Section 43 to 45 of the Negotiable Instruments Act deal with the want or failure of consideration and the question of liability of the parties thereunder. Want or failure of consideration of an instrument may be either complete or partial. Section 43 deals with total want or failure of consideration and its effects and the next two sections deal with partial want or failure of consideration.
Section 43 of the Negotiable Instruments Act,1881.
A negotiable instrument made, drawn, accepted, indorsed, or transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties to the transaction. But if any such party has transferred the instrument with or without indorsement to a holder for consideration, such holder, and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transferor for consideration or any prior party thereto.
Exception I. No party for whose accommodation a negotiable instrument has been made, drawn, accepted or indorsed can, if he has paid the amount thereof, recover thereon such amount from any person who became a party to such instrument for his accommodation.
Exception II. No party to the instrument who has induced any other party to make, draw, accept, indorse or transfer the same to him for a consideration which he has failed to pay or perform in full shall recover therein an amount exceeding the value of the consideration (if any) which he has actually paid or performed.
This section must be read subject to section 59 of the Act in all cases to which the latter applies. Thus, where the instrument is acquired by the holder after maturity section 59 applies and the holder after maturity has as against other parties only the rights thereon of his transferor.
Under section 118 every negotiable instrument shall be presumed to be for valuable consideration until the want or failure of consideration is proved by the person alleging it. That is to say, in an action on a negotiable instrument, the defendant, unlike other contracts where the plaintiff must prove consideration, must prove want or failure of consideration.
But this want or failure of consideration can be pleaded only between the two parties to the instrument who stand in immediate relationship to each other eg the drawer and the acceptor, the payee and the drawer of a cheque or the maker of a promissory note, an indorser and his indorsee. In an action between parties who do not stand in such immediate relationship the defendant cannot take the plea that he drew, accepted or indorsed it for no consideration. Thus, if a bill of exchange or a note be delivered by the drawer or maker to the payee as a gift, it cannot be enforced against him or his representatives. No liability arises between the donor and the donee and the latter cannot enforce it against the former but as between the donee and the other parties to the bill, they are liable to the donee. A promissory note executed for services which are not afterwards rendered is not enforceable against the maker as there is failure of consideration, or where it is executed for a balance not really due it is unenforceable against the maker as there is a total want of consideration. Failure of consideration has the same effect as want of consideration. The defence of failure or want of consideration cannot be pleaded between parties who do not stand in immediate relationship as enumerated above.
Where there is good consideration from the drawer to the payee no further consideration need be proved to pass from the payee to the acceptor to make the latter liable. But where no consideration passes between the two original parties to an instrument but it is subsequently transferred or endorsed for consideration, the holder for value can make all the prior parties liable and the acceptor will not be heard to say that he has accepted it without consideration and, therefore, not liable on such acceptance. If at any intermediate stage consideration passes, it is sufficient to make the bill enforceable by the holder against all prior parties.
A draws a bill which is accepted by B without consideration. A transfers it to C for consideration. Although B is not liable to A for accepting it without consideration and such defence is allowable between the two immediate parties (A and B) he is certainly liable to the holder C as his plea of want of consideration will not be entertained as B and C are not immediate but remote parties and between such parties it is not necessary to prove the passing of consideration.
As has been stated before failure of consideration has the same effect as total absence of consideration. Thus, in consideration of acting as the executor under his will A executes a note in favour of B for a certain amount A survives B who, therefore, cannot act as his executor. The consideration, therefore, fails and the note becomes unenforceable. There are no obligations between the two parties to a contract which is based on a future event and when that event becomes impossible for no fault of either party. Upon the failure of consideration for a note, obligation to pay under it is discharged. But the liability to pay is not discharged if the consideration does not fail, as where a bill was accepted against shipping documents for goods which could not be delivered on account of war but was allowed to be taken delivery of by a proclamation which saved the consideration. But there would be failure of consideration if acceptance of the bill was obtained after outbreak of the war against bills which had become void by the slate of war. Defence of failure of consideration is open only between immediate parties but once the instrument is transferred for consideration the holder and every other party subsequent to him can enforce it against all prior parties. But where, with the full knowledge of the indorsee about failure of consideration, a note is indorsed in his favour he cannot recover the amount as it will open wide the door for fraud.
In a suit on a promissory note given as a security against overdrafts from, a bank it is open to the defendant to plead absence of consideration and to ask for an account of the money due, or that no money was taken at all. Where on presentation of a bill by a bank it was accepted by a firm with reference to a bill of lading for a specified quantity of goods and the bill of lading subsequently turned out to be a forged one it was held that the bank was entitled to recover the amount due under the acceptance which was unconditional and not dependent upon the nature of the bill of lading about the genuineness of which there was no warranty by the bank.
“Prior party thereto” means any party to the bill at the time of the transfer.
This clause refers to accommodation instrument. Accommodation bill or note is an instrument to which a party, in order to accommodate another, lends his name without consideration for the use of the latter who is to pay it when due, and in case the accommodating party has to pay the amount, the party accommodated undertakes to indemnify him for his loss. The accommodated party cannot recover anything from the party accommodating as there is no consideration between the two. But once there is a transfer for consideration to a third party the transferee will be entitled to recover the amount from any one whose name appears on the bill and the absence of consideration between the two prior parties will not affect him. In a suit on a promissory note it is open under this section for the defendant to plead want of consideration and that he signed the note as a mere name lender so long as the rights of bona fide transferee are not involved. Cross acceptances made for mutual accommodation are not really accommodation bills but are bills for valuable consideration the acceptance of one being considered the consideration of the other and vice-versa. Therefore, if either of such party becomes an insolvent the bill accepted by him will be provable against his estate.
