Contract-II - Effect of Material Alteration in Negotiable Instrument

8/18/2019 Contract-II - Effect of Material Alteration in Negotiable Instrument

1/18

Nirma UniversityInstitue of Law

Final Draft of the Project Work

“Effect of Material Alternation in Negotiable Instrument”

undertaken in the partial fulfillment of B.Com. LL.B. (Hons.)

5 !ears "nte#rated Course at "nstitute of La$% &"'

*ni+ersit,.

Submitted By:

Mohit Mittal

Roll No. 11BBL059

IV - Semester, Section – C

Under The Guidance Of:

Mr. Nizam han

!ro"ect Coor#inator$ Contract -II

%sst. !ro&essor, Instit'te o& La(

Nirma )ni*ersit+


2/18

Introduction

A material alteration, though not defined in the Indian Contract Act or in the Negotiable

Instrument Act, 1881 or does receive any definition from legislature, it would be appropriate to

refer to udgment or legal precedents for defining the term !material alternation"# In Nathu Lal v#

$omti %aur, the privy council cited the following definition &the material alternation is one

which varies the rights, liabilities, or legal position of the parties ascertained by the deed in its

original state or otherwise varies the legal effect of the instrument as originally e'pressed, or

reduces to certainty some provision which was originally unascertained and as such void, or may

otherwise preudice the party bound by the deed as originally e'ecuted,(

As per section 88 of the Negotiable Instrument Act, 1881 the effect of material alternation of a

negotiable instrument renders the contract void as against anyone who is party thereto at the time

of ma)ing such alteration and does not consent thereto, unless it was made in order to carry out

the common intention of the original parties#

*wo other +ections of the Negotiable Instruments Act, 1881 which deal with material alterations,

are as under

As per +ection 88, Acceptor or endorsers are bound notwithstanding previous alteration# -

An acceptor or endorser of a negotiable instrument is bound by his acceptance or endorsement

notwithstanding any previous alteration of the instrument#.Again as per the +ection 8/, 0ayment of instrument on which alteration is not apparent#

213 4here a promissory note, bill of e'change or che5ue has been materially altered but does not

appear to have been so altered, or where a che5ue is presented for payment which does not at the

time of presentation appear to be crossed or to have had a crossing which has been obliterated,

payment thereof by a tenor thereof at the time of payment and otherwise in due course, shall

discharge such person or ban)er from all liability thereon6 and such payment shall not be

5uestioned by reasons of the instrument having been altered, or the che5ue crossed#

273 4here the che5ue is an electronic image of and the truncated che5ue shall be a material

alteration and it shall be the duty of the ban) or the clearing house, as the case may be, to ensure

the e'actness of the apparent tenor of electronic image of the truncated che5ue while truncating

and transmitting the image#


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23 Any ban) or a clearing house which receives a transmitted electronic image of a truncated

che5ue, shall verify from the party who transmitted the image to it, that the image so transmitted

to it and received by it, is e'actly the same#


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Chapter – I

Introduction

Negotiable Instrument Act was enacted, in India, in 1881# 9efore this, the :nglish Negotiable

Instrument Act was applicable in India# *hough, the present act is also based on the :nglish Act

with Indian modifications# It e'tends to the whole of India e'cept the +tate of ;ammu and

%ashmir# It was enacted with the aim &to define and amend the law relating to promissory notes,

bills of e'change and che5ue.# It is a document guaranteeing the payment of a specific amount

of money, either on demand, or at a set time# Negotiable instrument are often defined in

legislation# A negotiable instrument is one, therefore, which when transferred by delivery or by

endorsement and delivery, passes to the transferee a good title to payment according to its tenor

and irrespective of the title of the transferor, provided he is bonafide holder for value without

notice of any defect attaching to the instrument or in the title of the transferor6 in other words the

principle nemo dat quod non habit does not apply1# *he negotiable instrument includes a

promissory note, bill of e'change and che5ue7#

According to +ection 1 2a3 of the Act, &Negotiable instrument means a promissory note, bill of

e'change or che5ue payable either to order or to bearer, whether the word &order. or & bearer.

