DISHONOUR OF A CHEQUE

The relation between a banker and his customer is that of a debtor and
a creditor. Money deposited will always belong to the customer and the
bank will be bound to return its equivalent to the customer or to any
person to his order. But in certain cases a banker refuses to honor his
customer’s cheque. When the payment of the cheque is refused by the
bank, it is said to be dishonored.

REASONS FOR DISHONOUR

A cheque may be dishonored under the following circumstances.

i.. When balance to the credit of the customer is insufficient to meet

the cheque.

ii. When money deposited cannot be withdrawn on demand in the case

of fixed deposit.

iii. When the customer closes the account before the cheque is
presented for encashment.

iv. When the cheque is not properly drawn.

v. If the cheque is crossed but presented on counter for the payment.

vi. When the cheque is post dated.

vii. If death information of the A/C holder is received.

viii. If the A/C holder is declared insolvent by the law.

ix. If the A/C holder has stopped the payment.

x. If the signature on the cheque is different with the specimen

signature.

xi. If the amount written in figures is different from the amount written
in words.

xii. If the cheque is presented for payment at a branch other than the
one where the customer has the account.

COUNTERMANDS OF PAYMENT:
A banker is obliged to honor the cheque of his customer, if there is a
sufficient balance in the account to meet it, and the cheque is in order.
The drawer may, however, instruct the banker to stop payment of a
cheque, and the banker will be liable if he neglects to attend to the
instructions.
The Bills of Exchange Act, 1882, Section 75, states that the duty and
authority of a banker to pay a cheque drawn on him by his customer
are determined by countermand of payment.
A countermand of payment can be given only by the drawer, but notice
from a holder that a cheque has been lost by him would put a banker
on his guard, pending instructs tins from the drawer.
An order to stop payment of a cheque should be in writing and be
signed by the customer, and if the order is subsequently cancelled, the
fresh instructions should also be in writing. The drawer cannot stop
payment of a cheque which a banker has, at the drawer's request,
already certified, or marked, for payment.

MEANING OF NOTICE
By notice of dishonor is meant bringing either verbally or by writing, to
the knowledge of the drawer or indorser of an instrument, the fact that
a specified negotiable instrument, upon proper proceedings taken, has
not been accepted or hasn’t been paid, and that the party notified is
expected to paid it.

NECESSITY AND PURPOSE OF NOTICE

When an instrument is dishonored by NON-ACCEPTANCE or NON-
PAYMENT, notice of such dishonor must be given to persons
secondarily liable, as the case may be.
Otherwise, such parties are discharged.

BURDEN OF PROOF
• It is upon the plaintiff who seeks to enforce the defendant’s
liability upon a negotiable instrument as indorser to establish said
liability by proving that notice was given to the defendant within the
time and in the manner required by the law that the instrument
in question had been dishonored
• Where these facts are not proven, the plaintiff doesn’t
sufficiently establish the defendant’s liability.
• Where there is no proof in record tending to show that the
plaintiff gave any notice whatsoever to the defendant that the
instrument in question had been dishonored, said plaintiff hasn’t
established its cause of action.

PERSONS PRIMARILY LIABLE NEED NOT BE NOTIFIED

Does failure to give notice of dishonor of a previous installment to
person’s secondary liable also discharge them on the succeeding
installments?
• It depends on whether the instrument contains an acceleration
clause.

RULE WHERE THERE IS NO ACCELERATION CLAUSE

• Where the instrument contains no acceleration clause, failure
to give notice of dishonor on previous installment doesn’t
discharge drawers and indorsers as to the succeeding
installments, and therefore, the holder can file an action
against them for such succeeding installments, notice is given.
• The reason is that each separate installment is equivalent to
another note.

RULE WHERE THERE IS AN ACCELERATION CLAUSE

• It depends whether the clause is optional or automatic.
• If it is automatic, failure to give notice of dishonor as to a
previous installment will discharge the persons secondarily liable
as to the succeeding installments.
• If it is optional and it is not exercised, the rule would be the same
as where there is no acceleration clause.

EXCEPTIONS TO REQUIREMENT OF NOTICE

• The law provides for exceptions on failure to give notice
would discharge drawer or indorsers. Sec. 90. By whom given. - The
notice may be given by or on behalf of the holder, or by or on behalf of
any party to the instrument who might be compelled to pay it to the
holder, and who, upon taking it up, would have a right to
reimbursement from the party to whom the notice is given.

NOTICE MAY BE GIVEN BY

1. The holder
2. Another in behalf of the holder
3. Any party to the instrument who may be compelled to pay
it to the holder—against any party whom he has a right of
reimbursement should such party giving notice pay the instrument
4. Another person in behalf of such party

Sec. 91. Notice given by agent. - Notice of dishonor may be given by

any agent either in his own name or in the name of any party entitled
to given notice, whether that party be his principal or not.

