Introduction
This article serves as the second part of a series exploring the Negotiable Instruments Act, 1881, a comprehensive legislation that governs the legal aspects of negotiable instruments such as promissory notes, bills of exchange, and cheques.
In this part, we will focus on several crucial aspects of the Act, including payment and interest, discharge from liability, notice of dishonour, noting and protest, and the concept of reasonable time.
For a comprehensive understanding of the first part of the series, please visit https://bssidhuglaslawfirm.com/2024/04/19/negotiable-instruments-act-1881/.
Payment & Interest under The Negotiable Instruments Act
Payment:
When you need to make a payment using a promissory note, bill of exchange, or cheque, you must pay the holder of that instrument. The holder is the person who currently possesses the document and has the legal right to receive the payment.
For example, if you wrote a cheque to someone, you need to make the payment to the person who currently holds that cheque, whether it’s the original recipient or someone else they transferred the cheque to.
If you’ve lost the instrument or can’t produce it, you still need to make the payment. In such cases, you can request an indemnity from the holder, which is a guarantee that they won’t make any further claims against you for that instrument.
Interest:
Interest is the additional amount you may need to pay on top of the principal amount mentioned in the promissory note, bill of exchange, or cheque. The interest rate and calculation method depend on the instrument and the situation.
- If a specific interest rate is mentioned in the instrument, that rate will be used to calculate the interest. The interest will be charged on the principal amount from the date of the instrument until the payment is made or until the date specified by the court if a legal case is involved.
- If no interest rate is specified, the interest rate will be 18% per annum. The interest will be calculated from the date the payment was supposed to be made until the actual payment or the date specified by the court.
For example, if you issued a promissory note for Rs. 10,000 without mentioning an interest rate, and you didn’t pay on the due date, you would have to pay interest at 18% per annum on the principal amount of Rs. 10,000 from the due date until you make the payment.
If the payment is made by an endorser (someone who has transferred the instrument to another person), the interest will be calculated from the time the endorser received notice of non-payment.
These provisions aim to ensure that the parties involved in negotiable instruments are protected, and the transactions are carried out smoothly with clear guidelines for payment and interest calculations.
Discharge From Liability on Notes, Bills, and Cheques under the Negotiable Instruments Act
When dealing with negotiable instruments like promissory notes, bills of exchange or cheques, there are certain situations where the parties involved can be legally discharged from liability under the Negotiable Instruments Act. This protects the rights of makers, acceptors, endorsers and holders. The key ways to discharge from liability can occur while:
Cancellation:
If the holder of a note, bill or cheque intentionally cancels the name of the maker (person making the note), acceptor (person accepting to pay a bill) or endorser, it discharges that party from any liability on the instrument to the cancelling holder and any future holders deriving title from that holder.
Release:
When the holder takes any action that releases or discharges the maker, acceptor or endorser from liability under the instrument, it has the effect of discharging them from any debt owed to that holder and any subsequent holders who derive their title after being notified of the release.
Payment:
If a note, bill or cheque is payable to the bearer (holder) or has been endorsed in blank (without specifying a payee), the maker, acceptor or endorser can be discharged from all liability to all parties by making the full payment due in normal course.
Delay in Cheque Presentment:
In case of cheques, if the holder delays too long past a reasonable time in presenting it for payment after issuance, and the drawer (person writing the cheque) had adequate funds initially which got depleted due to the delay causing actual damage, the drawer is discharged from liability to the extent of the damage caused by the delay.
Qualified Acceptance:
When the holder assents to a qualified or conditional acceptance of a bill that changes the original terms like amount, timing or place of payment, any prior non-consenting parties like the drawer or endorsers are discharged from liability unless they assent after being notified of the qualified acceptance.
Material Alteration:
Any material alteration to the key terms of a negotiable instrument like the amount, date or payee’s name without consent of all parties renders the instrument void against those existing parties who did not consent, unless the alteration was meant to carry out the original common intention of the parties. An endorsee’s(endorser’s) alteration also discharges his prior endorser’s liability for the altered consideration.
Payment on Altered Instrument:
However, if an instrument has been materially altered but does not appear so on its face, if the payment is made by liable parties according to the apparent tenor, it will not be questioned and they will be discharged from liability due to the alteration.
By understanding these provisions, makers, drawers, acceptors, endorsers and holders of negotiable instruments can protect their rights and determine when they may be discharged from liability that would otherwise exist under the instrument. Proper cancellation, release, payment, delay in presentment causing damage, qualified acceptance or material alteration without consent can legally discharge liability as per the Act.
Notice of Dishonour under The Negotiable Instruments Act
When you issue or receive a negotiable instrument like a promissory note, bill of exchange, or cheque, there’s an expectation that it will be honoured – meaning accepted or paid – by the party it is drawn upon. However, sometimes these instruments are dishonoured, which means they are not accepted or paid when presented.
In such cases, the Negotiable Instruments Act, 1881 lays down rules about giving notice of dishonour to the concerned parties. This notice is important because it makes the parties liable for the dishonoured instrument.
What is Notice of Dishonour?
Notice of dishonour is a formal notification that a negotiable instrument has been dishonoured – either by non-acceptance or non-payment. This notice must be given by the holder (the person entitled to receive payment) to the other parties involved, informing them of the dishonour and that they will be held liable.
Who Should Give Notice?
