Section 58 of the Negotiable Instruments Act,1881.
When a negotiable instrument has been lost, or has been obtained from any maker, acceptor or holder thereof by means of an offence or fraud, or for an unlawful consideration, no possessor or indorsee who claims through the person who found or so obtained the instrument is entitled to receive the amount due thereon from such maker, acceptor or holder, or from any party prior to such holder, unless such possessor or indorsee is, or some person through whom he claims was, a holder thereof in due course.
The section deals with the effect of possession of a lost instrument and of instruments obtained by fraud, for unlawful consideration, or by an act which constitutes an offence under the law of the land. Under the ordinary law a person cannot transfer a better title than he possesses. But in the case of negotiable instruments, in certain cases, one having a defective title to the property in the instrument can pass an absolutely unimpeachable title to the transferee. A finder of an ordinary article is a bailee for the true owner and the latter, on sufficient identification, can recover it not only from the finder but even from his transferee, bona fide or otherwise. The case is, however, different in the case of some negotiable instruments.
Negotiable instruments payable to bearer are transferable by mere delivery and no indorsement is necessary. When the finder of such an instrument passes it to another who takes it bona fide for value he becomes a holder in due course and the real owner cannot recover it from him or any one claiming through him. The defence of unlawfulness of consideration is admissible only against an immediate party but not against persons claiming through him. This special privilege has been conferred on the holder in due course to make his position certain against all possible claims, uncertainty is opposed to the fundamental principle of the Law Merchant whose function is to give currency to these instruments for facility of trade and commerce by protecting the interest of bona fide dealers for value. It would, therefore, seem that in such cases it is the bona fide that counts. Without bona fides the transferee cannot be a holder in due course and, therefore, cannot resist the claim of the real owner. A holder in due course holds the instrument free from all defects and conveys a similar title to others.
The section applies only to cases of defect in title and does not apply where there is a total absence of title at the inception, nor does it apply where the instrument has not been obtained by any offence but an offence has been committed in connection with the instrument itself, eg, antedating an endorsement which is not an offence committed for obtaining the instrument. When an endorsement was antedated with the fraudulent intention of causing loss to the defendant by making him liable for an amount exceeding what law permitted it was held that although section 58 did not directly apply the forged endorsement had no legal effect and the plaintiff endorsee had no right to sue and only the true owner could sue.
If an instrument is lost from the custody of a holder the finder has no title to it and the holder can recover the instrument from the finder. Even if the finder receives any money on the instrument from the acceptor or the maker he will be deemed to have received the amount on behalf of the real owner and he cannot keep the money to himself. As has already been noticed negotiable instruments are transferable in two ways. Instruments which are payable to bearer can be transferred by mere delivery and instruments which are payable to order can be transferred by endorsement and delivery. When an instrument negotiable by mere delivery is lost and the finder passes it to another and the latter takes it bona fide for value he becomes a holder in due course and he can compel prior parties to make payment to him and the real owner, in such cases, will not be competent to recover from him. This special privilege is conferred on the holder in due course even against the real owner in case of lost instruments by the Law Merchant. The transferee in such cases must prove that he is a holder in due course. But where the instrument is negotiable by endorsement and delivery the position will be different. There the finder cannot negotiate it without endorsement and there having been no endorsement in his favour any endorsement he may make will amount to forgery, a forged endorsement which is a nullity can convey no title and the subsequent holder cannot claim to be a holder in due course. A payment to a wrong person under a forged endorsement is no payment and does not discharge liability to the true owner.
The position of stolen instruments in the hands of the thief and subsequent holders is exactly similar to that of the lost instruments. If the instrument is a completed instrument payable to bearer and it passes from the custody of the thief to a holder in due course the latter can retain it and enforce payment against all prior parties, but if it is payable to order and there is no endorsement on it, or if the document is not complete when it is stolen no title will pass. If, however, a person entrusted a blank paper with his signature to an agent or a third person to fill up the blanks in a particular form and the latter, contrary to the instructions or in breach of the particular purpose for which it was given, wrote out the instrument and negotiated it for value to a bona fide holder, the person who so entrusted the blank paper will be bound to the holder in due course.
