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negotiable-instruments:interest-when-no-rate-specified

Interest when no rate specified

Section 80 of the Negotiable Instruments Act,1881.

When no rate of interest is specified in the instrument, interest on the amount due thereon shall, “notwithstanding any agreement relating to interest between any parties to the instrument”, be calculated at the rate of eighteen per centum per annum, from the date at which the same ought to have been paid by the party charged, until tender or realization of the amount due thereon, or until such date after the institution of a suit to recover such amount as the Court directs.

Explanation. When the party charged is the indorser of an instrument dishonoured by non-payment, he is liable to pay interest only from the time that he receives notice of the dishonour.

The portion within the inverted comas has been substituted by Act 30 of 1926 for the words “except in cases provided for by the Code of Civil Procedure Sec 532”. This section which is an enabling one makes provisions for cases where there is no rate of interest specified in the instrument. The section applies only to promissory notes and bills of exchange and to no other instrument. Although the section speaks of non-specification of the rate of interest it governs cases where there is no mention of any interest whatever.

The portion underlined was substituted by Act 66 of 1988, sec. 2 for six per centum.1)

Rate of interest

Under the ordinary law existence of a separate contemporaneous oral agreement to pay interest is admissible in evidence when the document which is not governed by this Act is silent about interest or a person can claim interest under the provisions of the Interest Act of 1839. Previous to the amendment of the section in 1926, a collateral oral agreement was admissible to prove a higher rate of interest than eighteen per cent. But after the insertion of the words “notwithstanding any agreement relating to interest between any parties to the instrument” in the section, a party, under the Negotiable Instruments Act, can neither set up nor prove such a contemporaneous oral agreement about interest nor claim interest under the Interest Act 11 of 1839, but can claim interest only at the rate of eighteen per cent per annum as silence on this point is equivalent to an agreement to pay interest at eighteen per cent per annum. Therefore, when there is no mention of any interest in the document itself the court can grant interest only at the rate of eighteen per cent per annum as provided by this section and an award of a higher rate is illegal.

The decision awarding a higher rate on the admission of the defendant in a Calcutta case2) is no longer good law When in spite of agreement to pay interest in the document the late of such interest is not mentioned, eighteen per cent per annum will be allowed.

Since this Act does not abrogate local usages relating to negotiable instruments in an oriental language interest at a rate exceeding eighteen percent cent was allowed in a suit on a hundi according to local usage notwithstanding the provisions of the section.

Effect of the amendment

Prior to the amendment of 1926 by the insertion of the words “notwithstanding any agreement relating to interest between any parties to the instrument” in place of “except in cases provided for by the Code of Civil Procedure Sec 532” (ie order 37 Rule 2), a person who instituted a suit under the summary procedure laid down in that Code could not claim any interest nor was competent to set up a case of any agreement to pay interest when it was not provided for in the instrument itself. But the deletion of the latter clause enables the court to award interest at eighteen per cent per annum even in suits under the summary procedure and the insertion of the former clause has done away with the effect of any contemporaneous oral agreement regarding the rate of interest.

Therefore, in spite of any contemporaneous oral agreement for payment of interest at a higher rate, courts are not competent to allow interest at more than eighteen per cent per annum when the note is silent as to interest. The earlier decisions allowing a higher rate of interest on the admission of a contemporaneous oral agreement or a written agreement, or on a subsequent oral agreement in consideration of the creditor not pressing for payment are no longer good law.

Period of interest

Interest is payable from the date on which the money becomes due i.e. from the date of maturity of the instrument. But the unhappy wording of the section has given rise to conflict of decisions regarding the time from which interest under this section is to be allowed on notes payable on demand.

Following a literal and grammatical construction of the wording of the section it has been held that the phrase, the date at which the same ought to have been paid, has no reference to the amount due on the note but relates to the interest due thereon. Interest on those instruments to which section 80 applies is payable from the date of execution or from maturity or from presentation or from demand or from service of summons according to the circumstances of each case and in consequence the date was of necessity left indefinite in this section , and, therefore, where there was no demand, interest at eighteen per cent should be calculated from the service of summons, and if there was demand interest should be allowed from the date of demand. This view is based on a literal interpretation of the wording of the section. It has, however, been held in a number of cases all of which have been noticed in the Calcutta Case referred to above that where an on-demand promissory note is silent on the question of interest, interest shall be allowed at the rate of eighteen. per cent per annum from the date of the note, demand being unnecessary

Explanation

According to the explanation the indorser of a bill or note is liable to pay interest from the time he receives notice of dishonour. The section speaks of the indorser but not of the drawer whose position is similar In English law the present rule applies to the drawer as well. Where notice of dishonour is not necessary, or in case of dishonour by non-acceptance, interest is to be calculated from the date of dishonour

Applicability to cheque

In Sathyan vs Yousu3) the Hon'ble Kerala High Court held that:

Section 80 of the N.I. Act is applicable to all instruments. There is no definition for the expression “instrument” in the N.I. Act. But the expression ”negotiable instrument“ is defined in Section 13 of the N.I. Act. The “instrument” referred to in Section 80 of the N.I. Act must necessarily refer to “negotiable instruments” which by definition means a promissory note, bill of exchange or cheque payable either to order or to bearer. The cheque is hence a negotiable instrument and consequently an instrument to which Section 80 of the N.I. Act would apply.

English law

The English law is quite different from the rule laid down in this section regarding the rate of interest. According to the Bills of Exchange Act the courts have absolute discretion to grant interest as damages or to withhold it wholly or in part and the court may even refuse to award interest at a rate specified in the document.

1)
w.e.f. 30-12-1988
2)
Luchmi V Hemendra
3)
2007 CriLJ 2590, 2006 (4) KLT 923