When an instrument is dishonoured, the holder or any party who remains liable on the instrument must give notice of dishonour to all other parties they wish to hold liable. Interestingly, notice does not need to be given to the maker of a dishonoured promissory note or the drawee/acceptor of a dishonoured bill of exchange or cheque.
How Should Notice be Given?
The notice can be given orally or in writing, and can even be sent by post. It must clearly inform the party that the instrument has been dishonoured, how it was dishonoured (non-acceptance or non-payment), and that they will be held liable. The notice must be given within a reasonable time after dishonour, at the party’s place of business or residence.
It’s important to note that if the notice is properly addressed and sent by post but gets lost in the mail, it is still considered valid.
When is Notice Unnecessary?
In certain situations, notice of dishonour is not required:
- If the party entitled to notice has waived (forgone) the requirement
- When the drawer (issuer) of a bill of exchange has countermanded (cancelled) payment
- If the party could not suffer any damage due to lack of notice
- If the party entitled to notice cannot be found after due search
- If the party bound to give notice is unable to give it for reasons beyond their control
- For promissory notes that are not negotiable
- If the party entitled to notice, being aware of the facts, unconditionally promises to pay the amount due
In essence, the notice of dishonour is a crucial mechanism under the Negotiable Instruments Act to ensure that all parties involved in a dishonoured instrument are made aware of their liabilities. By following the prescribed procedures for giving notice, the holder can protect their rights and claim against the other parties.
Noting & Protest under the Instruments Act
When you lend money or extend credit to someone, you may receive a promissory note or a bill of exchange as a written promise to repay the debt. These documents are negotiable instruments that can be transferred from one person to another.
However, sometimes the person who is supposed to pay (the drawee or acceptor) may fail to honor their commitment. This is known as dishonor, and it can happen in two ways:
- Non-acceptance: The drawee refuses to accept the bill of exchange when it is first presented.
- Non-payment: The acceptor fails to pay the amount due on the promissory note or bill of exchange when it becomes due (at maturity).
In such cases, the holder (the person who is supposed to receive the payment) has certain legal options to safeguard their interests. These options are known as “Noting” and “Protest.”
Noting:
If a promissory note or bill of exchange is dishonored due to non-acceptance or non-payment, the holder can have the dishonor “noted” by a notary public. This involves the notary recording the details of the dishonor, such as the date, the reason (if any), and the notary’s charges. This process must be completed within a reasonable time after the dishonor.
Protest:
If the holder wants to take stronger action, they can have the dishonor “protested” by a notary public. This involves the notary certifying the dishonor and issuing a formal “protest” certificate. The protest certificate must contain details such as:
- The instrument itself or a transcript of it
- The names of the parties involved
- A statement that payment or acceptance was demanded and refused
- The time and place of dishonor
- The notary’s signature
The holder can then use this protest certificate as evidence in legal proceedings, if necessary.
In some cases, the holder may also request a “protest for better security” if the acceptor’s financial situation deteriorates before the bill’s maturity date. This allows the holder to demand additional security from the acceptor and, if refused, to have the refusal certified by a notary.
The purpose of noting and protesting is to establish legal proof of dishonor, which can be crucial if the holder needs to take further legal action to recover the debt. It also serves as a formal notice to the parties involved, potentially triggering certain legal consequences.
While the process may seem technical, it’s an important safeguard for holders of negotiable instruments, helping them protect their rights and interests in case of non-payment or non-acceptance.
Reasonable Time under The Negotiable Instruments Act
When dealing with negotiable instruments, there are certain time frames and deadlines that need to be adhered to. The Negotiable Instruments Act, which governs such instruments, lays down the concept of “reasonable time” for various actions related to these instruments.
What is “Reasonable Time”?
The Act does not define a fixed period as “reasonable time.” Instead, it states that the reasonableness of time should be determined based on the nature of the instrument and the usual course of dealing with similar instruments. In other words, the time considered reasonable may vary depending on the type of instrument and the customary practices followed for that particular instrument.
Here are some specific instances where the concept of “reasonable time” comes into play:
1. Presentment for Acceptance or Payment:
When presenting a negotiable instrument for acceptance or payment, the holder (the person entitled to receive the payment) must do so within a reasonable time. The reasonableness of time is determined by considering the nature of the instrument and the typical practices followed for similar instruments.
2. Giving Notice of Dishonour:
If a negotiable instrument is dishonoured (not accepted or paid), the holder must give notice of dishonour to the other parties involved within a reasonable time. The Act provides guidelines for determining reasonable time in such cases:
– If the holder and the party to be notified live or have businesses in different places, the notice is considered given within a reasonable time if it is dispatched by the next postal service or on the next day after the day of dishonour.
– If the holder and the party to be notified live or have businesses in the same place, the notice is considered given within a reasonable time if it is dispatched in time to reach its destination on the day after the day of dishonour.
3. Transmitting Notice of Dishonour:
If a party receives a notice of dishonour and wants to enforce their rights against a prior party (someone who endorsed or issued the instrument before them), they must transmit the notice within a reasonable time. The reasonable time for transmitting the notice is the same as the time they would have had to give the notice if they were the holder.
The purpose of these provisions is to ensure that parties involved in negotiable instruments act promptly and avoid unnecessary delays, which could affect the rights and obligations of the parties involved.
It’s important to note that while the Act provides guidelines for determining reasonable time, the exact time frame may vary based on the specific circumstances and the interpretation of the courts. In case of any dispute, the reasonableness of time would be determined by the court based on the facts and evidence presented.
This article is just for educational and informational purposes only.
To be continued