Section 10 of the Negotiable Instruments Act deals with the concept of “payment in due course” for cheques. Payment in due course refers to the payment made by a bank in accordance with the apparent tenor (terms) of a cheque to the person who is entitled to receive payment. This section provides protection to banks when they make payments in good faith, based on the appearance of the cheque and the regular course of business. Here are the key points regarding Section 10 and payment in due course for cheques:
- Apparent Tenor of the Cheque: The apparent tenor of a cheque refers to the terms and conditions mentioned on the face of the instrument, such as the amount, date, payee, and signature. Banks are expected to make payments based on the apparent tenor, assuming it to be genuine and regular unless they have valid reasons to suspect any irregularity.
- Protection for Banks: Section 10 provides protection to banks that make payments in due course. When a bank makes payment to a person presenting a cheque, it is deemed to have discharged its liability and the payment is considered valid and final, even if there may be defects, irregularities, or fraud associated with the cheque.
- Good Faith: For a bank’s payment to be considered in due course, it must be made in good faith. Good faith refers to an honest belief in the genuineness and regularity of the transaction without any notice of any defect or adverse claim. The bank should not have knowledge of any circumstances that would invalidate the payment.
- Ordinary Course of Business: Payment in due course should be made in accordance with the ordinary course of business of the bank. It means that the bank should follow its regular practices and procedures for verifying cheques and making payments. This includes verifying the signature of the drawer, ensuring sufficient funds, and complying with any specific instructions given by the account holder.
- Protection for Holders: Section 10 also provides protection to the holders of cheques. If a person receives payment in due course for a cheque, they are considered to have received valid discharge for the instrument, even if there may be underlying defects or claims against the drawer.
- Exceptions: There are certain circumstances where payment in due course may not protect the bank. These exceptions include cases where the payment was made with notice of any irregularity or fraud, or when the bank was a party to the fraud or negligence. Additionally, if the cheque is crossed and requires payment to be made through a bank account, payment in cash by the bank may not be considered in due course.
It is important to note that while Section 10 provides protection to banks and holders, it does not absolve the drawer of the cheque from their liabilities. If a cheque is dishonored due to insufficient funds, irregular signature, or any other valid reason, the drawer remains liable to make payment and can be held legally responsible for the dishonor.
Section 10 of the Negotiable Instruments Act plays a crucial role in providing legal certainty and protecting the integrity of cheque transactions. It encourages banks to make payments based on the apparent tenor of cheques and promotes the efficiency and reliability of the payment system.