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negotiable-instruments:note:material-alteration

Effect of material alteration

Section 87 of the Negotiable Instruments Act,1881.

Any material alteration of a negotiable instrument renders the same void as against any one who is a 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;

Alteration by indorsee: And any such alteration, if made by an indorsee, discharges his indorser from all liability to him in respect of the consideration thereof. The provisions of this section are subject to those of sections 20, 49, 86 and 125.

This section deals with the effect of any material change in a negotiable instrument in order that fraud may not be committed and the instruments may not be tampered with. Any act which changes the legal effect of the instrument, which causes it to speak a different language in legal effect from that in which it originally spoke, that is, which changes the legal identity or character of the instrument either in its terms or in the relation of the parties, is a material change or technically an alteration.1)

It is a general principle of law that contractual relationship cannot be altered without the consent of the parties concerned. And if a material alteration is made in an instrument without the consent of the prior parties it follows that such prior parties will not be bound by the altered instrument, for to make such persons liable would be to make for them a contract they never agreed to. In spite of any material alteration if a party admits his liability thereunder he is bound to the extent of his admission. But can the holder then revert to the original position i.e. the position before the alteration was effected? No, for where an instrument is materially altered all persons who are parties to the instruments at the time of the alteration and have not consented thereto are discharged from liability on the instrument and after such alteration the holder cannot fall back on the contract as it existed prior to the alteration, where a man has been wicked enough to alter a document fraudulently it is inconsistent with equity and good conscience or with public policy that he should be entitled to recover upon it. A material alteration, therefore, will make the instrument absolutely void against all prior parties who have not consented to it as no man should be permitted to attempt to commit fraud without running serious risk of loss after detection.

The plea of material alteration cannot be successfully taken by a party who has consented to it and, therefore, a person who becomes a party subsequent to such alteration will be bound by the altered instrument on the ground of estoppel. A material alteration made before the note was issued or while the instrument was unstamped and incomplete will not invalidate the instrument. The principles of this section apply to non-negotiable instrument as well when such alterations are fraudulent. When the alteration is apparent onus lies on the plaintiff to explain it and show it is not material.

Material Alteration

In order to avoid an instrument the alteration must be material, that is, an alteration which changes the nature of the instrument. An act which changes the legal effect of the instrument, that is, which changes the legal identity or character of the instrument either in its terms or in the relation of the parties is a material alteration. It is the effect of the act upon the instrument and not the particular manner in which it is done that is material and hence an alteration to be material must be an actual alteration whether by erasure, interlineation, addition, or substitution of a material matter affecting the identity of the instrument or contract. It must also be in a material part of the instrument and must affect the rights and obligations of the parties thereto. The question, of materiality of an alteration is a question of law. It does not matter whether the parties ever benefited or not by the alteration. As instances of material alteration may be considered the following:

  • alteration of dates,
  • the sum payable,
  • the time of payment,
  • the place of payment, and,
  • where a bill has been accepted generally, addition of a place of payment without the acceptor's assent, of the instrument.

It has a direct bearing on the due date, the time for limitation and determining the period for which the interest has to be paid. Therefore, any alteration of the date unless made with the consent of the prior parties to the instrument, will make the instrument void. Even if the alteration of the date does not affect the time for payment the instrument will be void as not being the contract originally entered into. This rule would apply with equal force to the alteration of the month or the year or both. But where such an alteration is made for the correction of a clerical mistake it will not be a material alteration. Nor does it come within the mischief of this section when a bill is drawn in the ordinary form payable some days after sight and the due date is noted in a corner of the bill and it is altered from time to time as fresh time for payment is given to the acceptor. The reason is that such a note of the due date does not form part of the bill but is only a docket for office purposes.

In Ravi Chopra vs State And Anr2) Delhi High Court held that:

“…any material alteration to a cheque without the consent of the drawer unless it is made to carry out the common intention of the original parties thereto renders the cheque void, the expression “material alteration” has not been defined. Significantly, Section 87 has been made subject to Sections 20, 49, 86 and 125 NI Act. These provisions help us to understand what are not considered 'material alterations' for the purpose of Section 87.

