Paying Banker and Payment in Due Course under Section 10 NI Act

The paying banker stands between two risks. If it refuses a cheque it ought to have paid, it answers to its customer for wrongful dishonour. If it pays a cheque it ought to have refused, it cannot debit the customer and must bear the loss itself. The law resolves the dilemma by a single concept: payment in due course. A banker who pays in due course is protected, and almost every protective section in the Act turns on that phrase.

1. Payment in Due Course

Figure 1: The four elements of payment in due course

• According to the apparent tenor: payment must follow the instrument as it appears, not as the banker guesses it was intended. A post dated cheque paid early, a stale cheque paid late, or an amount paid other than as written is outside the tenor.
• In good faith and without negligence: both are required, and they are different. Good faith is honesty; absence of negligence is care. An honest but careless payment is not in due course.
• To a person in possession: payment to someone who is not in possession of the instrument is not payment on it at all.
• No reasonable ground for suspicion: the test is objective. Where the circumstances would put a reasonable banker on enquiry, paying without enquiry defeats the protection, whatever the banker actually believed.

2. The Duty to Pay

• The source: Section 31 requires the drawee of a cheque having sufficient funds properly applicable to pay it when duly required, and on default to compensate the drawer.
• The mandate: the authority to pay is the customer's mandate, recorded when the account was opened. A payment outside it is made at the bank's own risk, whatever the Act may say about discharge.
• Precautions before paying: that the cheque is drawn on the branch; that it is properly dated and not stale or post dated; that the amount in words and figures agree; that any alteration is authenticated; that the signature matches the specimen; that the endorsement is regular; that the balance is sufficient and properly applicable; and that there is no legal bar such as a stop payment, a garnishee order or notice of death.
• Refusal is sometimes a duty: where the authority has been determined by countermand, by notice of death, insolvency or insanity, or by an order of attachment, the banker must refuse, and paying is a breach of its own duty.

3. The Statutory Protections

Figure 2: The sections that protect the paying banker

Section 85: cheques payable to order and to bearer

• Sub-section (1): where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee is discharged by payment in due course. The word purports is the heart of it: the banker is protected even where the endorsement turns out to be forged, provided it is regular on its face and the payment is in due course.
• The limit of the protection: the endorsement must be regular. An irregular endorsement, misspelt, inconsistent with the payee's description, or missing where the chain requires it, takes the bank outside the section, because paying on it is itself negligence.
• Sub-section (2): where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer, notwithstanding any endorsement, whether in full or in blank, and notwithstanding that such endorsement purports to restrict or exclude further negotiation.
• Once a bearer, always a bearer: sub-section (2) is the statutory form of that maxim. A cheque issued to bearer does not become an order cheque merely because someone endorses it in full, and the paying banker may continue to treat it as payable to the person presenting it.

Sections 85A, 89 and 128

• Section 85A: where a draft drawn by one branch of a bank upon another branch payable to order purports to be endorsed by or on behalf of the payee, the bank is discharged by payment in due course. It extends the Section 85 protection to demand drafts, which are not cheques within Section 6.
• Section 89: where an instrument has been materially altered but does not appear to have been so altered, or where a cheque presented for payment does not at the time of presentation appear to be crossed or to have had a crossing obliterated, payment according to the apparent tenor at the time of payment and otherwise in due course discharges the banker, and the payment may not be questioned by reason of the alteration or the crossing.
• The limit of Section 89: the protection depends on the alteration being invisible. An alteration that a careful banker would see takes the case outside the section. For truncated cheques, Section 89 treats any difference between the image and the paper as a material alteration, and Section 64 lets the drawee bank call for further information, or for the paper itself, where it doubts the image.
• Section 128: where the banker on whom a crossed cheque is drawn has paid it in due course, the banker, and, where the cheque has come into the hands of the payee, the drawer, are placed in the same position as if the amount had been paid to and received by the true owner. Compliance with the crossing is rewarded with a complete discharge.
• Section 129, the mirror: a banker paying a crossed cheque out of due course is liable to the true owner for any loss.