appear on the instrument or not#. In the words of ;ustice 4illis, &A negotiable instrument is one,

the property in which is ac5uired by anyone who ta)es it bonafide and for value notwithstanding

any defects of the title in the person from whom he too) it#

*hus, the term, negotiable instrument means a written document which creates a right in favor of

some person and which is freely transferable# Although the Act mentions only these three

instruments 2such as a promissory note, a bill of e'change and che5ue3, it does not e'clude the

possibility of adding any other instrument which satisfies the following two conditions of

negotiability

- *he instrument should be freely transferable 2by delivery or by endorsement# and delivery3 bythe custom of the trade6 and

- 9hashyam < Adiga"s, *he Negotiable Instruments Act, 18th :dition, 9harat Law =ouse New >elhi

+ection ?, @ and of Indian Negotiable Instrument Act, 1881


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*he person who obtains it in good faith and for value should get it free from all defects, and be

entitled to recover the money of the instrument in his own name#

CHARACTERITIC !" A NE#!TIA$%E INTR&MENT

*he Negotiable Instruments has the following characteristics

- 'ropert( - the possession holder of the negotiable instrument is presumed to be the owner of

the property contained therein# A negotiable instrument can be transferred from one person to

another without any comple' formalities#

Title - *he transferee of a negotiable instrument is )nown as !holder in due course#" A bona fide

transferee for value is not affected by any defect of title on the part of the transferor or of any of

the previous holders of the instrument#

/ Rights - *he holder in due course can sue in his own name, in case of dishonor# A negotiable

instrument can be transferred any number of times till it is at maturity# *he holder of the

instrument need not give notice of transfer to the party liable on the instruments to pay#

0 'resumptions - Certain presumptions apply to all negotiable instruments, e#g# the consideration

has been paid under it and it is not necessary to write every time that &for value received.#

5 'rompt 'a(ments - A negotiable instrument enables the holder to expect prompt

payment because a dishonor means the ruin of the credit of all persons who are

parties to the instrument

T)'E !" NE#!TIA$%E INTR&MENT

+ection 1 of the Negotiable Instruments Act, 1881 states, that a, negotiable instrument means a

promissory note, bill of e'change or che5ue payable either to order or to bearer# 9ut these are not

the end# *he customary practices recogniBes more than what is laid down in the Act# It also

includes =undis, +hare 4arrants, >ividend 4arrants, 9an)ers >raft, Circular Notes, 9earer

>ebentrues, >ebentures of 9ombay 0ort *rust, ailway eceipts, >elivery Drders, etc# *hus, as

per the :'planation 2i3 to +ection 1, A promissory note, bill of e'change or che5ue is payable to

order which is e'pressed to be so payable or which is e'pressed to be payable to a particular

person, and does not contain words prohibiting transfer or indicating an intention that it shall not

be transferable#


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:'planation 2ii3 - A promissory note, bill of e'change or che5ue is payable to bearer which is

e'pressed to be so payable or on which the only or last endorsement is an endorsement in blan)#

:'planation 2iii3 - 4here a promissory note, bill of e'change or che5ue, either originally or by

endorsement, is e'pressed 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#E

- 'romissor( Note - +ection ? of the Act defines, &A promissory note is an instrument in writing

2note being a ban)-note or a currency note3 containing an unconditional underta)ing, signed by

the ma)er, to pay a certain sum of money to or to the order of a certain person, or to the bearer of

the instruments#.

*hus, if any instruments that satisfy the following conditions can be regarded as the

promissory note

a It must be in 4riting

1 It must certainly an e'pressed promise or clear understanding to pay

c 0romise to pay must be unconditional

d It should be signed by the ma)er

e 2he maker must 1e certain.

f 2he pa,ee must 1e certain

# 2he promise should 1e to pa, mone, and mone, onl,

h 2he amount should 1e certain

i 3ther formalities

$ill of E*change - +ection @ of the Act defines, &A bill of e'change is an instrument in writing

containing an unconditional order, signed by the ma)er, 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.# A bill of e'change, therefore, is a written ac)nowledgement of the debt, written by

the creditor and accepted by the debtor# *here are usually three parties to a bill of e'change

drawer, acceptor or drawee and payee# >rawer himself may be the payee+

:ssentials Characteristics of a bill of e'change are as follows

a It must be in writing and should be signed by the drawer#

1 *he drawer, drawee and payee must be certain#

c *he sum payable must also be certain#

d It should be properly stamped#


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e It must contain an e'press order to pay money and money alone#

