Negotiable Instruments: Material alteration and its fall-outs
By Shreysi Singh
QUITE often attempts are made to make alterations/changes in negotiable instruments (a promissory note, bill of exchange or cheque payable either to order or to bearer) through modification, obliteration or interlineations. Such changes may sometimes be made unwittingly or innocently or they may be effected deliberately with the consent of the parties to the document. Quite often changes may be made in a deceitful manner to obtain an advantage not intended by the instrument. Further, some alterations may be very minor or inconsequential. However, some alterations may be material in nature and may give rise to some very significant legal consequences. The article attempts to study the legal consequences of material alterations in the negotiable instruments.
What is a material alteration?
A pertinent question arises as to what is ?material alteration?? The term ?material alteration? is not defined either in the Indian Contract Act, 1872 or in the Negotiable Instruments Act, 1881 even though documents relating to these acts suffer frequent alterations. The term ?material alteration? does not appear to have received any exact definition from legislature in any enactment in India. It would, therefore, be appropriate to look at the works of legal authorities and the judgments of the courts to find out as to how the term has been understood/interpreted.
Their Lordships of the Privy Council in the case of Nathu Lal v. Gomti Kuar cited the following paragraph from the Halsbury's Laws of England, which explains the term material alteration very succinctly:
"A material alteration is one which varies the rights, liabilities, or legal position of the parties ascertained by the deed in its original state or otherwise varies the legal effect of the instrument as originally expressed, or reduces to certainty some provision which was originally unascertained and as such void, or may otherwise prejudice the party bound by the deed as originally executed,"
The Supreme Court of India in Loonkaran Sethia v. Ivan E. John looked at the above definition with approval.
From the above definition, the following elements emerge, the presence of which would make a variation in an instrument as material alteration:
A material alteration varies the apparent nature of relationship of the parties as it alters rights, liabilities or legal position vis-?-vis what was originally stated in the document.
It may also otherwise change the legal character and effect of the document.
It may also affect the legal remedies available to the parties.
Impact of changes could be that the document becomes void.
Consequence of material alteration could be that it may prejudice the party vis-?-vis his interests as determined originally.
Material alteration may also remove the unambiguity of the original document and may make it, through alteration, more certain.
Legal consequences of material alteration
Without defining the term ?material alteration?, the Negotiable Instruments Act, 1881 has dealt with the effect of material alteration in the negotiable instruments. Section 87 determines the consequences of a material alteration as extracted below:
"87. Effect of material alteration --Any material alteration of a negotiable instrument renders the same void as against any one who is party thereto at the time of making such alteration and does not consent thereto, unless it was made in order to carry out the common intention of the original parties. Two other Sections of the Negotiable Instruments Act, 1881 which deal with material alterations, are as under:
?Section 88. Acceptor or indorser bound notwithstanding previous alteration. -
An acceptor or indorser of a negotiable instrument is bound by his acceptance or indorsement notwithstanding any previous alteration of the instrument.?
?89. Payment of instrument on which alteration is not apparent. ? (1) Where a promissory note, bill of exchange or cheque 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 or to have had a crossing which has been obliterated, payment thereof by a tenor thereof at the time of payment and otherwise in due course, shall discharge such person or banker from all liability thereon; and such payment shall not be questioned by reasons of the instrument having been altered, or the cheque crossed.
(2) Where the cheque is an electronic image of and the truncated cheque shall be a material alteration and it shall be the duty of the bank or the clearing house, as the case may be, to ensure the exactness of the apparent tenor of electronic image of the truncated cheque while truncating and transmitting the image.
(3) Any bank or a clearing house which receives a transmitted electronic image of a truncated cheque, shall verify from the party who transmitted the image to it, that the image so transmitted to it and received by it, is exactly the same.
From the above definitions it can be seen that the basic concept as regards the effect of material alteration in a negotiable instrument is that material alteration avoids the instrument and if done unilaterally without the consent of the other party in a deceitful manner for one?s own vested interests is nothing but an offence.
In this regard the following has been stated in Halsbury?s Law of England, ?The effect of making such an alteration, without consent of the party bound, is exactly the same as that of canceling the deed?. So the instrument becomes void and the party basing its claim upon it, cannot claim anything. This result follows irrespective of the fact whether the party concerned was responsible for the alteration or whether it was made by someone else without his consent or knowledge.