4. Forgery

• Forged signature of the drawer: the instrument is a nullity. There is no mandate, because the customer never gave an order at all. No section protects the banker, and it cannot debit the customer's account however careful it was.
• Why no protection: the protections in Sections 85 and 89 assume a genuine cheque that has been dealt with irregularly afterwards. A forged drawer's signature means there was never a cheque to begin with.
• No ratification: a forgery is a nullity and cannot be ratified by the customer, though he may choose not to dispute the debit.
• Estoppel: a customer who knows of the forgery and remains silent, allowing the bank to act to its detriment, may be estopped from asserting it. Mere failure to examine statements is not, without more, enough in Indian law, though the account terms often impose a period within which entries must be queried.
• Customer's negligence: where the loss flows from the customer's own carelessness in drawing the cheque, such as leaving blank spaces that permit the amount to be raised, the loss may be shifted to him. The negligence must be in the drawing of the instrument itself, not merely in looking after the chequebook.
• Forged endorsement: the position is the reverse. The cheque is genuine and the mandate exists; it is a later signature in the chain that is false. Section 85(1) protects the paying banker who pays in due course on an endorsement that purports to be the payee's and is regular on its face.

5. Wrongful Payment and Its Consequences

• Cannot debit the customer: the primary consequence. A payment outside the mandate is the bank's own payment, and the account must be restored.
• Liability to the true owner: in conversion, for dealing with the instrument inconsistently with the owner's title, and under Section 129 where a crossed cheque has been paid out of due course.
• No recovery from the recipient in some cases: money paid under a mistake of fact is ordinarily recoverable under Section 72 of the Indian Contract Act, 1872, but recovery is defeated where the recipient has changed his position in good faith on the faith of the payment.
• Deficiency in service: wrongful payment is actionable before the consumer commissions and the ombudsman, which is the route most customers use.
• Electronic transactions: where the wrongful payment is an unauthorised electronic transaction, the Reserve Bank's framework limits the customer's liability and places the burden of proving customer negligence on the bank.

6. Questions Arising

Why is a bank protected against a forged endorsement but not a forged signature?

Because of the mandate. A forged endorsement occurs on an instrument the customer really did issue, so the bank is carrying out an order it was given, and the law accepts that it cannot be expected to verify every signature in the chain, which is what Section 85(1) recognises by using the word purports. A forged drawer's signature means the customer gave no order at all, so there is nothing for the bank to carry out and nothing for the Act to protect. The bank can compare the drawer's signature with a specimen it holds; it holds no specimen of the payee's.

Does a customer's failure to check his statements bar a claim?

Not by itself under the general law, which requires something more than passive inattention before estoppel operates: the customer must have known of the forgery and kept silent while the bank acted to its detriment. The account terms, however, commonly require entries to be disputed within a stated period, and the Reserve Bank's framework on unauthorised electronic transactions expressly ties the customer's liability to how quickly he reports. Delay therefore matters a great deal in practice, even where the general law would not treat it as a bar.

7. Quick Revision

8. Frequently Asked Questions

What is payment in due course?

Under Section 10, payment in accordance with the apparent tenor of the instrument, in good faith and without negligence, to a person in possession of it, in circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment. It is the condition on which every statutory protection for the paying banker depends.

Is a bank protected if it pays a cheque bearing a forged endorsement?

Yes, where it pays in due course. Section 85(1) discharges the drawee of an order cheque that purports to be endorsed by or on behalf of the payee, and the word purports covers a forged endorsement, provided it is regular on its face. An irregular endorsement takes the bank outside the protection, because paying on it is itself negligence.

Can a bank debit its customer for a cheque bearing a forged signature?

No. A forged drawer's signature means there is no mandate and the instrument is a nullity, so the payment is the bank's own and the account must be restored. No section of the Act protects the bank. The loss may nonetheless shift to the customer where he is estopped, having known of the forgery and kept silent, or where his own negligence in drawing the cheque made the fraud possible.

What does Section 89 protect against?

Against a material alteration that is not apparent, and against a cheque that does not appear to be crossed or whose crossing has been obliterated. A banker who pays according to the apparent tenor at the time of payment and otherwise in due course is discharged, and the payment cannot be questioned by reason of the alteration or the crossing. The protection fails if the alteration was one a careful banker would have seen.

What happens if a bank pays money by mistake?

Money paid under a mistake of fact is ordinarily recoverable under Section 72 of the Indian Contract Act, 1872. Recovery is defeated where the recipient received it in good faith and has changed his position on the faith of the payment. As against the customer, the bank simply cannot debit the account, since a payment outside the mandate is its own.

9. Related Topics and Provisions

• The cheque as a banker's instrument
• Crossing of cheques and its effect on the banker
• The collecting banker and the protection of Section 131
• Duties of a banker: secrecy, care and honouring cheques
• Dishonour of cheques under Section 138