/ Che,ue - +ection of the Act defines &A che5ue is a bill of e'change drawn on a specified

ban)er, and not e'pressed to be payable otherwise than on demand.#

A che5ue is bill of e'change with two more 5ualifications, namely,

i it is always drawn on a specified ban)er, and

ii it is always payable on demand#

Conse5uently, all che5ues are bill of e'change, but all bills are not che5ue# A che5ue must satisfy

all the re5uirements of a bill of e'change6 that is, it must be signed by the drawer, and must

contain an unconditional order on a specified ban)er to pay a certain sum of money to or to the

order of a certain person or to the bearer of the che5ue# It does not re5uire acceptance#


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Chapter – II

-e.elopment of Negotiable Instruments in India

Negotiable instruments are those special writings 2&commercial specialties.3 used in commerceas a means of transferring money or the right to it# *he most familiar is the chec), but it is merely

a special type of a general instrument, the draft or bill of e'change# *hus, Negotiable instrument,

is essentially a document embodying a right to the payment of money and which may be

transferred from person to person, developed historically from efforts to ma)e credit instruments

transferable6 that is, documents proving that somebody was in their debt were used by creditors

to meet their own liabilities# *his &negotiability of credit. was facilitated by the development of

a variety of negotiable instruments including promissory notes, chec)s, and drafts 2bills of

e'change3# *hese are in fact the most common negotiable instruments in use, and the following

discussion will be confined to them#

In India, Negotiable Instruments has a long history much before the act was enacted in the

country# In India, there is reason to believe that instrument to e'change were in use from early

times and there are evidences and researched papers representing that paper money were

introduced in the country by one of the Fohammedan sovereigns of >elhi in the early part of the

fourteenth century# *he word GhundiG, a generic term used to denote instruments of e'change in

vernacular is derived from the +ans)rit root GhundG meaning Gto collectG and well e'presses the

purpose to which instruments were utilised in their origin# 4ith the advent of 9ritish rule in India

commercial activities increased to a great e'tent# *he growing demands for money could not be

met be mere supply of coins and hard money6 and thus, the instrument of credit too) the function

of money which they represented#?

/ httpHHwww#britannica#comH:9chec)edHtopicH17/8Hcommercial-transactionH717/HNegotiable-instruments last

assessed on 8th Farch 7J1

0 Ka)il No#1 httpHHwww#va)ilno1#comHbareactsHnegoinstruactHintroduction#htmM last assessed on /*h Farch

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4ith the 9ritishers, starting to coloniBe more and more parts of India by increasing the

commercial activities, the need for the credit transactions arises which cannot be met with the

oral terms as before# *hus, a need for the separate instruments for handling credit transaction

started ta)ing place and therefore the negotiable instruments finds the way for its origin# *o

overcome the applicability all over the country, a separate act was enacted named as Negotiable

Instruments Act, 1881

9efore the enactment of the Negotiable Instrument Act, 1881, in India, the law of negotiable

instruments as prevalent in :ngland was applied by the Courts in India when any 5uestion

relating to such instruments arose between :uropeans# 4hen then parties were =indu or

Fohammedans, their personal law was held to apply# *hough neither the law boo)s of =indu nor

those of Fohammedans contain any reference to negotiable instruments as such, the customs

prevailing among the merchants of the respective community were recogniBed by the courts and

applied to the transactions among them# >uring the course of time there had developed in the

country a strong body of usage relating to hundis, which even the Legislature could not without

hardship to Indian ban)ers and merchants ignore# In fact, the Legislature felt the strength of such

local usages and though fit to e'empt them from the operation of the Act with a proviso that such

usage may be e'cluded altogether by appropriate words# In the absence of any such customary

law, the principles derived from :nglish law were applied to the Indians as rules of e5uity ustice

and good conscience#


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Chapter / III

Material Alteration and its Constituents

Faterial alteration is undefined in the Indian Contract Act, 187 or in the Negotiable Instrument

Act, 1881 or does receive any definition from legislature, it would be appropriate to refer to

udgment or legal precedents for defining the term !material alternation"# In Nathu Lal v# $omti

