Legal Studies - Unit 4: Negotiable Instruments PDF

# The Negotiable Instruments Act, 1881 ## Chapter 4-1: Negotiable Instruments ### Chapter Contents - The Negotiable Instruments Act, 1881 - Definition of Negotiable Instrument - Characteristics of a Negotiable Instrument - Types of Negotiable Instruments - Instrument Negotiable by Statute...

# The Negotiable Instruments Act, 1881 ## Chapter 4-1: Negotiable Instruments ### Chapter Contents - The Negotiable Instruments Act, 1881 - Definition of Negotiable Instrument - Characteristics of a Negotiable Instrument - Types of Negotiable Instruments - Instrument Negotiable by Statute - Instruments Negotiable by Custom or Usage - Questions-Test ## The Negotiable Instruments Act, 1881 There are certain documents which are freely used in commercial transactions and monetary dealings. These documents, if they satisfy certain conditions, are known as 'negotiable instruments'. The word 'negotiable' means “transferable from one person to another in return for consideration” and 'instrument' means a “written document by which a right is created in favour of some person.” Thus, a negotiable instrument is a document which entitles a person to a sum of money and which is transferable from one person to another by mere delivery or by indorsement and delivery. The terms 'delivery' and 'indorsement' have been explained in a subsequent Chapter. The law relating to negotiable instruments is contained in the Negotiable Instruments Act, 1881, which deals with promissory notes, bills of exchange and cheques, as also hundis (a bill of exchange in a vernacular language). It is based, except where conditions in India require a departure, mainly upon the English Law as to negotiable instruments and judicial decisions. The Act extends to the whole of India. It does not affect any local usage relating to any instrument in a vernacular language. The local usages may however be excluded by any words in the body of the instrument. The Act came into force on first day of March, 1882. References to Sections in Chapters 4-1 to 4-10, unless otherwise indicated, are to the Negotiable Instruments Act, 1881. ## The Reserve Bank of India Act, 1934 The Negotiable Instruments Act does not affect the provisions of Secs. 31 and 32 of the Reserve Bank of India Act, 1934. The object of Sec. 31 is to prevent private persons from infringing the monopoly of the Government in note issue (paper currency) in India. The provisions of Sec. 31 are as follows: 1. No person (other than the Reserve Bank or the Central Government) can draw, accept, make, or issue any bill of exchange, hundi, or promissory note payable to bearer on demand. 2. No person (other than the Reserve Bank or the Central Government) can make or issue any promissory note payable to the bearer of the instrument. This renders the words 'or to bearer' in the definition of a 'promissory note' in Sec. 4 of the Negotiable Instruments Act inoperative. But a bill or a note, on being indorsed in blank, can become payable to bearer on demand. A cheque is also payable to bearer on demand. These are exceptions to the rules as contained in Sec. 31. Sec. 32 of the Reserve Bank of India Act provides that if anybody issues a bill or note payable to bearer on demand, or a note payable to bearer, he shall be punishable with fine. ## Definition of Negotiable Instrument A negotiable instrument is a method of transferring a debt from one person to another. The term 'negotiable instrument' as such is not defined in the Negotiable Instruments Act. Sec. 13, however, says that “a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.” The definition, as it is, says that a negotiable instrument 'means' and not 'means and includes'. Therefore, any other instrument which satisfies the conditions of negotiability can be added to the list of negotiable instruments. Justice Willis defines a negotiable instrument as "one the property in which is acquired by anyone who takes it bona fide and for value notwithstanding any defect of title in the person from whom he took it." [The Law of Negotiable Securities, 5th ed., p. 5]. According to Thomas, a negotiable instrument is one which is, by a legally recognised custom of trade or by law, - transferable by delivery or by indorsement and delivery, - without notice to the party liable, in such a way that the holder of it for the time being may sue upon it in his own name, and - the property in it passes to a bona fide transferee for value free from equities and free from any defect in the title of the person from whom he obtained it [Commerce, Its Theory and Practice by Thomas, 8th ed., p. 629]. This means that the person taking an instrument (i) bona fide, and (ii) for a value, known as a holder in due course, gets a good title even though the title of the transferor may be defective. A rough and ready test of negotiability in case of bearer instruments is: Can a good title be acquired through a thief? If yes, the instrument is negotiable. Negotiable instruments are a special class of contracts. ## Characteristics of a Negotiable Instrument The characteristics of a negotiable instrument are as follows: 1. **Freely transferable.