The section deals with the effect of only obtaining an instrument by offences. It need hardly be said that forgery is an offence and a forged instrument confers no title to the holder. Is then forgery included in the offences mentioned in the section? Under the English Law Merchant a forged signature is wholly inoperative and no right to retain the bill or to give discharge therefore or to enforce payment thereof against any party thereto can be acquired through and under that signature. But the absence of any such specific provision in the Indian Act has given rise to conflict of decisions here. It was laid down in one case that this section is not exhaustive of the offences by which an instrument can be obtained and forgery is also included in it and that once a holder is shown to be a holder in due course he has a good title notwithstanding a forged endorsement. This view does not make any distinction between forgery and other offences or between want of title and defective title. But this case has not been followed in other cases where it has been held that a forged instrument has in the eye of law no existence at all. And the better opinion is that forgery stands on a different footing from all other offences by which an instrument may be negotiated because in the case of forgery the party who is sought to be charged with liability cannot be accused either of negligence or any act of his, by which he helps such fraud to be committed, while m the case of other offences such an element is present (j) Where a person was induced by his clerk to draw a cheque in favour of a customer and the clerk slightly changed the initials and made it payable to a fictitious person and then took it to B who made payment and passed the cheque to his banker who collected the amount, it was held that the drawer was entitled to recover from B as he acquired no title by the forgeries of the clerk. Similarly, where A entrusted certain debentures to B for recovering interest and B forged A's signature and endorsed them in favour of a bank and the debentures were renewed and B obtained a loan from C and handed them over to him as security it was held that C did not derive any title by the forgeries and that A was entitled to recover the debentures. But in two other similar cases forgery was not allowed to nullify the contract arising out of the renewal of a bill containing a forged endorsement, in one case, on the ground that the last holder was not bound to enquire into the title of the old debentures before renewal and in another case, on the ground that although forged endorsement could convey no title still the effect of the renewal was to create a fresh contract and the owner could not, therefore, claim the new debentures from the third party. The last two cases have been confirmed on appeal by the Privy Council.
A careful examination of the wording of the section shows that forgery cannot be included in the offences contemplated here. According to the present section those offences must be committed in obtaining the document. Forgery, however, is an offence which can only be committed after the instrument has been obtained and not in obtaining it. In the matter of forgery the courts are left to be controlled by rules of Law Merchant as embodied in section 24 of the Bill of Exchange Act. It may be added here that even before the passing of this Act the law here was that forgery could convey no title. If the signature of one of the joint executants is a forgery the note is invalid.
In the case of hundis also the principle that forgery conveys no title to the innocent transferee is applicable, with this difference that, according to the custom specially prevalent there, the holder of a forged hundi may get rid of his liability by producing the forger. A bona fide pledgee of a negotiable instrument, even when ignorant of the fact that the pledgor's title was based on a forged endorsement, acquires no rights under the pledge. Money given for a forged pronote can be recovered if independent evidence of the loan is adduced. As an ordinary rule, defence of forgery can be raised between the immediate parties. Such defence can be taken even by one who has contributed to it by his own negligence, but the person whose signature is forged will be estopped if, after having knowledge of the forgery, he remains silent and does not disclose the fact to the holder, or when, on being questioned, he admits it to be his signature. This doctrine of estoppel depends on the duty to disclose.
Where an instrument is obtained from a blind or illiterate person or from a person who for certain reason cannot read the document, by having a contract read to him in such a false way that the contract read is of a different nature from the contract such a person signs, the signature thus obtained, in the absence of any negligence on the part of the person signing, is of no force as the mind of the signer did not accompany the signature. In the eye of law the signer will be deemed not to have signed the instrument at all. Similarly, when after the signature of a person had been obtained on a piece of paper, a note or a bill was written thereon the signature will not bind the person making it as he never signed the note or the bill nor did he intend doing so. Absence of negligence is a condition precedent to the exemption of liability in such cases of misrepresentation.
