000 from A while retaining Rs. 5,000 from B, a double recovery of
Rs. 15,000 on a Rs. 10,000 instrument. Nothing in section 43 or in the law of negotiable

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instruments sanctions unjust enrichment of the holder. The right conferred is a right against
any prior party, which governs the choice of defendant, not the quantum recoverable.

Adjudication. A’s defence is well founded. He remains liable, but only for the unpaid
balance.

C. Conclusion
A’s claim is valid; C’s claim for the full amount is invalid.

The debt on the instrument stood reduced pro tanto by B’s payment. C may recover only
Rs. 5,000 from A.

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PART VI — REVISION APPARATUS

Tables, drills and the examiner’s expectations

A. The Maturity Drill

STEP RULE

1. Starting event After date → the date of the instrument. After sight → presentment for
sight (note) or acceptance / noting / protest for non-acceptance (bill) (s.
21). After an event → the day the event happens.
2. Exclude day Exclude the starting day (s. 24) when the period is in days.
one
3. Months Find the corresponding day; if the terminal month has no corresponding
day, take the last day of that month (s. 23).

4. Grace Add three days (s. 22) — unless payable on demand, at sight, on
presentment, or it is a cheque.

5. Holiday If the resulting day is a public holiday, move backwards to the next
preceding business day (s. 25).

B. Holder and Holder in Due Course

HOLDER (s. 8) HOLDER IN DUE COURSE (s. 9)

Entitled in his own name to possession and Must additionally have given consideration.
to recover the amount.

Consideration not essential — a donee may Must have obtained the instrument before
be a holder. maturity.

May take after maturity. Instrument must be complete and regular

on its face.

Notice of defect immaterial to the status. Must take in good faith, without sufficient
cause to believe in a defect.

Takes subject to all defects in his transferor’s Takes free of prior defects (s. 58), except
title. forgery.

Cannot pass a better title than he has. Passes his own superior rights to every
subsequent holder (s. 53).

C. Types of Endorsement at a Glance

TYPE FORM AND EFFECT

Blank (ss. 16, 54) Endorser signs his name only. Converts an order instrument into a
bearer instrument; negotiable by delivery alone.

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TYPE FORM AND EFFECT

Full / Special (s. “Pay B or order — Sd. A.” Names the endorsee; further negotiation
16) requires his endorsement. “Pay A” equals “Pay A or order”.

Restrictive (s. 50) Express words restricting or excluding further negotiation, or

constituting the endorsee an agent for collection — “Pay C only”, “Pay
C for my use”, “Account Payee”, “For Deposit Only”.

Conditional (s. 52) Makes the endorser’s liability, or the holder’s right, depend on a
specified event — “Pay John Doe upon completion of the roofing
project”.

Sans recours (s. 52) “Without recourse” — the endorser excludes his own liability while
passing title.

Partial (s. 56) Purports to transfer part only of the amount — does not operate as a
negotiation.

Facultative The endorser waives some right, e.g. “notice of dishonour waived”.

D. Mapping the Answer to the Rubric

The CIA-3 rubric awards marks in five columns. The highest band in each requires the
following, and every answer in Part V has been drafted to satisfy them:

RUBRIC COLUMN WHAT THE TOP BAND REQUIRES

Statement of facts All the relevant facts identified — including each party’s defence,
stated separately.

Identification of Issues identified and analysed in depth; framed as questions of law,

issues not restatements of fact.

Principles / legal All relevant provisions identified and applied; the section number
provision alone earns the lowest band — state the content of the section.
Use of precedents Precedents identified with citation and applied to the hypothetical
problem; name the case and state the ratio.
Analysis and Well-constructed paragraphs, organised content, a fair analysis;
structure adjudicate each defence separately and conclude on each claim.

···
“Certainty on the face of the instrument; good faith in the hands that hold it.”

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