Articles

Article Title: Equity and the Law on Negotiable Instruments - An Enigmatic Approach
Date of Article: January 1, 1970

Equity and the Law on Negotiable Instruments -

An Enigmatic Approach

(Sree Vidya.V, Judicial Magistrate, Fast Track Court,Theni)

I set my mind on a world without money. What would have happened if there was no money? The barter system would be in existence. No pro notes, No cheques, No bills, No Hundi’s, no money, no Negotiable Instruments Act, No rulings and no Fast Track Courts! The thought of everything in nothing is empirical.

Any how in Modern Era, we prefer to carry a small piece of paper known as Cheque rather than carrying the currency worth the value of the Cheque. Before 1988 there was no provision to restrain the person issuing a Cheque without having sufficient funds in his account. To ensure promptitude and remedy against the defaulters of the Negotiable Instrument a criminal remedy of penalty was inserted in Negotiable Instruments Act, 1881 by amending it with Negotiable Instruments Act, 1988 and the present Act with amendments was brought in to force on February 6, 2003. The present act is meant to plug in the loopholes, in the system, with the introduction of Section 138 to 147.

 It takes a great mind to do an analytical view of this law with the law of contracts. Lord Denning was a sculptor of the Law of contracts, and did great justice to common law in his era. Treating him at par with the modern trend in Negotiable Instruments, it is a real cocktail enriched with wisdom and flavour, to devour such reasonable principles of law and subject, is a treat in itself.

          “Nova conatitutio, futuris for mam imponere debet, non prateritis”.

This legal Maxim is the Bhagwad Gita of the law of precedents meaning “ A new law ought to impose form on what is to follow, not on past, “Lord Denning was piece of a starling who brought revolution. His language simplicit and ethios, has no match, till this day.

ON CONSIDERATION & LEGALLY ENFORCEABLE DEBT

          In White Vs Bluett

[Exchequer chamber (1853) 23 LJ Ex 36] on consideration Lord pollock CB and Anderson B

Facts

Mr Bluett had lent his son some money. Mr Bluett died. The executor of Mr Bluett's estate was Mr White. He sued the son to pay back the money. In his defense, the son argued that his father had said the son need not repay if the son would stop complaining about how Mr Bluett would distribute his property in his will among the children.

Judgment

Pollock CB held there was no consideration for any discharge of the obligation to repay. The son had ‘no right to complain’ anyway. Not complaining was therefore an entirely intangible benefit.

In modern NI Act, consideration has taken the role of a legally enforceable debt rather and the section 138 of the Act itself reiterates constitution of offence if all ingredients need to be satisfied before a person had drawn the cheque and can be deemed to have committed offence under the Act.

To constitute an offence under Section 138, Negotiable Instruments Act, 1881, the following ingredients of consideration are required to be fulfilled.

          i) a person must have drawn a cheque on an account maintained by him in a bank for payment of a certain amount of money to another person from out of that account;

          ii) the cheque should have been issued for the discharge, in whole or in part, of any debt or other liability.

          There are umpteen case laws decided by our Hon’ble Supreme Court on this aspect and hence needs no mention here.

          ON FRAUD & HOLDER IN DUE COURSE

In Lewis Vs Averay

[1971] 3 All ER 907 Court of Appeal.

Facts in brief;

It is seen, the real question in the case is whether on May 8, 1969, there was a contract of sale under which the property in the car passed from Mr Lewis to the rogue. If there was such a contract, then, even though it was voidable for fraud, nevertheless Mr Averay would get a good title to the car. But if there was no contract of sale by Mr Lewis to the rogue--either because there was, on the face of it, no agreement between the parties, or because any apparent agreement was a nullity and void ab initio for mistake, then no property would pass from Mr Lewis to the rogue. Mr Averay would not get a good title because the rogue had no property to pass to him.