Where a literate man does not intentionally read the document or where the signer having full means to know the nature of the contract does not avail himself of it, he cannot complain when it has reached a holder in due course. When one executes a document with full knowledge of its contents but without realising the legal consequences thereof he will not be allowed to deny execution.
In the case of a purdanashin lady the position is rather different. The plaintiff, in such cases, must not only prove that the document was read over and explained to her but that she fully understood the nature and effect of the same.
For the purpose of a valid contract there must be free consent of the contracting parties and consent cannot be free when it is caused by coercion which means the committing of, or threatening to commit, any act forbidden by the Indian Penal Code, or the unlawful detention of, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. Therefore, a contract caused by coercion is not enforceable between the parties. Thus, where A was confined in a room and by show of force he was made to execute a pronote in favour of B, the latter could not recover from the former. But if B endorsed it for value to C who without any knowledge of this fact took it bona fide, C being a holder in due course could recover it from A.
Where there is fraud, free consent, which is of the essence of a contract, is lacking. Fraud will vitiate all contracts. Fraud generally includes all acts, omissions and concealments which involve a breach of legal or equitable duty, trust or confidence justly reposed and are injurious to one or by which an undue and unconscientious advantage is taken by another. Fraud is defined in the Indian Contract Act, section 17. Fraud, coercion, undue influence and misrepresentation are all separate and separable categories in law though, it is true, they may overlap or may be combined. Fraud as a cause of rescission of a contract is reducible to fraudulent misrepresentation, that is to say, misrepresentation, when fraudulent, will be a good cause for rescinding a contract and will be a good defence to an action on a negotiable instrument and the person defrauding will not be entitled to recover When the issue or any subsequent negotiation of a bill is obtained by fraud or in breach of faith, the bill is said to be affected with fraud. In such cases the holder subsequent to the fraud cannot enforce payment against any party thereto, nor can retain the bill against the true owner.
When an instrument is obtained by fraud even for the purpose of defrauding a third party the person, who thus obtains it, has a defective title and cannot enforce it , but if subsequently the instrument passes to a holder in due course he can enforce it and the plea of fraud will not avail against him. When, on the representation of the plaintiff that rent was due, the defendant accepted a bill but it was eventually found that the rent was not due, or when the plaintiff, a partner, on the faith of false account papers, induced another partner, after dissolution, to execute a promissory note in his favour for an amount falsely shown due, the plaintiff could not recover.
A hundi taken for advances of money on false representations knowingly made becomes enforceable before the due date expires as the plaintiff is entitled to rescind the contract immediately. Antedating or post-dating a bill is not an offence, but, if it is done for defrauding creditors, it may amount to forgery.
Consideration may be unlawful either because it is immoral and opposed to public policy, or because it is expressly or impliedly forbidden by law, or is fraudulent. An instrument given for unlawful consideration is void except in the hand of a holder in due course who can enforce it against all prior parties. Unlike other contracts a negotiable instruments is thus not absolutely void for unlawful consideration.
Agreements tending to social immorality are void. Thus, a pronote executed for future illicit cohabitation is void, while one executed for past cohabitation is not, provided past cohabitation did not amount to adultery which was an offence (currently illegal) and a promise in consideration of that is unenforceable. A promise in consideration of the past cohabitation with a kept mistress is void. A promise in consideration of adultery with the consent or connivance of the husband which was not an offence is enforceable. A promise to pay a dancing girl for cohabiting with her, or an agreement made with the immediate object of applying the money for immoral purposes, or an agreement to enable her to teach a dancing girl to carry on her trade, but not to enable her to teach singing is illegal and unenforceable. When a pronote is taken for money lent in the name of one’s concubine’s mother, in a suit by the latter, the defendant cannot plead that the consideration is tainted with immorality.