** The property in a negotiable instrument passes from one person to another by delivery, if the instrument are as follows: instrument passes from one person to another by delivery, if the property in a negotiable instrument is payable to bearer, and by indorsement and delivery if it is payable to order. 2. **Title of holder free from all defects.** A person, taking an instrument bona fide and for value, known as a holder in due course, gets the instrument free from all defects in the title of the transferor. He is not in any way affected by any defect in the title of the transferor or of any prior party. **Example:** S sells certain goods to B. B gives a promissory note to S for the price. He refuses to pay the promissory note, claiming that the goods are not according to order. If S sues B on the note, B's defence is good. But if he negotiates the note to H, a holder in due course, B's defence will be of no avail. The holder in due course is also not affected by certain defences, for example, fraud, which might be available against previous holders, provided he himself is not a party to it. 3. **Recovery.** The holder in due course can sue upon a negotiable instrument in his own name for the recovery of the amount. Further, he need not give notice of transfer to the party liable on the instrument to pay. 4. **Presumptions.** Certain presumptions apply to all negotiable instruments, unless contrary is proved. These presumptions are dealt with in Secs. 118 and 119 and are as follows: - **Consideration:** Every negotiable instrument is presumed to have been made, drawn, accepted, indorsed, negotiated or transferred, for consideration. This would help a holder to get a decree from a Court without any difficulty. - **Date:** Every negotiable instrument bearing date is presumed to have been drawn on such date. - **Time of acceptance:** When a bill of exchange has been accepted, it is presumed that it was accepted within a reasonable time of its date and before its maturity. - **Time of transfer:** Every transfer of a negotiable instrument is presumed to have been made before its maturity. - **Order of indorsements:** The indorsements appearing upon a negotiable instrument are presumed to have been made in the order in which they appear thereon. - **Stamp:** When an instrument has been lost, it is presumed that it was duly stamped. - **Holder presumed to be a holder in due course:** Every holder of a negotiable instrument is presumed to be a holder in due course (Sec. 118). - **Proof of protest:** In a suit upon an instrument which has been dishonoured, the Court, on proof of the protest, presumes the fact of dishonour, until such fact is disproved (Sec. 119). The above presumptions are rebuttable by evidence. If anyone challenges any of these presumptions, he has to prove his allegation. Again, these presumptions would not arise where an instrument has been obtained by any offence, fraud or unlawful consideration. ## Chapter 4-2: Notes, Bills and Cheques ### Chapter Contents - Promissory Note - Bill of Exchange - Distinction between a Bill of Exchange and a Promissory Note - Cheque - Distinction between a Bill of Exchange and a Cheque - Marking of Cheques - Crossing of Cheques - Classification of Negotiable Instruments - Bearer and Order Instruments - Inland and Foreign Instruments - Instruments Payable on Demand - Time Instruments - Accommodation, Fictitious, Documentary and Clean Bill - Ambiguous Instruments - Inchoate Instrument - Undated Bills and Notes - Bills in Sets - Maturity and Days of Grace - Payment in Due Course - Interest on Bills and Notes - Questions-Test, Practical ## 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 order of, a certain person, or to the bearer of the instrument (Sec. 4). The person who makes the promissory note and promises to pay is called the maker. The person to whom the payment is to be made is called the payee. **Examples:** A signs an instrument in the following terms: - “I promise to pay B or order ₹5,000.” - “I acknowledge myself to be indebted to B in ₹10,000 to be paid on demand, for value received.” - “Mr. B, I.O.U. ₹5,000.” - “I promise to pay B ₹5,000 and all other sums which shall be due to him.” - “I promise to pay B ₹5,000, first deducting thereout any money which he may owe me.” - “I promise to pay B ₹5,000 seven days after my marriage with C.” - “I promise to pay B ₹5,000 on D’s death, provided D leaves me enough to pay that sum.” - “I promise to pay B ₹5,000 and to deliver to him my black horse on 1st January next.” Of these only (a) and (b) are promissory notes. The specimen of a promissory note is given below: ₹10,000 **Specimen of a Promissory Note** Delhi, July 10, 2022 Three months after date I promise to pay Shyam Sunder or order the sum of ten thousand rupees, for value received. To Shyam Sunder 222, Ashok Vihar Delhi-110 052 Stamp Ram Sd/- ## Essential Elements For an instrument to become a promissory note, it must have the following essential elements: 1. **Writing.