Payment and Payment in Due Course (Sections 10, 78 and 81)

Payment is the normal end of an instrument's life. But paying the wrong person, or paying in suspicious circumstances, may not discharge the payer, who could then have to pay twice. The Act answers the payer's question, "when am I safe?", through the concept of payment in due course. This note explains Section 10, the rule that payment must be made to the holder, and the payer's right to see and receive the instrument.

1. Payment in Due Course (Section 10)

In accordance with the apparent tenor

Payment must match what the instrument, on its face, requires: the right amount, to the right person as shown by the instrument and its indorsements, and at the right time. Payment before maturity is not in accordance with the apparent tenor, and so is not payment in due course; a holder in due course who later presents the instrument at maturity may still enforce it. A crossed cheque paid over the counter is not paid according to its tenor (Topic 34).

In good faith and without negligence

The payer must act honestly and with reasonable care. Under Section 3 of the General Clauses Act, a thing is done in good faith if done honestly, whether negligently or not, but Section 10 adds the separate requirement of absence of negligence. A bank that pays a cheque with an obvious alteration, a signature that does not match the specimen, or in breach of its own procedures, may not be paying in due course.

To a person in possession

The payee must be in possession of the instrument. For a bearer instrument, possession is enough; for an order instrument, the person must also appear entitled through regular indorsements.

No reasonable ground for suspicion

The circumstances must not give a reasonable ground for believing that the person is not entitled to payment. Notice of loss, a stop-payment instruction, an unusual request for cash, or knowledge of a dispute may defeat payment in due course.

2. To Whom Payment Must Be Made (Section 78)

• General rule: payment discharges the maker or acceptor only if made to the holder (Topic 12).
• Bearer instruments (Section 82(c)): where the instrument is payable to bearer or has been indorsed in blank, a maker, acceptor or indorser who makes payment in due course is discharged to all parties, even if the person paid turns out not to be the true owner.
• Order instruments: payment to a person claiming through a forged indorsement is not payment to the holder, and does not discharge the maker or acceptor. Banks have special statutory protection for cheques and drafts (Sections 85 and 85A; Topic 35).

3. Showing and Delivering Up the Instrument (Section 81)

• Before payment: the payer may insist on seeing the instrument, to check its genuineness and the holder's title.
• On payment: he may insist on its delivery up, so that it cannot be negotiated again to a holder in due course.
• If lost: he may insist on an indemnity against further claims (Topic 15).
• Truncated cheques: the collecting bank retains the paper cheque, and the paying bank's certificate on the printout of the image is prima facie proof of payment.

4. Protection Given by Payment in Due Course

• Discharge of the instrument: payment in due course by the maker, acceptor or drawee at or after maturity discharges the instrument and ends its negotiability (Sections 60 and 82(c); Topic 24).
• Paying bank: a bank that pays an order cheque purporting to be indorsed by the payee, or a bearer cheque to the bearer, in due course, is discharged (Section 85); similarly for drafts (Section 85A).
• Altered instruments: a person or bank paying an instrument whose material alteration is not apparent, or a cheque whose crossing is not apparent, according to its apparent tenor and otherwise in due course, is discharged (Section 89; Topic 28).

5. Related Topics and Provisions

• Holder (Topic 12)
• Discharge from liability (Topic 28)
• Paying banker (Topic 35)