%aur @, the privy council cited the following definition &the material alternation is one which

varies the rights, liabilities, or legal position of the parties ascertained by the deed in its original

state or otherwise varies the legal effect of the instrument as originally e'pressed, or reduces to

certainty some provision which was originally unascertained and as such void, or may otherwise

preudice the party bound by the deed as originally e'ecuted,(#

*hus, material alteration in the negotiable instrumetns can be defined as &any change in the

instruments which causes the instruments to spea) a different language in legal effect from that

which it originally spo)e, or which changes the legal identity of the instruments either in terms

of the relations of the parties to it or any other relevant changes due to which there is a change in

the legal position of the parties without the consent of the other is regarded as a material

alteration#

It is not necessary that all the changes made in the negotiable instruments with or without the

consent of the parties shall be considered as the material alteration on the assumption that it is

carried out without the consent of the other party# It is not the case# +ome alterations are material

while some are immaterial#

It is immaterial whether the alteration is advantageous or disadvantageous# Alteration must be

intentional# An accidental alteration is not bad# It need not be made by the holder# It is sufficient

if it was made when the instrument was in the possession of the holder# *he holder must ta)e

every care to protect it from such alteration6 otherwise he will be liable for the conse5uence of

the alteration#

5 AI 1/?J 0C 1J


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+ome alteration is material and some are immaterial# An alteration is material if it alters

materially or substantially the operation of the instrument and thereby the rights and liabilities of

the parties# It can also be said that &An alteration which alters the business effect if the

instrument if used for any business purpose# Any change made in the instrument that causes it to

spea) a different language from what it originally intended, or which changes the legal identity

of the instrument in its terms or in relation to parties thereto is a material alteration#. *hough it

differs from fact to fact, but some alterations are considered as the material in all the

circumstances irrelevant of the nature of the negotiable instruments# +ome of these can be

classified as

1# >ate of instrument is altered

7# +um payable is altered# *ime and place of payment are altered or adding a specific place, where no place of

payment is specified,?# ate of interest is altered6

@# *earing an instrument in material part6

# Change of dates of endorsement etc## Fedium or currency in which payment is to be made is altered

*he list is not an e'haustive but only a suggestive and can be varied according to the

circumstances of each and every case#

*hus, if any alteration affects the very or said purpose of the original instrument, that is, if it goes

to the root of the instrument, it is considered to be a material alteration#

Alterations Authori0ed b( the Act

*here are some alterations already provided by the Negotiable Instruments Act, which if made

does not amount to material alteration# *hese are

1# "illing an inchoate but stamped instrument 1ec+ 2345 / the holder has the authority to

fill in the blan)s in such an instrument# :ven where the holder fills an amount larger than

intended 2but is covered by the stamp3 the instrument is not void against a holder in due

course#

4httpHHwww#batasnatin#comHlaw-libraryHmercantile-lawHnegotiable-instrumentsH//-material-

alteration-in-a-negotiable-instrument#html last assessed on 1?th Farch 7J1

http://www.informationbible.com/article-material-alteration-in-a-negotiable-instrument-182417.htmlhttp://www.informationbible.com/article-material-alteration-in-a-negotiable-instrument-182417.htmlhttp://www.batasnatin.com/law-library/mercantile-law/negotiable-instruments/969-material-alteration-in-a-negotiable-instrument.htmlhttp://www.batasnatin.com/law-library/mercantile-law/negotiable-instruments/969-material-alteration-in-a-negotiable-instrument.htmlhttp://www.batasnatin.com/law-library/mercantile-law/negotiable-instruments/969-material-alteration-in-a-negotiable-instrument.htmlhttp://www.informationbible.com/article-material-alteration-in-a-negotiable-instrument-182417.htmlhttp://www.batasnatin.com/law-library/mercantile-law/negotiable-instruments/969-material-alteration-in-a-negotiable-instrument.htmlhttp://www.batasnatin.com/law-library/mercantile-law/negotiable-instruments/969-material-alteration-in-a-negotiable-instrument.html


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7# Con.ersion of an endorsement in blan6 into an endorsement in full 1ec+ 784 - *he

holder has the authority to convert an indorsement in blan) into an indorsement in full## Conditional or 9ualified Acceptance 1ec+ :;45 / A holder has a option to ta)e a

5ualified acceptance

?# Crossing of Che,ues after it has been issued 1ec+


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Chapter / I>

%egitimac( of the Material Alteration

*he material alterations certainly have a certain effect on the contract under which suchnegotiable instrument"s was made or issued#