** The instrument must be in writing. Mere verbal engagement to pay is not enough. Writing includes print and typewriting and may also be in pencil or ink. 2. **Promise to pay.** The instrument must contain an express promise to pay. A mere acknowledgement of indebtedness or implied undertaking by the use of the word 'debt' or 'pronote', is not sufficient. The following instruments signed by A are not promissory notes: - “Mr. B, I.O.U. ₹5,000” or “Mr. B, I owe you ₹5,000.” - “I am liable to B, in a sum of ₹5,000 to be paid by instalments." - “I am bound to pay the sum of ₹5,000 which I received from you.” A receipt for money, if it does not contain express promise to pay, is not a promissory note. **Example:** “I of my own free will and accord approached B and borrowed from him the sum of ₹100 bearing interest at the rate of 2% per mensem. I have, therefore, executed these few presents by way of a promissory note so that it may serve as evidence and be of use when needed.” Signed by A. Held, the instrument is not a promissory note as it does not contain an express undertaking to pay the amount mentioned in it [Bal Mukand v. Munna Lal Ramji Lal, A.I.R. (1970) P.& H. 516]. But if the receipt is coupled with a promise to pay, it is a promissory note. **Example:** “We have received the sum of ₹9,000 from Shri R.R. Sharma. This amount will be repaid on demand. We have received this amount in cash.” Held, this is a promissory note [Surjit Singh v. Ram Ratan, A.I.R. (1975) Gau. 15]. 3. **Definite and unconditional.** The promise to pay must be definite and unconditional. If it is uncertain or conditional, the instrument is invalid. Thus, the following instruments signed by A are not promissory notes: - “I promise to pay B a sum of ₹500, when convenient or able.” - “I promise to pay B ₹500 by instalments with a proviso that no payment shall be made after my death.” - “I promise to pay B ₹500 when he delivers the goods.” - “I promise to pay B ₹500 on D’s death, provided D leaves me enough to pay that sum.” [Robert v. Peake, (1757) 97 E.R. 333]. However, the promise to pay may be subject to a condition which according to the ordinary experience of mankind is bound to happen. Thus, a promise (or order, in case of a bill of exchange) to pay is not 'conditional' if- - it depends upon an event which is certain to happen though the time of its happening may be uncertain. **Examples:** - A promises to pay B a sum of ₹500 after the death of C. This is not a conditional promise for it is certain that C shall die. - “I promise to pay ₹1,000 to B, 30 days after his marriage with C.” Signed by A. This is not a promissory note as it is probable that B may not marry C [Beardsley v. Baldwin, (1741) 93 E.R. 1994]. - the promise is to pay at a particular place or after a specified time. 4. **Signed by the maker.** The instrument must be signed by the maker, otherwise it is incomplete and of no effect. Even if it is written by the maker himself and his name appears in the body of the instrument, his signature must be there. Signature means the writing of a person’s name in order to authenticate and give effect to the contract contained in the instrument. It is, at the same time, essential that the mind of the signer must accompany the signature. An agent of a trading firm can sign a promissory note on its behalf [Meenakshi v. Chettiar, A.I.R. (1957) Mad. 8]. 5. **Certain parties.** The instrument must point out with certainty as to who the maker is and who the payee is. Where the maker and the payee cannot be identified with certainty from the instrument itself, the instrument, even if it contains an unconditional promise to pay, is not a promissory note. The payee may sometimes be misnamed or designated by description only. In such a case, the note is valid if the payee can be ascertained by evidence [Wills v. Barret, (1816) 2 Stark 29]. As such a promissory note payable ‘to the manager of a certain bank’ is payable to a certain person. A promissory note cannot be made payable to the maker (promisor) himself. Such a note is a nullity. But if it is indorsed by the maker to some other person or indorsed in blank, it becomes a valid promissory note [Gay v. Landal, (1848) L.T.C.P. 286]. 