Section 85 of the Negotiable Instruments Act,1881.

(1)Where a cheque payable to order purports to be indorsed by or on behalf of the payee, the drawee is discharged by payment in due course.

(2) Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, notwithstanding any indorsement whether in full or in blank appearing thereon, and notwithstanding that any such indorsement purports to restrict or exclude further negotiation.

Subsection (2) was added by section 2 of the N.I Amendment Act, 1934 (XVII of 1934).

This section affords a special protection to the banker who stands in the position of a debtor and is directed to make payment on behalf of his customer who has funds with him. The banker is reasonably expected to know the signature of his customer who draws a cheque against him. As a matter of practice every banker has got a specimen signature of his customer and it is his bounden duty to compare the signature of the customer on the cheque with the specimen signature to guard against any forgery and wrong payment. While the banker can very well satisfy himself about the genuineness of the signature of his customer he is not in a position to verify the signature of the payee who may not be known to him. In such cases the banker could take a reasonable time to make enquiries as to the genuineness of the endorsements on the bills. But this dilatory procedure was hardly practical for a banker to adopt. In order to remove this difficulty and to facilitate commerce it was laid down that a draft or order drawn upon a banker payable to order might be paid by him when presented if it purported to have been endorsed by the payee.

Closely following this rule the present section has been enacted and it protects the banker where the signature of the payee is forged and where the agent of the payee without his authority endorses it on behalf of the payee. This removes a serious hindrance to the dispatch so essential in banking business and a serious impediment to the negotiability of cheques drawn to order on a bank. But to avail himself of the protection afforded by this section the banker must make payment in due course which means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned. The protection given by this section is not only in relation to the endorsement by the payee but extends to other endorsements as well.

Previously, the Bombay and the Calcutta High Courts held that the operation of this section was confined to the endorsement by the payee only and when the signature of the endorsee was forged the banker could not avail of the protection afforded by this section.¹⁾ This view which was based on the distinction between sections 7 and 16 which define a payee and an endorsee respectively and on a literal construction of this section, is no longer a good law in view of the insertion of clause 2 of section 16 by section 3 of the Amending Act 5 of 1914 which places the endorsee in the same position as the payee so far as possible.

In Canara Bank vs Canara Sales Corporation And Ors²⁾ the Supreme Court has categorically held that whenever, a cheque purporting to be issued by a customer is presented before a bank it carries a mandate to the bank to pay, but if a cheque is a forged one there is no such mandate and the bank can escape the liability only if it can establish that the customer had knowledge to that forgery.

In Babulal Agarwalla vs State Bank Of Bikaner And Jaipur³⁾ the Calcutta High Court held that: the mandate of the customer to the Bank to pay the cheque signed by him for the bearer which is statutorily recognised by Section 85(2) of the Negotiable Instruments Act ceases as soon as it is proved that cheque paid by the bank was a forged one because a forged cheque is no cheque issued by the customer. Therefore the mandate of the customer is not there to the bank to pay such forged cheque. So the protection given to the bank by Section 85 is not available to the bank in respect of forged cheque.

Payment must be made in accordance with what appears on the face of the instrument to be the intention of the parties. Therefore, payment made to one not mentioned in the document i.e., one not entitled to receive payment, or when it is stipulated in the document that payment is to be made at or after maturity, payment before maturity, although it may discharge the obligations between the parties, will not be payment in due course and will not entitle the banker to the protection of the section.

When there are suspicious circumstances and the banker fails to make any enquiry which may bring home the defects, the payment is not in due course.

• When a payment is made by a person with the knowledge that the note paid for is a stolen one and the person receiving the payment is not entitled to receive payment or
• when a person makes a payment after receipt of an order stopping payment, or when a Shahjog hundi is paid without any enquiry about the Shah, or
• when payment is made to a wrong person, or
• when payment is made in spite of discrepancy between the name of the payee and his indorsement, or
• when payment is made at the counter on a cheque payable to order and crossed, or
• when payment is made on a stale cheque, or
• when payment is made of a large sum of money on an uncrossed cheque over the counter to a man whose appearance and demeanour excite suspicion, or
• when payment is made on a cheque with alterations or with alterations initialled but not by all the drawers,

they will not be payments in good faith and without negligence. And for such payments the paying bank will not be protected.

But if, however, the customer’s negligence is the direct cause of the loss or is intimately connected with the transaction the customer will be liable and not the bank, or when the banker can show that the forgery of the drawer’s name was intimately connected with the negligence of the customary payment on such forged cheque he would be protected on the principle that where one of the two innocent persons must suffer a loss, that party should suffer whose negligence was the proximate cause of the loss.

Mere negligence in not keeping the cheque book and the rubber stamps in proper custody was not held sufficient to make the customer liable.

In order to be a payment in due course it must be made to the person who is in possession of the instrument. This condition however, admits of one exception as when a note is stolen, payment to the possessor of a stolen note will not be payment in due course if the man making the payment has actual or constructive notice of this fact. But if a cheque is sent through the post office which is the recognised means of transmission of cheques and in course of such transmission it is stolen and the thief gets payment from the bank by means of forged endorsements the bank is not liable although the cheque is sent without any request.

This is closely allied to payment in good faith and without negligence. For this see notes under good faith and without negligence and also under section 10.

It will be noticed that under the English law a payment to be protected must be one made in good faith in the ordinary course of business and a thing is deemed to be done in good faith when it is in fact done honestly, whether it is done negligently or not. While, therefore, only honesty is the essence of the protected payment under the English law and “without negligence” forms no part of it, the Indian law makes both of them conditions precedent to such payment.

This section expressly lays down the position of the drawee of the cheque i.e. the position of the bank. In the terms of this section payment in due course discharges the liability of the bank. But what is the position of the drawer of a cheque who is the principal debtor. The answer to this question is not to be expressly found in the Act. It has, however, been found that the drawer as the principal debtor is only bound to pay the holder in case of dishonour by the drawee under section 30 and as payment mentioned in this section does not constitute dishonour on the part of the drawee i.e. the bank, the drawer is not bound to pay and is also necessarily discharged.