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DISCHARGE OF

PARTIES FROM
LIABILITY
Prepared by:-
MANISHA
B.com-1 B
2385
INTRODUCTION
• The term discharge from liability in relation to negotiable
instruments has two connotations namely,
• (1) the discharge of the instrument and
• (2) the discharge of one or more parties liable on the instrument.
The discharge of instrument is to be distinguished from the
discharge of one or more parties from liability thereon. When an
instrument is discharged it ceases to be negotiable. Therefore, if
after its discharge an instrument comes into the hands of a holder
in due course, he acquires no right under it. But when only a
particular party is discharged, the instrument continues to be
negotiable with the liabilities of undischarged parties attaching
thereto. The discharge of one or more parties to an instrument
does not discharge the instrument.
Discharge of instrument
• A negotiable instrument may be discharged in any of the
following ways.
• 1.By payment in due course- It is the most usual mode of
discharge, Since a negotiable
• instrument is ultimately meant for payment, payment of the
amount due on the instrument to the holder would result in the
discharge of the parties to the instrument. Payment by the maker,
drawee or acceptor would result in the discharge of the
instrument.
• Any person liable to pay and called upon by the holder thereof to
pay, the amount due on a promissory note, bill of exchange or
cheque is before payment entitled to have it shown and is on
payment entitled to have it delivered up to him. If the
instrument is lost or cannot be produced the person making the
payment is entitled to be indemnified against any further claim
thereon against him (Sec. 81).
• 2.Debtor as holder-If a bill of exchange which has been
negotiated is at or after maturity held by the acceptor in his own
rights ,all rights of action thereon are extinguished (Sec. 90).
• 3.By the express waiver- When the holder of an instrument at
or after its maturity absolutely and unconditionally renounces or
gives up his right against all the parties to the instrument, the
instrument is discharged. The renunciation must be in writing
unless the instrument is delivered upto the party primarily liable.
• 4.By cancellation -When a holder cancels the instrument with
an intention to release party primarily liable thereon from the
liability, the instrument is discharged and ceases to negotiable
(Sec. 82).
• 5.By material alteration or lapse of time- An instrument stands
discharged when the party primarily liable is discharged by
material alteration in the instrument or by lapse of time making
the debit time barred under the Limitation Act.
Discharge of a party or parties
• The maker, acceptor or endorser of a negotiable instrument
may be discharged from liability in the following ways-
• 1.Discharge by cancellation : If the holder of a negotiable
instrument of his agent deliberately cancels the name of any
party on the instrument, with an intention to discharge him, such
party is discharged from liability to the holder. Cancellation in
order to be valid must be intentional and apparent. However,
where the cancellation is done under a mistake, or without the
authority of the holder is would be inoperative. Cancellation of
the name of a party on the instrument discharges not only that
person but also subsequent parties who have a right of action
against the party whose name is so cancelled. Further, a
cancellation of the drawer’s name would discharge all the
endorsers, Section82 (a).
• 2.Discharge by release : If the holder of a negotiable instrument
releases any party to the instrument by any method other than
cancellation, the party so released is discharged from liability,
But the release of one of joint parties will not release all. Section
82 (b). Section 63 of the Indian Contract act also contains a
provision to that effect.
• 3.Discharge by payment : Payment to person in possession of
the bearer instrument discharges the party. But payment must be
to the holder or his agent. It must also be of the whole amount.
Section 82 ©
• 4.Discharge by allowing drawee more than forty eight hours :
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. But parties consent to such allowance
will not be discharged. ( Section 83).
• 5.Discharge by delay in presentment of cheque : Where a cheque is not
presented for payment within a reasonable time of its issue and the drawer
suffers actual damage through the delay because of the failure of the bank,
he is discharged to the extent of such damage .If at the time the bank fails,
the drawer had the full amount of the cheque with the banker for the
payment of the cheque, he will be discharged in full. Section 84 (1).
• 6.Cheque payable to order : A banker who pays in due course a cheque
drawn upon him is discharged from liability though the endorsement of the
payee may be forged. Suppose a cheque drawn payable to A’s order endorsed
to B and C steals the cheque from B and forges B’s endorsement upon it and
gets paid in due course. The paying banker will be discharged from liability.