6. **Certain sum of money.** The sum payable must be certain and must not be capable of contingent additions or subtractions. The following instruments signed by A are not promissory notes (as the sum payable is not certain): - “I promise to pay B ₹1,000 and all the other sums due to him." - “I promise to pay B ₹1,000 and the fine according to the rules." - “I promise to pay B ₹500, first deducting thereout any money which he may owe me.” The sum payable is certain- - When it is payable with interest. But if the rate of interest is not stated in the instrument, it is not a promissory note. - When it is payable at an indicated rate of exchange. - When it is payable by instalments, with a provision that on default being made in payment, the balance unpaid shall become due (Sec. 5, Para 3). 7. **Promise to pay money only.** The payment to be made under the instrument must be in the legal tender money of India. If the instrument contains a promise to pay something in addition to money, it cannot be a promissory note. Thus, the following instruments signed by A are not promissory notes: - “I promise to pay B ₹200 and deliver one quintal of paddy.” - “I promise to pay B in 20 shares and 10 bonds of XY Ltd.” - “I promise to deliver to B 100 bags of wheat.” 8. **Bank note or currency note is not a promissory note.** This is because a bank note or a currency note is money or a currency note is money itself. 9. **Formalities like number, date, place, consideration, etc.** These are usually found in an instrument although they are not essential in law. The omission of the words “for value received”, the place where the instrument is made or where it is payable or date (if the date of execution of the instrument can be independently proved) do not invalidate the instrument. The date of a promissory note is also not necessary unless the amount is payable at a certain time after date. But it must bear the necessary stamp under the Indian Stamp Act, 1899. 10. **It may be payable on demand or after a definite period of time.** The expression ‘on demand’ means payable immediately or forthwith. 11. **It cannot be made payable to bearer on demand.** The Reserve Bank of India Act, 1934 prohibits issue of such promissory notes except by the Reserve Bank of India itself or the Central Government. Lack of any of the requirements mentioned in Sec. 4 will not make a document a promissory note [Bapanna Krishnayya v. Chaparala Baburao, A.I.R. (1977) A.P. 42]. ## 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 (Sec. 5). ### Parties to a bill: There are three parties to bill of exchange, viz., the drawer, the drawee and the payee. - **The person who gives the order to pay or who makes the bill is called the drawer.** - **The person who is directed to pay is called the drawee.** - **When the drawee accepts the bill, he is called the acceptor.** - **The person to whom the payment is to be made is called the payee.** Where the payee named in a bill is a fictitious or non-existing person, the bill is treated as payable to bearer [Clutton v. Attenborough, (1897) A.C. 90]. In some cases, the drawer and the payee, or when a principal draws on his agent, the drawer and the drawee may be one and the same person. - **The drawer or the payee who is in possession of the bill is called the holder. The holder must present the bill to the drawee for his acceptance.** - **When the holder indorses the bill, note or cheque, he is called the indorser. The person to whom the bill, note or cheque is indorsed is called the indorsee.** - **When in the bill or in any indorsement thereon the name of any person is given in addition to the drawee to be referred to in case of need, such person is called a drawee in case of need (Sec. 7, Para 2). The name of the drawee in case of need may be given in the bill by the drawer at the time when it is drawn or by some subsequent indorser. The resort is to be had to the ‘drawee in case of need’ only when the bill is dishonoured by non-acceptance or non-payment.** **Specimen of a Bill of Exchange** Shyam of Delhi buys goods on credit from Krishan of Mumbai for ₹50,000 to be paid three months after date. Krishan buys goods from Ram of Delhi for ₹50,000 on similar terms. Now Krishan may order Shyam to pay the sum of ₹50,000 to Ram. The order will be a Bill of Exchange. **Specimen of a Bill of Exchange** Mumbai, Jan. 10, 2022 ₹50,000 Three months after date pay to Ram or order the sum of fifty thousand rupees, for value received. To Shyam 235, Subhash Marg, Delhi-110 006 In case of need with Canara Bank, Delhi Stamp Accepted Shyam Sd/- Krishan ## Essential Elements - **It must be in writing.