In the cases of Firm Sri Chand v. Lajja Ram and Jayantilal Lal Goel v. Zubeda Khanum, it is held that a material alteration of the instrument discharges all parties who are liable on the instrument at the time of alteration and who do not consent to such alteration.
In the case of Arumugam v. M.S Narasaich, it is held that if an alteration is made by erasure, interlineations or otherwise in a material part of a deed after its execution by or with the consent of any party thereto or person entitled thereunder, but without the consent of the party or person liable thereunder, the deed is thereby void.
Thus the instrument stands invalidated as a result of material alteration as against the party whose consent was not taken for alteration. But what is the status of the document subjected to material alteration as against the person who became a party subsequent to material alterations? This question was answered in the case of Ramachandran v. Dinesan. It is held in this case that ?As regards the effect of material alteration, the basic principle of law is ?????such a change invalidates the instrument against the person not consenting to the change???. By alteration, the identity of the instrument is destroyed. So, the effect of making a material alteration on a negotiable instrument without the consent of the party bound under it is exactly the same as that cancelling the instrument. The instrument is rendered void only as against any one who is a party thereto and not against anyone becoming a party subsequent to the alteration. If a person indorses an altered instrument without the knowledge of the alteration he may be liable to the indorsee. A person, who accepts an altered instrument, cannot absolve his liability on the acceptance on account of the previous alteration.?
Whether the alteration was fraudulent or innocent also makes a difference. In the case of Rajiv Bhai Nathabhai Patel v. Ranchhod Ragunath Patel, it is held that where there has been a material alteration in the instrument, the further questions for consideration of the court are whether the alteration is fraudulent or innocent. Where the alteration is fraudulent, the courts will not allow the plaint to be amended and the plaintiff to fall back on the original cause of action. But where the alteration, though material, is innocent and the plaint is based on the original cause of action as well as on the document altered, the claim if properly proved can be allowed on the original cause of action. Or if the original plaint is not on the original cause of action, it is open to the plaintiff to apply and the court to consider whether the plaintiff should be allowed to amend it.
It has been held in a no of cases that if alteration is made in a document when it was in the custody of a party, that party is bound to suffer because a party who has the custody of an instrument made for his benefit, is bound to preserve it in its original state. It has also been held that a material alteration made with the consent of the other party would operate as a new agreement and as such the consequences of material alteration made with the consent of the other party are different from those when material alteration is made without such consent.
Material alteration in negotiable instruments and its liability on banks
In order to ascertain the obligations of the banks in India vis-?-vis material alteration in a negotiable instrument, best way could be to find out how the courts have determined such obligations.
In Brahma Shum Shere Jung Bahadur v. Chartered Bank of India, Australia & China ,the following points have been laid down:-
Banker is protected even though he has paid a materially altered cheque if (i) the alterations were not apparent at the time of payment and (ii) he pays in due course, i.e. in good faith and without negligence
If there is anything to arouse his suspicion, he should make enquiries.
Mere indication that the writer of the body of the cheque is different from the signatory, is not sufficient to arouse suspicio
Banker?s obligation to pay cheques arises out of contract. Under the contract, the banker may have agreed to follow an overdraft to the customer and pay his cheques upto an agreed limit. Here, the banker?s obligation to pay cheques is subject to the same rules as are applicable to a deposit account.
In Tanjore Permanent Bank Ltd. v. S.R. Rangachari, the question that arose for decision was whether T.P Bank was entitled to debit the account of Mr. Rangachari with the amount of two cheques which were signed in blank by the said customer and which were subsequently filled in by the accountant of the said banks. The facts were that Mr. Rangachari had drawn the two cheques in favour of his two clerks and the said cheques appeared to be discharged by the said clerks. Mr. Rangachari, flatly denied the veracity of the signatures and in the suit there was no evidence to rebutt. The trial court held that it was a criminal act of forgery and misappropriation by the servant of the bank and no protection could be available under Section 89 of the Negotiable Instrument Act, 1881. When the matter came in appeal, a different issue was framed as to ?whether under the peculiar circumstances, the bank lawfully can debit the two enteries in Mr. Rangachari?s account and secondly whether the bank should bear the loss for any other person than considered by the trial court?. The High Court held that the bank could not claim the amounts of the two debits from Shri Rangachari. The High Court Judges after looking at the cheques, were of the opinion that there are clear indications of material alteration. They also accepted the following statement of law in Bhashyam & Adigas, ?Negotiable Instruments Act, ?10th edition:
?The bank has also to see whether there are any alterations in the cheque and whether they have been properly authenticated. Therefore, where an alteration in a cheque is initialed not by all the drawers but only by some of them, the bank will be paying the amount on the said cheque at its own risk. In this connection it is necessary to notice that under Section 89 protection is afforded to the bank paying a cheque where the alteration is not apparent?.