Sum payable

Any alteration of the sum payable made in the instrument is a material alteration and it does not matter that such an alteration benefits the party sought to be charged with as the identity of the contract is destroyed. Therefore, the alteration of a sum of Rs 200/- to Rs 100/- which is to the advantage of the person liable will be a material alteration to make the instrument void. Similarly, any change of the rate of interest will be a material alteration within the meaning of this section although the alteration effected is of a rate which is not enforceable in law as, for instance, of a penal rate which the court cannot grant , or where the alteration is to the advantage of the person liable, being from a higher to a lower rate. Alteration of lawful interest into 6 pc is a material alteration.

Interpolation

Subsequent interpolation of a stipulation to pay interest without the knowledge of the executant is a material alteration and vitiates the contract. So, also, the insertion of a rate of interest not agreed upon by the parties when the note was first made is a material alteration. But where the words 'at 5 per cent per mensem' were already written in the instrument the interpolation of the words 'with interest' before that was held not to be a material alteration3) as the rate was clearly provided and the insertion only carried out the common intention of the parties.

Time of payment

An alteration of the time when money is due and payable is a material alteration and will have the effect of vitiating the instrument. Thus, the alteration of a note payable three months after date into one payable three months after sight or an endorsement postponing payment of a note payable on demand is a material alteration. But, as all notes, in which no time for payment is specified, are deemed to be notes payable 'on demand' the insertion of the words 'on demand' in such notes does not amount to material alteration as it does not alter the legal character of the instrument.

As has been stated before, where the due date is mentioned on the top of the instrument and not in the body of the bill, and such date is changed from time to time to grant extension of time for payment to the acceptor at his request, the alteration will not attract the operation of this section.

Place of payment

Apart from the question of convenience and inconvenience of payment the place where payment is to be made has an additional importance as it determines the forum of suit. Therefore, any alteration in the place of payment is a material alteration and vitiates the contract .

Erasure or cancellation of a place mentioned in the instrument, or altering one place to another, or inserting a place where none is mentioned in the deed will amount to a material alteration and avoid the contract. An alteration of the place of drawing is also a material alteration.

Medium of payment

When at the time of contract a certain medium of payment is agreed upon by the parties the payment must be made through that medium as a part of the original contract. Any alteration of that medium, as for instance,(from rupees to dollars) will be a material alteration. It may be that this conversion results in no loss to the parties concerned. But yet that is not the original contract and there may be the possibility of some injury to the acceptor who cannot be compelled to depart from the original contract Such alteration will, therefore, discharge the prior parties if they have not assented to it.

Parties

The addition of a new party or the exclusion of an existing party may seriously affect the position of the other parties to the instrument. Therefore, any change affecting the number or the respective relation of the parties or their legal character will be a material alteration to discharge the prior parties who do not consent to such alteration. Addition of a new party to a contract constitutes a material alteration and the effect of such alteration is to destroy the identity of the instrument as it may seriously affect the position of the parties e.g. if the original maker have a demand against the payee which they could lawfully set off against the bond, the addition of another maker may destroy that right or the addition of the place of residence of the additional maker may enable the payee to change the forum of the suit that may be brought by him to enforce the bond.

Addition of names, as joint executants, made without the consent of other parties is a material alteration unless it is made to carry out the common intention of the parties. Any variation from the original contract affecting the position of the parties will discharge the whole instrument. Where it was agreed that two persons would jointly execute a note and be jointly liable for the amount and one of them signed the note and the signature of the other was forged on the note, the note was not enforceable against any.4)

Similarly, there was material alteration where it was found that one of the executants had forged the signature of the other on the note and the creditor was aware of this fact.5) It is doubtful whether the facts of this case properly come under the operation of this section which applies to alterations after execution and not to anything done at the time of execution. Therefore, where a pronote was alleged to have been executed by two persons and it was found that the signature of one of the executants was forged it was found that the present section did not apply(Madam Pillai v. Athinarayana, 1925 Mad 929))

Conversion of several into a joint liability by altering 'I promise' into ‘We promise’, or forgery of the mark of a person, or alteration of the name of payee is a material alteration sufficient to make the instrument void.