** - **It must contain an order to pay.** **Example:** “Mr. Little, Please let the bearer have 17 and oblige.” Signed by A. This is not a bill of exchange as it contains a request and not an order [Little v. Slackford (1828) M. & W. 171]. - **The order must be unconditional.** - **It requires three parties, i.e., the drawer, the drawee and the payee.** - **The parties must be certain.** - **It must be signed by the drawer.** - **The sum payable must be certain.** - **It must contain an order to pay money** - **The formalities relating to number, date, place and consideration, though usually found in bills, are not essential in law. But a bill must be affixed with the necessary stamp.** A bill as originally drawn cannot be made payable to bearer on demand. ## Distinction between a Bill of Exchange and a Promissory Note 1. **In a note there are two parties-the maker and the payee. In a bill there are three parties- the drawer, the drawee and the payee.** 2. **A note contains an unconditional promise to pay. A bill contains an unconditional order to pay.** 3. **The maker of a note is the debtor and he himself undertakes to pay. The drawer of a bill is the creditor who directs the drawee (his debtor) to pay.** 4. **The maker of a note corresponds in general to the acceptor of a bill. But the maker of the note cannot undertake to pay conditionally whereas the acceptor may accept the bill conditionally because he is not the originator of the bill.** 5. **The liability of the maker of a note is primary and absolute, whereas the liability of the drawer of a bill is secondary and conditional.** 6. **A note cannot be made payable to the maker himself, whereas in a bill the drawer and the payee may be one and the same person.** 7. **A note requires no acceptance as it is signed by the person who is liable to pay. A bill payable after sight or after a certain period must be accepted by the drawee before it is presented for payment.** 8. **A note cannot be drawn payable to bearer. A bill can be so drawn. But in no case can a note or bill be drawn ‘payable to bearer on demand.’** 9. **The maker of a note stands in immediate relation with the payee. The drawer of a bill stands in immediate relation with the acceptor and not the payee.** 10. **Certain provisions like (a) presentment for acceptance (Sec. 61), (b) acceptance (Sec. 75), (c) acceptance for honour (Sec. 108), and (d) bill in sets (Sec. 132) apply to bills but not to notes.** 11. **In case of dishonour of a bill either by non-acceptance or by non-payment, due notice of dishonour must be given to all the persons who are to be made liable to pay. This includes the drawer and the prior indorsers. But in the case of dishonour of a note no such notice is required to be given to the maker (Sec. 93).** 12. **Foreign bills must be protested for dishonour when such protest is required by the law of the place where they are drawn (Sec. 104). No such protest is required in the case of a note.** ## Cheque A cheque is a bill of exchange drawn upon a specified banker and payable on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form. A cheque in the electronic form means "cheque which contains the exact mirror image of a proper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature and asymmetric crypto system." A truncated cheque means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing. 'Clearing house' means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India [Sec. 6 as substituted by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002]. A cheque is a species of a bill of exchange; but it has the following two additional qualifications, viz., - **It is always drawn on a specified banker, and** - **It is always payable on demand.** All cheques are bills of exchange, but all bills of exchange are not cheques. A cheque must have all the essential requisites of a bill of exchange. It must be signed by the drawer. It must contain an unconditional order on a specified banker to pay a certain sum of money to or to the order of a specified person or the bearer of the cheque. But it does not require acceptance as it is intended for immediate payment. The usual form of bank cheque is as follows: ## Distinction between a Bill of Exchange and a Cheque 1. **A bill of exchange may be drawn on any person, including a banker, but a cheque is always drawn on a banker. Thus, all bills are not cheques whereas all cheques are necessarily bills.** 2. **A bill must be accepted before the drawee can be called upon to make payment upon it. A cheque requires no acceptance as it is intended for immediate payment.** 3. **A bill which is not expressed to be payable on demand is entitled to three days of grace. A cheque is not entitled to any days of grace.