It is also observed that in the above case the High Court had also looked into some English authorities and noted the observations by House of Lords in London Joint stock v. Macmillan and Arthur that a customer when he signs a cheque in blank and permits another person to fill it up, is bound by the said instrument. However, this cannot absolve the bank of its responsibility in the case of material alteration which is apparent on the Negotiable Instrument. A banker has no right to set up the rule of estoppel against the constituent in a case where the negligence of the bank has contributed to the loss. Court held that in this case inspite of the negligence on the part of the customer, the real cause for material alteration was the fraudulent action of an officer of the bank.
Thus, from the above, three principles emerge relating to material alteration vis-?-vis a bank?s liability which may be stated as under:
Section 89 of the Negotiable Instrument Act, 1881, does not afford protection to the banker if the alterations on the cheque are apparent and not authenticated by the drawer.
If the customer hands over signed but otherwise blank cheques to the bank officials, his negligence would not give right to the bank to claim protection against fraudulent or forged material alteration committed by an employee of the bank.
In the case of fraudulent material alteration in a cheque by a bank employee, the bank cannot setup a defence that a customer should guard against fraud / forgery by an employee of the bank.
Alterations though material but not vitiating
Whereas generally speaking material alteration avoids an instrument, alterations which are material in nature may not always vitiate an instrument. In following cases, though the alteration was held to be material, but was held not to be vitiating the document.
(i) When the alteration is made before the bill or note is issued
When the alteration is made before the bill or note is issued, it does not vitiate the instrument. Thus where a note intended to be executed by father and son was signed by the son, but as the father did not turn up, his nishani was put in by the son, it was held that Section 87 did not apply, and that there was no material alteration. Further, when an instrument is altered from a note to a bill before it is negotiated or where in a joint and several note by three, after two have signed, the third before signing inserted new words in the instrument or where the place of drawing was changed before the instrument was available as a bill or where the bill or note was altered by the consent of all the parties before delivering it over to the payee, it was held that alteration took place before the instrument was available as such and so not void.
(ii) When made to correct mistakes or effectuate intention of the parties
When alteration is made merely to correct a mistake or to make it what it was originally intended to be, it does not vitiate the contract, as, where a provision for interest was inserted in accordance with the original intention. Again, where an indorsement is inserted to rectify a mistake or where a bill was dated by mistake 1832 instead of 1823, and subsequently the agent of the drawer corrected the mistake, or again where a note by the defendant was altered by him after delivery to the plaintiff, by the insertion of the words ?or order? and it was proved that the alteration was in pursuance of the original intention of the parties, it was held that the alteration did not vitiate the contract.
Conclusion
Sometimes, changes though subtle, may change the entire meaning and intent contained in an instrument. On the other hand, changes which do not create any new right or liability in favour of the persons executing the changes may be of little consequence. For instance, acknowledgment or receipts on the documents, even though alterations in themselves by way of addition of a few words do not change the character of the original document. Similarly there are other innocent alterations such as alterations made to correct typographical mistakes, spelling errors etc, with the consent of the parties concerned. Such alterations would not lead to a Negotiable Instrument losing its substance or identity nor would they be considered material alterations.
However where the changes are material in nature i.e. varying the rights, liabilities, or legal position of the parties then such an alteration would render the instrument void (as the identity of the instrument gets destroyed) against anyone who is a party thereto at the time of making such alterations and does not consent thereto unless it was made in order to carry out the common intention of the original parties. To hold one of the parties liable under such circumstances, wherein he does not consent to alteration would amount to making for him a contract that he never agreed to.
The principle behind this concept being that for smooth and orderly running of affairs of the society, it is necessary that no person should be allowed to take advantage of the fraud committed by him, and he should run the risk of being caught for the fraud. Further, if material alterations are not made liable to consequences of the instrument being avoided, people would lose respect for the integrity and sanctity of the instruments and no body would be deterred from committing forgery. Tolerance of material alteration would also be detrimental to public policy if the perpetrator of forgery is not in a worse position after detection thereof than he was when he held the instrument in its original form.
(The author works as Legal Executive with BHEL and the views expressed are strictly personal)
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