Consideration

The insertion of a particular consideration for ‘value received’ constituted a material alteration as, where, the words “for value received generally” were substituted by “for the good will and trade of K deceased”.6)

Bearer or order

The addition of the words “bearer” or “order” after the name of the payee constitutes a material alteration to vitiate the instrument as it converts a non-negotiable instrument into a negotiable one. Striking out of the words ‘or bearer’ from a note payable ‘to order or bearer' or the substitution of the word ‘bearer’ for ‘order’ but not of the word ‘order’ for ‘bearer’ constitutes a material alteration.

Addition of attesting witnesses

The interpolation of a name of a witness in a document like the negotiable instrument which need not be attested is not a material alteration that would render the document void. The reason of this rule is that the addition of a witness in a document which does not require attestation goes only to the proof of the execution of the document but does not affect the nature or operation of the contract and the contract remains as before. But in relation to a document which requires attestation the position is different. As for instance, a document creating a mortgage without the attesting witnesses will operate as a simple bond and not as a mortgage instrument. So, where, in such a document, originally without any attesting witness, some witnesses are interpolated, the nature of the contract is changed as it converts the simple bond into a mortgage bond. There the alteration will be material. Following this principle the addition of two witnesses in an improperly stamped pronote to turn it into a bond was held to be a material alteration.7)

Mutilation which will have the effect of making some material word disappear will be a material alteration. An accidental obliteration of the number of a Bank Note is not a material alteration within the meaning of this section. An earlier decision of the Bombay High Court where it was held that the addition of witnesses in a contract would in all cases vitiate the contract8) does not appear to be based on good reason and has not been followed in a later Bombay case.9)

Other material alterations

Besides what have been mentioned before the other alterations which have been held to be material are the addition or alteration of a rate of interest, the insertion of a particular rate of exchange, the addition of a name of a new maker to a joint or several note or the elimination of the name of an existing maker and the conversion of a joint note into a joint and several note.

A crossing of a cheque as authorised by the statute becomes a material part of it, so that an alteration or obliteration of the crossing or an addition thereto, when not authorised, becomes a material alteration of the cheque

Alterations not material

The addition of a wrong date for the maturity of the instrument, the elimination of the words 'or order' in an instrument payable to order, or the alteration of the drawer's style, when wrongly stated in the bill, to his true style as signed by him in his acceptance, the conversion of a blank endorsement into a special endorsement which is sanctioned by the statute are not material alterations.

Alterations made before the instrument is complete and negotiated, or alteration effected to make explicit what was implicit in the document, or made to correct a mistake or the addition in the margin of a statement of fact, or a forged alteration in a note which does not form a part of it or a provision for payment of interest in default of payment at maturity, or alterations made with mutual consent of the parties, and if not made with the fraudulent intention of defrauding a third party are also not material alterations and do not vitiate the instrument. Nor will an instrument be vitiated by an alteration made in good faith by a party without the knowledge of the others if it was intended to carry out the original intention of the parties. Besides the above, there are other alterations which do not vitiate the instrument and they have been noticed before.

Adding amount and name to a cheque

A collective reading of sections 20, 49, 86 and 125 NI Act shows that even under the scheme of the NI Act it is possible for the drawer of a cheque to give a blank cheque signed by him to the payee and consent either impliedly or expressly to the said cheque being filled up at a subsequent point in time and presented for payment by the drawee.

What however is essential is that the cheque must have been signed by the drawer. If the signature is altered or does not tally with the normal signature of the maker, that would be a material alteration. Therefore as long as the cheque has been signed by the drawer, the fact that the ink in which the name and figures are written or the date is filled up is different from the ink of the signature is not a material alteration for the purposes of Section 87 NI Act.10)

In Lillykutty vs Lawrance11) Kerala High Court held that:

According to the drawer of the cheque, amount and the name has been written not by the drawer but by somebody else or by the payee and tried to get it encashed. We are of the view, by putting the amount and the name there is no material alteration on the cheque under Section 87 of the Negotiable Instruments Act.