** 4. **A bill may be payable on demand or after the expiry of a certain period after date or sight. A cheque is always payable on demand.** 5. **A bill must be duly presented for payment to the acceptor or else the drawer of the bill will be discharged from liability. The drawer of a cheque is not necessarily discharged from his liability by delay of the holder in presenting it for payment. He is discharged only to the extent of the damage, if any, suffered by him.** 6. **A cheque may be crossed but not a bill.** 7. **A cheque does not require any stamp whereas a bill except in certain cases, must be stamped.** 8. **The payment of a cheque may be countermanded (revoked or cancelled) by the drawer but the payment of a bill cannot be countermanded.** 9. **A cheque is not required to be noted or protested for dishonour. A bill may be noted or protested for dishonour.** ## Marking of Cheques A cheque does not require acceptance in ordinary course of business as it is intended for immediate payment. The custom among bankers to mark cheques as ‘good for payment’ does not amount to an acceptance. Marking is the writing on a cheque by the drawee banker that it would be honoured when it is duly presented for payment. The effect of marking a cheque as good by the drawee banker is that it cannot be countermanded by the drawer subsequently and the payee is certain of getting the money. In India, no such practice of marking of cheques has been established either by judicial decisions or by Statutes [Bank of Baroda v. Punjab National Bank, (1944) A.C.176]. Cheques may be marked as good by the drawee banker at the instance of- - the drawer, or - the holder, or - the collecting banker. 1. **Marking at drawer’s instance.** When a cheque is marked good at the instance of the drawer, the drawee banker earmarks sufficient funds in the account to meet the cheque when it will be presented for payment. The drawer cannot afterwards countermand payment of such cheque. The banker is entitled to dishonour other cheques if their encashment would leave the banker with insufficient funds to meet the cheque marked good. 2. **Marking at holder’s instance.** When a cheque is marked good at the holder’s instance, it is an intimation to the holder that at the time of marking, the banker has sufficient funds of the drawer in his hands. The banker may refuse to honour the cheque when it is subsequently presented for payment if in due course the drawer has withdrawn funds or stopped payment of the cheque. ## Chapter 4-6: Dishonour of a Negotiable Instrument ### Chapter Contents - Meaning - Dishonour by Non-acceptance - Dishonour by Non-payment - Notice of Dishonour - Noting and Protesting - Noting - Protest - Rules as to Compensation - Penalties in Case of Dishonour of Certain Cheques for Insufficiency of Funds - Questions-Test, Practical ## Meaning A bill may be dishonoured by non-acceptance (since only bills require acceptance) or by non-payment. A promissory note and a cheque are dishonoured by non-payment only. When a negotiable instrument is dishonoured, the holder must give a notice of dishonour to all the prior parties in order to make them liable on the instrument. If he fails to do so, except in cases when notice of dishonour may be excused, he forfeits his right of action against the prior parties entitled to the notice of dishonour (Sec. 93). ### Dishonour by Non-acceptance (Sec. 91) A bill of exchange is dishonoured by non-acceptance in any one of the following ways: 1. If the drawee does not accept the bill within 48 hours from the time of presentment though it is duly presented for acceptance. 2. If there are several drawees (who are not partners) and all of them do not accept. 3. When presentment for acceptance is excused, and the bill is not accepted. 4. When the drawee is incompetent to contract. 5. When the drawee gives a qualified acceptance. 6. When the drawee is a fictitious person or after reasonable search cannot be found. If a drawee in case of need is mentioned in a bill, the bill is not deemed to be dishonoured unless it is dishonoured by such drawee in case of need also (Sec. 115). ### Dishonour by Non-payment (Sec. 92) A promissory note, bill of exchange or cheque is said to be dishonoured by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same (Sec. 92). An instrument is also dishonoured by non-payment when presentment for payment is excused and the instrument when overdue remains unpaid (Sec. 76). ## Notice of Dishonour When a negotiable instrument is dishonoured either by non-acceptance or by non-payment, the holder of the instrument or some party to it who is liable thereon, must give a notice of dishonour to all the prior parties whom he wants to make liable