Discharge From Liability (In the Case of Negotiable Instruments)

In the case of negotiable instruments, the term discharge from liability has two connotations:

1) discharge of one or more parties from liability in respect of a negotiable instrument, and

2) discharge of the instrument itself.

The discharge of an instrument is one thing and is different from discharge of a party from liability under it. The discharge of the instrument results in extinguishment of all rights of action under it and puts an end to its negotiability. Therefore, if after its discharge, an instrument comes into the hands of a holder in due course, he acquires no right under it and he cannot bring a suit on the foot of it. On the other hand, when only a particular party is discharged, the instrument continues to be negotiable with the liabilities of undischarged parties attaching thereto. Thus, the discharge of one or more parties to an instrument does not discharge the instrument.

The maker, acceptor or endorser of a negotiable instrument is discharged from liability in the following ways:


1) Discharge by Cancellation: The holder of a negotiable instrument may deliberately cancel the name of any of the parties liable under that instrument with the intention to discharge him from the liability. A party whose name has been cancelled is discharged from liability to the holder who has cancelled his name, and to all other persons who derive their title from him. The proper and safe mode of cancellation is to draw the pen through the name so as to leave it legible.

In order that a cancellation may be valid, it must be intentional. If it is done under a mistake or without the authority of the holder or without the intention of discharging the party, it is not operative.


2) Discharge by Release: When the holder of an instrument releases any party to the instrument by any method other than cancellation, the party so released is discharged from liability. But release of one of joint parties will not release all. A promisee can only dispense with the performance of the promise by a voluntary conscious act. (A mere omission to assert his rights or insist upon his rights cannot amount to dispensing with, within the meaning of Sec. 63, Contract Act) Even negligence to assert his rights cannot amount to dispensing with, though in certain cases it might result in estoppel. A dispensation may be express or implied by conduct if it is consistent with the continuance of the original right. Releases may certainly be affected by agreement between parties. A promisee may, by his kindness excuse the promisor from performance of his obligations.


3) Discharge by Payment: When payment of money due on a negotiable instrument is made in due course to the person legally entitled to receive it, the maker/endorser/acceptor of that instrument is discharged from liability. In the case of instrument payable to bearer or indorsed in blank, such maker, acceptor or endorser should make payment in due course of the amount due thereon. Thus, where the maker executes a promote in favour of the promise and the amount is payable to the promisee’s order, a payment made by the maker to the promisee’s adopted son or to his father, does not discharge the maker from liability, as the note is not payable to bearer and also the payment cannot be said to have been made in “due course”. A promissory note may be discharged by cash payment or by a fresh note and when once discharged, the original note ceases to be in force, even against a signatory who did not execute the fresh note.


4) Discharge by Operation of Law: The law relating to negotiable instruments being only a branch of the law of contract, the principle of general law also applies to negotiable instruments and, hence, they are discharged in ways other than those contemplated by the present Act, e.g., by becoming time barred under the Limitation Act, by the debtor being adjudicated insolvent, or by merger of one debt into another, or where the acceptor of a bill becomes the holder of it at or after its maturity.


5) Discharge by Allowing Drawee more than Forty-eight Hours to Accept: “If the 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 to such holder” (section 83).


6) Discharge in the case of Cheques: If the holder of a cheque presents the cheque after a reasonable time, the liability of the drawer stands discharged, and the holder in due course becomes a creditor of the bank in respect of the amount of the cheque and a set-off is available in respect of such amount.

If the bank on whom the cheque is drawn becomes insolvent before the cheque is presented, the drawer would be discharged to the extent of loss suffered by him by the bankruptcy of the banker. But if the banker remains solvent and the holder proves that the drawer has suffered no loss the drawer will remain liable to the holder.

The drawer of a cheque must prove two facts:

(1) the drawer had sufficient money in deposit in the bank deposit in the bank in his account to honour the cheque, and

(2) he had suffered actual loss or damage on account of non-presentment of the cheque within a reasonable time.

The liability of the drawer is discharged to the extent of the loss or damage suffered by him by the neglect of the holder. If the drawer had sufficient funds with the bank to meet the cheque at the time when the bank failed, he will be discharged in full.

For example, A draws a cheque for Rs. 1,000 and when the cheque sought to be presented, the bank has funds to meet it. The bank fails (becomes insolvent) before the cheque is presented. The drawer is discharged but the holder can proceed against the bank for the amount of the cheque.

If the funds were not sufficient for the payment of the cheque on the date when the bank went into liquidation, the drawer will be discharged only to the extent of the amount which he had in the bank at the time for honour of the cheque. If, however, the bank fails before the cheque could be presented within a reasonable time, the drawer will not be discharged at all.

The above provision applies only to the drawer of a cheque and not to an endorser. To charge an endorser, the cheque must be presented for payment within a reasonable time after delivery of it by him. In default of such presentment, the endorser would be altogether discharged.

Under Section 85 a banker who pays (a cheque payable to order) in due course a cheque drawn upon him is protected. This is so even if the indorsement of the payee is forged. The payment is a discharge of the drawer.

Bank is not liable for loss of cheque or draft in transit when sent by post because the post office is not an agent of the addressee bank unless the addressee had asked for despatch by post but not otherwise.

Drafts drawn by one branch of a bank on another payable to order: “Where any draft, that is an order to pay money, drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand, purports to be indorsed by or on behalf of the payee, the bank is discharged by payment in due course” (Section 85-A)

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