There is no doubt that Mr Lewis was mistaken as to the identity of the person who handed him the cheque. He thought that he was Richard Greene, a film actor of standing and worth: whereas in fact he was a rogue whose identity is quite unknown. It was under the influence of that mistake that Mr Lewis let the rogue have the car. He would not have dreamed of letting him have it otherwise and in Philips Vs Brooks similar to the case in Ingram Vs Little

Where a jeweler had a ring for sale. A plausible rogue comes along. The rogue says that he likes the ring, He asks the price. The seller names it. The rogue says that he is prepared to buy it at that price. He pulls out a cheque book. He writes or prepares to write, a cheque for the price. The seller hesitates. He has never met this man before. He does not want to hand over the ring or the car not knowing whether the cheque will be met. The rogue notices the seller's hesitation. He is quick with his next move. He says to the jeweller, in Phillips v Brooks: "I am Sir George Bullough of 11 St James's Square"; The jeweller looks up the directory and finds there is a Sir George Bullough at 11 St James's Square. The seller feels that this is sufficient confirmation of the man's identity. So he accepts the cheque signed by the rogue and lets him have the ring,

The rogue goes off and sells the goods to a third person who buys them in entire good faith and pays the price to the rogue. The rogue disappears. The original seller presents the cheque. It is dishonoured. Who is entitled to the goods? The original seller? Or the ultimate buyer? The courts have given different answers. In Phillips v Brooks Ltd, the ultimate buyer was held to be entitled to the ring.

In this case there was, to all outward appearance, a contract: but there was a mistake by the seller as to the identity of the buyer. This mistake was fundamental. In each case it led to the handing over of the goods. Without it the seller would not have parted with them.

This case therefore raises the question: What is the effect of a mistake by one party as to the identity of the other?

Again it has been suggested that a mistake as to the identity of a person is one thing: and a mistake as to his attributes is another. A mistake as to identity, it is said, avoids a contract: whereas a mistake as to attributes does not. But this is a distinction without a difference. A man's very name is one of his attributes. It is also a key to his identity.

If then, he gives a false name, is it a mistake as to his identity? or a mistake as to his attributes? These fine distinctions do no good to the law.

I think the true principle is that which underlies the decision of this court is this: When two parties have come to a contract--or rather what appears, on the face of it, to be a contract--the fact that one party is mistaken as to the identity of the other does not mean that there is no contract, or that the contract is a nullity and void from the beginning. It only means that the contract is voidable, that is, liable to be set aside at the instance of the mistaken person, so long as he does so before third parties have in good faith acquired rights under it.

In the Negotiable Instruments Section 9 says

“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 indorsee thereof, if payable to order, before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.

The English Equivalent is “Bonafide holder for value without notice”. Rightly under Indian Law, a holder, to be in due course should have acted in good faith with reasonable caution.

The instrument should be delivered for a liability. The 13^th Edition of Chalmer’s book contains this statement at page. 283. “The test of bonafide as regards bill transaction has varied greatly. Previous to 1820, the law was much as it is now under the Act. Under the influence of Lord Tenterden due care and caution was made the test [Gill Vs Cubitt (1824) 3B and C 466], and this principle seem to be adopted by section 8 of the Indian Negotiable Instruments Act”.

So, the claim of a holder of an instrument will be defeated only by proving the existence of positive circumstance to put him on enquiry. So the stricter rule of Indian law makes it difficult for dishonest transferors to part with Negotiable Instruments and honest transferors will not suffer from it, as they have no real difficulty in persuading the transferees to take the instrument as their title is good, and due deligence is the prime requirement, and this makes the difference that a holder is different from a holder in due course.

The principle is that a bill, cheque or note is given and taken in payment as so much cash, and not as merely given a right of action for the creditor to sue.

   As per Lord Denning M.R. in Fielding & Platt Ltd v Selim Najjar

[1969] 1 W.L.R. 357 at 361; [1969] 2 All E.R. 150 at 152, CA

"We have repeatedly said in this court that a bill of exchange or a promissory note is to be treated as cash. It is to be honoured unless there is some good reason to the contrary"

STOP PAYMENT - IS AN OFFENCE

In Curie Vs Misa

A company named Lizardi & Co, then in good credit in the City, sold four bills of exchange to Mr Misa, drawn from a bank in Cadiz. Mr Currie was the owner of the banking firm and the plaintiff bringing the action. The bills of exchange were sold on the 11th of February, and by the custom of bill, brokers were to be paid for on the first foreign post-day following the day of the sale