Section 85A of the Negotiable Instruments Act,1881.
Where any draft, that is an order to pay money, drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand, purports to be indorsed by or on behalf of the payee, the bank is discharged by payment in due course.
This section has been inserted by the Amending Act XXV of 1930 to make it clear that it affords protection to bankers in India against forged or unauthorised indorsement on 'on demand’ drafts, drawn by one branch of a bank upon another branch of the same bank. A doubt had been expressed in authoritative quarters as to whether the Indian law as it stood at past, extended the same protection to banks in India, as the English law did to the banks in England and consequently legislation was considered to be expedient in order that the position may be established beyond all doubt.
In Sanju Sinha vs Vice-Chairman, Patna Regional1) Patna High Court held that:
“Where a cheque payable to the order purports to be endorsed by or on behalf of the payee, the drawee is discharged by payment in due course. Similar would be the position of a draft. In case of a Bank Draft the same is almost an order to pay money but it is drawn by one office of a bank another office of the same Bank for a sum of money payable to order on demand. On payment of the amount in due course the Bank would be discharged.”
Ordinarily, a bank cannot stop payment of an on-demand draft unless there is some doubt about the identity of the person presenting it. The position of a bank in regard to its own drafts is not quite the same as its position in regard to cheques drawn on it, since it has taken on commitments of its own in favour of a third person at the instance of the purchaser. The purchaser is not entitled to ask the issuing bank to stop payment on grounds such as matters relating to consideration in respect of which the draft has been issued at his instance, for this would often put the bank in an impossible position. When careful enquiries are made about the nature of the endorsement and no doubt remains that the draft has been properly presented on behalf of the person in whose favour it has been drawn the bank cannot be guilty of any negligence and will be discharged under the provisions of this section read with section 10.
But when a bank issued a draft on a branch of theirs for payment to H and G or order and H appeared at the branch and was refused payment as he was not known to the manager and thereupon an arrangement was made with a constituent of the bank, who had a current account there that H could endorse it in his favour and accordingly the amount of the draft was deposited in his current account without any confirmation or identification of the signature of G the payment of this draft was not held to have been made in good faith and without negligence.2)
A pay order is akin to the banker's draft but with the difference that it is issued by, and drawn on, the same office of the bank. Pay orders are paid, and collected by, banks in the same way as cheques are. It is however to be noted that pay orders are not covered by Sections 85A and 131A of the N.I. Act since they are not bankers' drafts.3)
In,T.V. Subhadra Amma vs Kerala Board Of Revenue And Ors.4) Kerala High Court held that:
“The definition of a banker's draft given in Section 85A (which is referred to in Section 131-A) requires that it should be drawn by one office of a bank upon another office of the same Bank. Hence, it would appear that the banker will not be protected in paying such an order with a forged endorsement. The collecting banker also will not be able to claim protection under Section 131 of the N. I. Act while collecting such orders.”