Modes of Discharge of Negotiable Instrument

1. Introduction

A negotiable instrument is said to be discharged when all rights on it are extinguished. The discharge of liability may be either the discharge of one or more parties to the instrument or the discharge of the instrument itself. The later takes place when the party is ultimately liable on it discharged from liability.

2. VARIOUS MODES IN WHICH INDIVIDUAL LIABILITY OF THE MAKER, ACCEPTOR AND ENDORSER OF NEGOTIABLE INSTRUMENT IS DISCHARGED

(i) Discharge by payment in due course

When a party liable on the instrument makes the payment in due course at the maturity, all the parties to the instrument stand discharged.

In order that a payment may operate as a payment in due course, it is necessary that the payment is made to

1. A person in possession of the instrument
2. In accordance with apparent tenor of the instrument
3. That it was paid in good faith, without suspecting that the person in possession is not entitled to payment and
4. The payment is made without negligence

(ii) By cancellation

When the holder of a negotiable instrument deliberately conceals the name of any of the party liable on the instrument to discharge him from liability the party and all subsequently endorsers are discharged from liability.

A cancellation in order to be operative must be

(a) Intentional

If a party’s name is cancelled by mistake. It would not discharge him from liability. If on the face of an instrument a party’s name appears to be scored out, the party seeking to charge him must prove that cancellation was made inadvertently and only by mistake. It is always safe to make a note on the instrument at once where such mistake is committed.

(b) Apparent

The cancellation should distinctly appear on the instrument. It is better to make cancellation by drawing a line over the name without making the name illegible. When on due date the acceptor of a bill asks for further time, the bill is not cancelled and the liability of the acceptor is not discharged. When there is no material alteration on the face of the bill, it is not cancelled.

(iii) Discharge by Release

When the holder releases the maker, acceptor or endorser otherwise than by cancellation, the party so released is discharged from liability to the holder and to all parties deriving title under such holder after notice of such discharge.

(iv) Discharge by allowing drawee

If the a holder of a bill of exchange allows the drawee more than forty eight hours, exclusive of public holidays to consider whether he will accept the same, all previous parties not consenting to such allowance are thereby discharged from liability of such holder.

(v) Discharge by delay in presentment of cheques

A cheque ought to be presented for payment within reasonable time after its issue. If the drawer suffers damage through the delay in presenting the cheque, the drawer will be discharged to the extent of the damage suffered by him.

(vi) Cheque payment to order

Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the banker is discharged by payment in due course.

Where a cheque is originally expressed to be payable to bearer, the drawer is discharged by a payment in due course to the bearer, notwithstanding that such endorsement purports to restrict or exclude further negotiation.

(vii) Draft drawn by one bank to another

Where any draft is drawn by one office of a bank upon another office of the same bank for sum of money payable to order on demand, the bank is discharged by payment in due course.

(viii) Accepting qualified acceptance

If the holder of a bill of exchange acquiescence in a qualified acceptance, all previous partners whose consent is not obtained to such acceptance are discharged as against the holder and those claiming under him.

(ix) Discharge by operation of law

The discharge takes place on account of an order of insolvency of debtor, by loss of remedy on expiry of the limitation or by merger of note into judgment debt or lesser security into higher security.

(x) Material Alteration

A material alteration in a negotiable instrument discharges all parties who are liable to the instrument at the time of the alteration and who does not  consent to such alteration.

(xi) Payment of Altered instrument

Where a promissory note, bill of exchange or cheque has been materially altered but does not appear to have been so altered, or where a cheque is presented for payment which does not at all time of presentation appear to be crossed or payment on such an instrument discharges the party liable provided he makes payment according to the apparent tenor of the instrument and in due course. Such a payment cannot be questioned by reason of the instrument having been altered or the cheque crossed.

(xii) Notice of Dishonour

If the holder fails to give notice of dishonor to all previous parties, they are discharged as against the holder and those claiming under him. But this rule has no application to maker the acceptor or the drawee of a note bill or cheque respectively.

Conclusion

Negotiable instrument provides various modes in which the individual liability of the parties to negotiable instrument is discharged. The discharge of liabilities may be either the discharge of instrument itself or the discharge of one or more parties to the instrument.