Effect

It has already been noticed that if a material alteration is made in an instrument without the consent of the prior parties, such prior parties will not be bound by the altered instrument, for, to make such persons liable under an altered instrument would be to make for them a contract they never agreed to. But even in such cases a decree will be passed if a prior party admits his liability. All persons who are parties to the instrument at the time of the alteration are discharged from liability if they have not consented to the alteration, and after such alteration, if it is a fraudulent one, the holder cannot fall back upon the pre-existing contract , for, where a man has been wicked enough to alter a document fraudulently it is inconsistent with equity or good conscience or with sound policy that he should be entitled to recover upon it.

A material alteration, therefore, which is fraudulent, deprives the holder from at all recovering anything. He cannot sue upon the original consideration even if such a suit be otherwise competent.

Suit on original consideration

When a document is inadmissible in evidence on account of insufficiency of stamp or on account of any material alteration therein an action does not necessarily lie on the original consideration. In such cases the point for consideration will be if the loan and the document which may be inadmissible because of insufficiency of stamp or because of any material alteration made there in form one indivisible transaction or if they are different transactions separate from one another. If the loan advanced is based on the note they are indivisible. If the loan advanced is independent of the note executed subsequently or contemporaneously as evidence of the loan they are separate transactions.

When a cause of action for money is once complete in itself whether for goods sold or money lent or for any other claim and the debtor then gives a bill or note to the creditor for payment of the money at a future time, the creditor, if the bill or note is not paid at maturity, may always as a rule, sue for the original debt provided he has not endorsed or lost or parted with the bill or note to make the debtor liable to a third person. In such cases the bill or note is said to be taken by the creditor on account of the debt and if it is not paid at maturity the creditor may disregard the bill and sue for the original consideration. But when the original cause of action is the bill or note itself and does not exist independently of it, as for instance, when in consideration of A depositing money with B, B contracts by a promissory note to repay it with interest, here there is no cause of action for money lent, or otherwise than upon the note itself, because the deposit is made upon the terms contained in the note and no other. In such a case the note is the only contract between the parties and if for any reason the note is not admissible in evidence the creditor must lose his money.

A suit on original consideration will be if brought within the period of limitation from the passing of the consideration when the debt and the note do not form one transaction i.e. when the loan is independent of the note. A suit in such cases will lie on original consideration even after the statutory period from the passing of original consideration if limitation is saved by acknowledgment or payment. The alteration in such cases, though material must not be tainted with fraud. There is no difference if the holder permits a stranger to make the alteration. But when the holder is not a party to a material alteration made by a stranger and has no laches his rights are not affected.

Stamp

When an alteration is made with the consent of the prior parties the alteration, if not made for the purpose of carrying out the original intention of the parties, will make a fresh contract and, as such, will require a new stamp.

Position of subsequent parties

Since it is the parties liable on the instrument at the time of alteration who are discharged, the liability of persons who become parties to the instrument subsequently to the alteration remains unaffected. Therefore, when a person endorses an altered instrument even without the knowledge of the alteration he becomes liable to the endorsee and the acceptor of altered bill becomes liable under the same.

1)
Krishna v. Nogendrabala, 25 CWN 942
2)
13 March, 2008
3)
Lala Tulsiram v. Ram Saran, 49 MLJ 132
4)
Amirtham v. Nanjah, 26 MLJ 257
5)
Santhu v. Jamal, 1928 Mad 1092
6)
Knill v Williams, 1809 10 East, 431
7)
Mangal v Jaswant, 1930 Lah 959
8)
Sitaram v. Daji, 7 Bom 418
9)
Venkatesh v. Bavasubraya, 15 Bom 44
10)
See Ravi Chopra vs State And Anr decided on 13 March, 2008 by Delhi High Court.
11)
2003 (3) KLT 721

Created on 2021/02/24 08:21 by LawPage • Last modified on 2021/04/09 22:26 (external edit)