Where the consideration is opposed to public policy it is illegal and a contract including a negotiable instrument based on such consideration is void and unenforcible. Agreements in restraint of trade or involving traffic in litigation or in public offices, or in consideration of inducing a woman to marry the promisor, or of giving one’s ward in marriage, or of marriage brocage contracts, or of procuring a wife, or of bringing about an adoption, or of compounding of an offence not allowed by law are all opposed to public policy and negotiable instruments based on such considerations are void and unenforceable between the parties.
Thus, also, a loan for bribing a public officer, or a note executed to make a public officer retire from service so that his place may be occupied , or a note executed for influencing public officer for getting some benefit, is void. A note executed by a party in favour of a commissioner appointed by a court for work done is void as the commissioner did the work for the court and not for the party. But a promise of payment in consideration of one’s influence to settle a civil dispute is valid. Agreements for stifling criminal prosecutions are opposed to public policy and, therefore, a note executed for the purpose of stifling a criminal case for a non-compoundable offence or for compounding a charge of grievous hurt caused to a person who died before any complaint could be lodged, or for abandonment, or withdrawal, of criminal prosecution for a non-compoundable offence is void and unenforceable, but it is not void if the offence is a compoundable one. A pronote executed by the debtor and an outsider in consideration of a transaction involving civil and criminal liability is valid and enforceable, so also is a note executed by the servant in favour of his master for an amount embezzled by him under threat of prosecution. There are cases in which the considerations for the contracts arise out of illegalities committed by the party to the contract. It is always opposed to public policy to encourage such considerations to form the basis of valid contracts. Thus, where, after a petition for discharge has been filed by an insolvent, he executes a pronote in favour of an opposing creditor so that the latter may withdraw his opposition, or where an insolvent gives preference to one creditor by executing a pronote in his favour to induce him to sign a composition deed, the pronote is void.
An agreement to pay an amount in excess of real professional remuneration due to an attorney by his client, or to pay to a lawyer's clerk a special amount for special attention is void as opposed to public policy. In the same way if a certain person illegally detains another's goods and takes from him a pronote for releasing them, the note is bad and unenforceable . It is the duty of all persons to help the administration of justice and, therefore, to give evidence when summoned by the court. A person who takes a pronote in consideration of giving evidence in court from a party cannot enforce it. A fraudulent combination amongst the bidders not to bid is illegal and a note passed in consideration of that is void. But where in consideration of an agreement, which is not fraudulent, to abstain from bidding at an excise auction a note is executed it is not void. A note given for commission to the agent of the creditor is not illegal.
According to the Indian Contract Act, contracts by way of wager are void. Therefore, any negotiable instrument given in respect of such transactions is necessarily unenforceable in law. But money lent on a note for payment of such, debts, or to enable a party to take part in such gambling as is not expressly forbidden by law, is recoverable. Where, however, money was knowingly lent for gambling by a cheque, in an action based on the consideration, it was held that the amount was not recoverable. Speculation as such is not necessarily a contract by wager, an intention to wager common to the contracting parties is necessary. When the circumstances as to the contracts for sale, purchase and delivery of goods at a given time and place are such as to warrant the legal inference that the contracting parties never intended any actual transfer of goods at all but meant only to pay or receive money between one another according as the market price of the goods should vary from the contract price at the given time, the contract is not a commercial transaction but a wager on the use or fall of the market and where such differences in the price form the consideration for a pronote the plaintiff cannot recover in a suit on the note. In order to determine whether a note or a bill is enforceable or not the point for consideration is whether the agreement is for a thing that offends against any provision of any law or will frustrate the provisions of any law. In either case the claim will be unenforceable even if the plaintiff is wholly innocent and the defendant pleads his own illegality. If any portion of the consideration is tainted with fraud or illegality the other part is not recoverable and the whole claim will fail. If, however, the illegal portion is distinct and severable, the legal portion may be allowed. Illegality of consideration is a defence available only against an immediate party or any other party who is not a holder in due course Where the statute declares a note to be absolutely void and prohibits the issue of such a note it is void against all parties immediate or remote though it may so happen that the endorser will be liable on his endorsement to the endorsee.