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negotiable-instruments:payment-in-due-course

Payment in due course

Section 10: “Payment in due course” 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.

In order to constitute a payment in due course the following conditions must be fulfilled

  1. Payment must be in accordance with the apparent tenor of the document.
  2. Payment must be made in good faith and without negligence.
  3. Payment must be made to the person in possession of the instrument.
  4. Payment must be made under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount mentioned there.
  5. Payment in Coins.

Payment must be in accordance with the apparent tenor of the document

That is to say, what appears on the face of the instrument to be the intention of the part. Thus, 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 obligation between the parties, will not be a payment in due course so as to discharge the instrument and make the parties free from any liability to the holder in due course.

Payment must be made in good faith and without negligence

When there are suspicious circumstances and the payer 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 that the person receiving the payment is not entitled to receive the payment, or when a person makes a payment after receipt of an order stopping payment or when a Shahjog hundi is paid without enquiry about the Shah,or when payment is made to a wrong person, it is not a payment in due course. (See also notes under section 85)

Payment must be made to the person in possession of the instrument

This condition, however, admits of one exception. As explained before, if a note be stolen then payment to the possessor of the stolen note will not be payment in due course if the man making the payment has actual or constructive notice of this fact. When a note, payable to a particular person or order, is paid to another person in possession of the note without any endorsement of the person to whom it is payable, the payment is not a payment in due course. But if the person in possession proved that he was entitled to receive the payment it would be good payment under the circumstances. Payment to a special endorsee or to the assignee of an insolvent, or the representative of a deceased holder, or to the managing member of a Hindu joint family is good

Reasonable Ground for believing he is entitled to receive payment

Payment must be made under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount mentioned there. This condition is closely allied to condition (2) mentioned before. There must be no suspicion either about the payee or the amount to be paid, and, there must be no reasonable ground subsisting at the time of payment for believing that the payee is not entitled to receive payment of the amount mentioned in the instrument. There should be no suspicious circumstances about the payee or the amount payable. Payment to any person other than a payee or endorsee without enquiry as to whether he is entitled to receive payment on behalf of the last holder is not payment in due course.

Payment in Coins

The payment referred to in this section is payment of money only as the use of the word amount signifies. Money includes note which is a legal tender. The holder is not bound to accept payment in goods nor by a cheque. If, however, a holder accepts a cheque and objects only to the amount he will not be allowed afterwards to question the nature of the tender by cheque.