Consideration and Accommodation Instruments (Sections 43 to 45)

A negotiable instrument is a contract, and like any contract it needs consideration. But the Act treats consideration differently depending on who is suing whom. Between the immediate parties, absence or failure of consideration is a complete or partial defence; against a holder in due course, it is no defence at all. The Act also recognises the accommodation instrument, signed without consideration to lend credit to another. This note explains Sections 43 to 45, the presumption of consideration and the rules on accommodation parties.

1. Consideration in Negotiable Instruments

Contract Act definition: consideration is defined in Section 2(d) of the Indian Contract Act, 1872, and includes past consideration. An instrument given for an antecedent debt is therefore supported by consideration.
Adequacy irrelevant: as in contract law generally, the courts do not weigh whether the consideration was adequate.
Presumption (Section 118(a)): every negotiable instrument is presumed to have been made, drawn, accepted, indorsed, negotiated or transferred for consideration, until the contrary is proved (Section 5 below).

2. Absence or Failure of Consideration (Section 43)

Section 43, Negotiable Instruments Act, 1881

A negotiable instrument made, drawn, accepted, indorsed or transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties to the transaction. But if any such party has transferred the instrument with or without indorsement to a holder for consideration, such holder, and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transferor for consideration or any prior party thereto.

Exception I. No party for whose accommodation a negotiable instrument has been made, drawn, accepted or indorsed can, if he has paid the amount thereof, recover thereon such amount from any person who became a party to such instrument for his accommodation.

Exception II. No party to the instrument who has induced any other party to make, draw, accept, indorse or transfer the same to him for a consideration which he has failed to perform, or has performed partially, shall recover thereon an amount exceeding the value of the consideration (if any) which he has actually performed.

Between immediate parties: where there was no consideration, or it failed, the instrument creates no obligation between the parties to that transaction. A buyer who gave a note for goods that were never delivered need not pay the seller.
Against a holder for value: once the instrument reaches a holder who gave consideration, he and those claiming through him can recover from the transferor and all prior parties. The defence is personal to the immediate parties.
Exception I: the accommodated party cannot sue the accommodation party.
Exception II: a party who induced the instrument by promising consideration he failed to perform recovers only the value of what he actually performed.

3. Partial Absence or Failure (Sections 44 and 45)

Money consideration (Section 44): where the consideration was money and was originally absent in part or has failed in part, the sum a holder standing in immediate relation with the signer can recover from him is proportionally reduced.
Immediate relation: the drawer of a bill stands in immediate relation with the acceptor; the maker of a note, bill or cheque with the payee; and an indorser with his indorsee. Other signers may stand in immediate relation by agreement.
Non-money consideration (Section 45): where a part of the consideration, though not money, is ascertainable in money without collateral inquiry, and that part fails, the amount recoverable by a holder in immediate relation is proportionally reduced.

For example, if A gives B a note for Rs. 1,00,000 in exchange for goods worth Rs. 1,00,000 and B delivers only half the goods, at a fixed price per unit, B can recover only Rs. 50,000 from A. If B has indorsed the note to C, a holder in due course, C can recover the full amount from A.

4. Accommodation Instruments

An accommodation party signs an instrument, as maker, drawer, acceptor or indorser, without receiving consideration, to lend his name and credit to another (the accommodated party), who then raises money on it. The rules are:

No liability to the accommodated party: as between them, there is no consideration, and the accommodated party cannot sue the accommodation party (Section 43, Exception I).
Liability to a holder for value: the accommodation party is liable to a holder who gave value, even if the holder knew it was an accommodation instrument, because lending credit to that holder was the very object.
After maturity: a person who in good faith and for consideration takes an accommodation note or bill after maturity may still recover from any prior party (Section 59, proviso).
Surety position: the accommodation party is in substance a surety for the accommodated party, and if he pays, he may recover from the accommodated party (Topic 19).

5. Proving or Rebutting Consideration

📖 Kundan Lal Rallaram v. Custodian, Evacuee Property (Supreme Court, 1961)

Held: The presumption of consideration under Section 118(a) is a rebuttable presumption of law. Once the defendant produces evidence that makes the existence of consideration improbable or doubtful, the presumption disappears and the burden shifts back to the plaintiff to prove consideration.

📖 Bharat Barrel and Drum Manufacturing Co. v. Amin Chand Payrelal (Supreme Court, 1999)

Held: To rebut the presumption, the defendant need not disprove consideration conclusively. He may show, by direct or circumstantial evidence, or by relying on the plaintiff's own evidence and the surrounding circumstances, that the non-existence of consideration is probable, judged by the standard of a prudent person.

For cheques, Section 139 adds a further presumption in Section 138 prosecutions: that the holder received the cheque for the discharge of a debt or liability (Topic 45).

⚠ Key point

Consideration may be past and need not be adequate, and every instrument is presumed to be for consideration (Section 118(a)), rebuttable on a preponderance of probabilities (Kundan Lal Rallaram; Bharat Barrel). Absence or failure of consideration creates no obligation between the immediate parties, but a holder for consideration and those claiming through him can recover from all prior parties (Section 43). Partial absence or failure proportionally reduces the amount recoverable between parties in immediate relation (Sections 44 and 45). An accommodation party is not liable to the accommodated party but is liable to a holder for value, even one who knew of the accommodation.

6. Related Topics and Provisions

Holder in due course (Topic 13)
Indorsers as principal and surety (Topic 19)
Presumptions and estoppels (Topic 38)
Presumption under Sections 139 and 140 (Topic 45)