As per section 8 of the Negotiable Instrument Act, 1881, &the effect of material alternation of a

negotiable instrument renders the contract void as against anyone who is party thereto at the time

of ma)ing such alteration and does not consent thereto, unless it was made in order to carry out

the common intention of the original parties#

If such alteration is made by the endorsee, it discharges his endorsers from all liability to him in

respect of the consideration thereof# It is based on the sound ustice that

1# Nobody should be permitted to ta)e chance of committing a fraud without running any

ris) of loss by the event when it is detected7# 9y the alteration, the identity of the instruments is lost, and to hold one of the parties

liable under such circumstances would ma)e him liable for something, for which he

would never agree#

*hus, when a material alteration has been made a negotiable instrument"s, as well as the parties

to the instruments are discharged# If the alteration is made by an endorser, then his endorsee is

discharged from all liabilities to him#8 It should be noted that if a material alteration is agreed to

by all the parties, it becomes a new instrument which requires a new stamp.

Again +ection 88 states the acceptor or endorser of a negotiable instrument is bound by his

acceptance or endorsement notwithstanding any previous alteration of the instrument#

Also, +ection 8/ tal)s about the payment of instrument on which alteration is not apparent# it

states that

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187?1#html last assessed on 1?th Farch 7J1

6 httpHHwww#preservearticles#comH7J17J17711/Hshort-notes-on-discharge-in-relation-to-negotiable-instruments#html last assessed on 1th Farch 7J1

http://www.informationbible.com/article-material-alteration-in-a-negotiable-instrument-182417.htmlhttp://www.informationbible.com/article-material-alteration-in-a-negotiable-instrument-182417.htmlhttp://www.preservearticles.com/2012012621619/short-notes-on-discharge-in-relation-to-negotiable-instruments.htmlhttp://www.preservearticles.com/2012012621619/short-notes-on-discharge-in-relation-to-negotiable-instruments.htmlhttp://www.preservearticles.com/2012012621619/short-notes-on-discharge-in-relation-to-negotiable-instruments.htmlhttp://www.informationbible.com/article-material-alteration-in-a-negotiable-instrument-182417.htmlhttp://www.informationbible.com/article-material-alteration-in-a-negotiable-instrument-182417.htmlhttp://www.preservearticles.com/2012012621619/short-notes-on-discharge-in-relation-to-negotiable-instruments.htmlhttp://www.preservearticles.com/2012012621619/short-notes-on-discharge-in-relation-to-negotiable-instruments.html


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213 4here a promissory note, bill of e'change or che5ue has been materially altered but does not

appear to have been so altered, or where a che5ue is presented for payment which does not at the

time of presentation appear to be crossed or to have had a crossing which has been obliterated,

payment thereof by a tenor thereof at the time of payment and otherwise in due course, shall

discharge such person or ban)er from all liability thereon6 and such payment shall not be

5uestioned by reasons of the instrument having been altered, or the che5ue crossed#

273 4here the che5ue is an electronic image of and the truncated che5ue shall be a material

alteration and it shall be the duty of the ban) or the clearing house, as the case may be, to ensure

the e'actness of the apparent tenor of electronic image of the truncated che5ue while truncating

and transmitting the image#

23 Any ban) or a clearing house which receives a transmitted electronic image of a truncated

che5ue, shall verify from the party who transmitted the image to it, that the image so transmitted

to it and received by it, is e'actly the same#

rom the above definitions it can be seen that the basic concept as regards the effect of material

alteration in a negotiable instrument is that material alteration avoids the instrument and if done

unilaterally without the consent of the other party in a deceitful manner for one"s own vested

interests nothing but amounts to an offence#/

In this regard the following has been stated in =alsbury"s Law of :ngland, &*he effect of ma)ing

such an alteration, without consent of the party bound, is e'actly the same as that of canceling

the deed.# +o the instrument becomes void and the party basing its claim upon it, cannot claim

anything# *his result follows irrespective of the fact whether the party concerned was responsible

for the alteration or whether it was made by someone else without his consent or )nowledge#

In the cases of Firm Sri Chand v. Lajja Ram and Jayantilal Lal Goel v. Zubeda Khanum, it is

held that a material alteration of the instrument discharges all parties who are liable on the

instrument at the time of alteration and who do not consent to such alteration#

In the case of Arumugam v. M.S ara!ai"h, it is held that if an alteration is made by erasure,

7 +hreysi +ingh, egotiable #n!trument!$ Material alteration and it! Fall%&ut!,

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Chapter / >?udicial Trends


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Contract-II - Effect of Material Alteration in Negotiable Instrument