on the instrument. If he does not give this notice, except in cases when notice of dishonour may be excused, all the prior parties liable thereon are discharged of their liability (Sec. 93). ### Object of notice of dishonour: The object of notice of dishonour is to inform the party liable on the instrument about the liability which accrues as a result of the dishonour of the instrument. The notice is necessary whatever the nature of the instrument, i.e., whether it is payable at sight or on demand or whether it is an accommodation bill. If the holder neglects to give such notice within a reasonable time from the date of dishonour, all the prior parties liable on the instrument and entitled to notice are discharged. ### Notice by Whom 1. **Notice by holder or any prior party.** Notice of dishonour may be given by the holder or any of the parties liable on the instrument (Sec. 93). 2. **Chain method of giving notice of dishonour.** A party receiving notice of dishonour must, in order to render any prior party liable to himself, give notice of dishonour to such party within a reasonable time, unless such party otherwise receives due notice (Sec. 95). It is not necessary that the notice should always emanate from the holder for he is entitled to avail himself of a notice given by any party liable on the instrument. But if a notice is given by a stranger it would be a mere nullity. 3. **Notice by principal or agent.** If an instrument deposited with an agent for presentment is dishonoured, the notice of dishonour may be given either by the agent or by the principal himself. The agent may give notice to his principal within a reasonable time, and the principal may give notice within a reasonable time to the parties sought to be held liable (Sec. 96). ### Notice to Whom 1. **Notice to all parties whom the holder seeks to make liable.** Notice of dishonour must be given to all the parties whom the holder seeks to make liable. Notice of dishonour need not be given to the acceptor of a bill of exchange or the maker of a promissory note or the drawee of a cheque (Sec. 93), because they are the parties primarily liable upon the instrument. It is they who dishonour the instrument by non-acceptance or non-payment, and notice to them will merely be notice of a fact already known to them. 2. **Notice to party or his agent, or to legal representative or assignee.** Notice of dishonour may be given to the party liable or his duly authorised agent, or, where he has died, to his legal representative, or, where he has been declared insolvent, to, bis assignee (Sec. 94). When the party liable or his duly authorised agent is dead, but the party despatching the notice is ignorant of his death, the notice is sufficient (Sec. 97). ### Form of Notice 1. The notice of dishonour may be oral or written. If it is written, it may be sent by post. If it is duly directed and sent by post, it would be a good notice even though it is miscarried. 2. It may be in any form but it must clearly indicate that the instrument has been dishonoured and in what way, and that the party to whom it is being given will be liable on the instrument. 3. It must be given within a reasonable time at the place of business or (in case such party has no place of business) at the residence of the party for whom it is intended (Sec. 94). Delay caused by circumstances beyond the control of the party desiring to serve notice is excused provided it is not imputable to his default, misconduct or negligence [Beveridge v. Burgis, (1812) 3 Camp. 262]. **What is a reasonable time?** In determining what is a reasonable time for giving notice of dishonour, regard must be had to the nature of the instrument and the usual course of dealing with respect to similar instruments. In calculating such time, public holidays shall be excluded (Sec. 105). ### Rules for Giving Notice of Dishonour (Sec. 106) 1. **If the holder and the party entitled to notice of dishonour carry on business or live (as the case may be) in different cities, the notice must be despatched by the next post or on the day next after the day of honour.** 2. **If these parties carry on business or live in the same place, the notice must be despatched in time to reach its destination on the day next after the day of dishonour.** ### When the Notice of Dishonour is not Necessary (Sec. 98) No notice of dishonour is necessary- - **when it is dispensed with by the party entitled thereto;** - **to charge the drawee, when he has countermanded payment;** - **when the party charged could not suffer damage for want of notice;** - **when the party entitled to notice cannot after due search be found, or the party bound to give notice is, for any other reason, unable without any fault of his own to give it;