The operation of the clause is confined to the immediate parties only and the exception should be strictly applied. This exception can be applied only against the persons who offered the inducement.
A executes or indorses a note to B for no consideration B is induced by C to transfer it to him for a quarter the value C can recover from A or B only the amount he has paid.
Section 44 of the Negotiable Instruments Act,1881.
When the consideration for which a person signed a promissory note, bill of exchange or cheque consisted of money, and was originally absent in part or has subsequently failed in part, the sum which a holder standing in immediate relation with such signer is entitled to receive from him is proportionally reduced.
Explanation: The drawer of a bill of exchange stands in immediate relation with the acceptor. The maker of a promissory note, bill of exchange or cheque stands in immediate relation with the payee, and the indorser with his indorsee. Other signers may by agreement stand in immediate relation with a holder.
Illustration: A draws a bill on B for Rs. 500 payable to the order of A. B accepts the bill, but subsequently dishonours it by non-payment. A sues B on the bill, B proves that it was accepted for value as to Rs. 400, and as an accommodation to the plaintiff as to the residue. A can only recover Rs. 400.
According to English Law a valuable consideration may consist either in some right, interest, profit or benefit accruing to one party or some forbearance, detriment or loss or responsibility given or suffered or undertaken by the other. According to Sec 2(d) of the Indian Contract Act consideration means an act, abstinence, or promise made by the promisee or any other person at the desire of the promisor. This definition is wider than that of English Law. Consideration may, therefore, consist of money as well as of something other than money but having a money value. This section applies where the consideration consists of money only and there is partial want or failure of such consideration. This section has no application where the consideration consists partly of money and partly of something other than money but having a money value as for instance cancellation of an old note or where a hand note reserving simple interest is renewed charging compound interest the consideration for renewal being forbearance to sue on the promisor's agreement to pay compound interest. The next following section deals with partial want or failure of consideration other than money with reference to the immediate parties. Who are regarded as immediate parties will be found in the explanation annexed to the section.
Where the consideration for which a party signed a bill or note consisted of a definite sum of money or of something the value of which was definitely ascertainable in money and it was either originally absent in part or has subsequently failed in part, the amount which a holder standing in immediate relation to such party is entitled to recover from him is protanto reduced. Partial failure of consideration is a defence protanto against an immediate party when that part of consideration is an ascertained and liquidated amount and not otherwise, that is, when collateral enquiry is not necessary for the purpose.
In cases of partial failure of consideration, it is only where that part is ascertainable in money without collateral enquiry that reduction can be made but if a collateral enquiry becomes necessary for ascertainment of the amount the holder can recover the whole amount on the instrument. As already stated the operation of this section is confined to money consideration and to the immediate parties. Thus where a promissory note is executed for money to be advanced and the payee advances a lesser amount subsequently than is mentioned in the note, the liability of the maker is proportionately reduced. Where a promissory note is executed for money due under a suit on an earlier note in which a payment of a certain amount was not credited on the understanding that accounts should be examined, a defence of partial failure of consideration can be taken in an action on the second note. When a cheque is given for a larger amount than is actually due, the payee can recover only what is due and no more and evidence is allowable to show that the drawer of the cheque was induced to sign it on the representation that the sum mentioned in the cheque was due.
Similarly, when one person executed a note as part consideration for the price of a property in favour of another who had possession but no title, there was failure of consideration and consequently there was no liability to pay. Such defence of absence of failure of consideration can be taken only against an immediate party. No subsequent holder will be affected by partial absence or failure of consideration between the prior parties.
Section 45 of the Negotiable Instruments Act,1881.
Where a part of the consideration for which a person signed a promissory note, bill of exchange or cheque, though not consisting of money, is ascertainable in money without collateral enquiry, and there has been a failure of that party, the sum which a holder standing in immediate relation with such signer is entitled to receive from him is proportionally reduced.
This section deals with partial failure of consideration other than money consideration between the immediate parties. It is essential that such consideration should be ascertainable in money value without any collateral enquiry. Partial failure of consideration is a defence protanto against an immediate party when the consideration that has failed is an ascertained and liquidated amount and not otherwise, that is, when collateral enquiry is not necessary for the purpose of ascertaining the money value of such consideration.
The holder can, however, recover the full amount mentioned in the note if the partial want or failure of consideration is not ascertainable in its money value without collateral enquiry. Thus, when in a note executed for a certain amount say Rs 500/- by A in favour of B for the price of goods to be supplied and B supplied the goods, A cannot allege partial failure of consideration on the ground that the goods supplied were of inferior quality, a defence requiring a collateral enquiry. A is, therefore, bound to pay the whole value of the note though he may claim damages from the payee for the loss suffered by him. But when the note was executed for Rs 100/- for two bales of cotton of equal value of which only one was supplied, a defence of partial failure of consideration was tenable and the amount was protanto reduced as the amount was ascertainable without any collateral enquiry. The gist of the whole thing is that the amount is to be ascertained from the instrument itself and must not be left to be determined by extraneous evidence.