(Section 85).Where a drawer issues a bearer cheque, the drawee banker is
discharged if the makes the payment to the bearer, notwithstanding any
endorsement on the cheque. The banker can safely ignore the endorsement
on bearer cheque, whether the endorsement thereon is forged, prohibitive or
restrictive. But payment must be in due course.
• 7.Draft drawn by one branch on another : Where a demand draft is drawn
by one office of the bank upon another office of the same bank, for a sum of
money payable to order, the banker is discharged from liability if it makes
the payment in due course even though the endorsement of the payee may
be forged or unauthorized. (Section 85-A).
• 8.Discharge by taking qualified acceptance : If holder of a bill takes a
qualified or limited acceptance, he does so at his own risk and
discharges all the parties prior to himself, unless he obtains their
consent. However, the parties will be liable if on a notice being given to
them they give their assent to such acceptance. (Section 86).
• 9.Discharge by operation of law : discharge takes place on account of
an order of the insolvency Court, by the lapse of time or merger.
• 10.Discharge by payment of altered instrument : Where a negotiable
instrument has been materially altered but does not appear to have
been so altered, or where a cheque is presented for payment which does
not at the time of presentation appear to be crossed , payment on such
an instrument discharges the party liable provided he makes payment
according to the apparent tenor of the instrument and in due course.
(Section 89). Such a payment cannot be questioned even if it is proved
that the instrument has been altered or that the cheque was originally
crossed.
• 11.Discharge by material alteration : Where a negotiable instrument
is materially altered without the assent of all the parties on the
instrument, the instrument is avoided (Section 87) . Any alteration
made by an indorsee discharges his indorser from all liabilities to him in
respect of the consideration thereof.
MATERIAL ALTERATION
• Material alteration of an instrument invalidates the instruments against
the person not consenting to such alteration. Section 87 incorporates
this principle and is designed to prevent fraud and deter men from
tempering with written instrument. It is not every alteration that avoids
the instrument, to avoid the instrument the alteration must be a material
one.
• An alteration which in any way alters the operation of the instrument
and the liabilities of the parties thereto or which alters the business
effect of the instrument is a material alteration. If the identity or
character of the instrument is affected or its liability is extended by the
alteration, it will amount to a material alteration. Any alteration which
gives a man a cause of action which he would not have had but for
such change, is a material alteration. Any alteration in an instrument
which causes to speak a different language in legal effect from that
which it originally spoke, is a material alternation. It is immaterial
whether the alteration is beneficial or prejudicial or whether it is made
by a stranger or a party to the instrument.
•The following are instances of
material alteration:
• (1) Alteration of date
• (2) alteration of name
• (3) alteration of time
• (4) alteration of place of payment
• (5) alteration of amount
• (6) alteration or rate of interest
• (7) alteration by the addition of a new party
• (8) tearing an instrument in a material part.
• The following are the instances where alteration does
not amount to does not amount to material alteration.
• 1) Alteration made to carry out the original intention of
the parties. E. g. the subsequent insertion of the words ‘or
order’ where the drawer of a bill forgets to use these words.
• 2) Correction of a mistake in data or of a clerical error e.g.
where a bill was dated 1969 instead of 1996 and
subsequently the agent to the drawer corrected the mistake.
• 3) Alteration made with the consent of parties.
• 4) Alteration made before the instrument is issued.
• 5) Alteration which is not apparent and the instrument
goes into the hands of holder in due course.
• 6) The addition of words which could not prejudice any
one.
Alteration authorized by the
Act
• The following alterations are permitted by the
Act and do not avoid the instrument.
• 1) Filling blanks in inchoate instruments (Section
20).
• 2) Conversion of blank endorsement into
endorsement in full (Section 49).
• 3) Making acceptance conditional (Section 86).
• 4) Crossing of an uncrossed cheque, conversion of
general crossing to special crossing, addition of
words like ‘not negotiable’ to a crossed cheque
(Section 125).
Effect of material alteration
• Material alteration discharges the parties liable
on the instrument at the time of the alteration,
and the instrument is rendered void. The person
who made the alteration and all subsequent
endorsers are bound by the bill as altered. If a
person endorses the altered instrument, he
becomes liable to the endorsee. Any material
alteration, if made by an endorsee, discharges
his endorser from all liability to him in respect
of the consideration thereof. (Section 86).
THANK YOU

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