NOTICE OF AGENT
• Notice may be given by the agent and it is not necessary that the agent be
authorized by the principal
• He may give the notice in his name or in the name of his principal
• A collecting bank may give notice, and where it has done so, no notice from the
owner is necessary
• And where the cashier of the drawee bank which had refused to pay a check gave the
check to a notary to protest, which was done, it was held that the possession of the check
by the cashier was evidence of his agency of the holder to present it for protest

Sec. 92. Effect of notice on behalf of holder. - Where notice is given by or on behalf
of the holder, it inures to the benefit of all subsequent holders and all prior
parties who have a right of recourse against the party to whom it is given.

MEANING OF BENEFIT
• Benefit refers to the right to charge the person secondarily liable
who received notice
• The party to whom this benefit inures can charge the party
receiving notice of dishonor, even if himself didn’t give the notice.

INURES TO THE BENEFIT OF THE FOLLOWING

1. All parties prior to the holder, who have a right of recourse
against the party to whom the notice is given
2. All holders subsequent to the holder giving notice

Sec. 93. Effect where notice is given by party entitled thereto. -

Where notice is given by or on behalf of a party entitled to give
notice, it inures to the benefit of the holder and all parties
subsequent to the party to whom notice is given.

APPLICATION OF THIS SECTION

• Follows the same principle as the preceding section but this time,
the person giving notice is not the holder but a party to the
instrument who might be compelled to pay it to the holder, and who,
upon taking t up, would have a right of reimbursement from the
party to whom notice is given

Sec. 94. When agent may give notice. - Where the instrument has
been dishonored in the hands of an agent, he may either
himself give notice to the parties liable thereon, or he may give
notice to his principal. If he gives notice to his principal, he must
do so within the same time as if he were the holder, and the
principal, upon the receipt of such notice, has himself the same
time for giving notice as if the agent had been an independent holder.
WHEN AGENT’S NOTICE MUST BE GIVEN
• When an instrument is dishonored in the hands of an agent, he
can do either of the following
o Directly give notice to the persons secondarily liable thereon
o Give notice to his principal
• If the agent decides to give notice to the principal, he must give
notice within the time ed by law as if he were a holder
• The principal has also the same time to give notice to the
persons secondarily liable

Sec. 95. When notice sufficient. - A written notice need not be

signed and an insufficient written notice may be supplemented and
validated by verbal communication. A misdescription of the
instrument does not vitiate the notice unless the party to whom the
notice is given is in fact misled thereby.

Sec. 96. Form of notice. - The notice may be in writing or merely oral
and may be given in any terms which sufficiently identify the
instrument, and indicate that it has been dishonored by non-
acceptance or non-payment. It may in all cases be given by
delivering it personally or through the mails.

FORM AND CONTENTS OF NOTICE

• It may be oral or in writing
• whether oral or in writing, it must contain.

1. SUFFICIENT DESCRIPTION OF THE INSTRUMENT TO IDENTIFY IT.

2. A STATEMENT THAT IT HAS BEEN PRESENTED FOR PAYMENT AND

FOR
ACCEPTANCE AND THAT IT HAS BEEN DISHONORED.

3. A STATEMENT THAT THE PARTY GIVING NOTICE INTENDS TO LOOK

FOR THE
PARTY ADDRESSED FOR PAYMENT.

EFFECTS OF DEFECTS IN NOTICE

• If the notice is not signed, it will not invalidate it
• If the notice is written and doesn’t contain #2 and #3, it
can be supplemented by oral communication stating the things
lacking
• If there is misdescription, it would only vitiate the notice if the
person is misled thereby

NOTICE BY PHONE
• This could be done however it must be shown that the
party to be notified was really communicated with, that is, fully
identified as to the party at the receiving end of the line.

MANNER OF GIVING NOTICE

• May be given by personal delivery or by mail

Sec. 97. To whom notice may be given. - Notice of dishonor may be

given either to the party himself or to his agent in that behalf.

NOTICE MAY BE GIVEN

1. To the party himself.
2. To his agent in his behalf.
• An accommodation indorser is entitled to notice
• An irregular indorser must also be given notice if he is to be
charged
• And if notice is given to an agent, he must be duly
authorized to receive the notice of dishonor

AGENT DISTINGUISHED FROM PERSON PRESENT IN

ABSENCE OF PARTY
• Notice to agent must be distinguished from notice
attempted to be given to party himself where he is absent at his
place of business or residence. In such a case, the notice may be left
with anyone found in charge therein

Sec. 98. Notice where party is dead. - When any party is dead and his
death is known to the party giving notice, the notice must be given to
a personal representative, if there be one, and if with reasonable
diligence, he can be found. If there be no personal
representative, notice may be sent to the last residence or last
place of business of the deceased.

REQUISITES FOR NOTICE TO REPRESENTATIVE

1. Death is known to the party giving notice.
2. There is a personal representative.
3. If with reasonable diligence he could be found.

WHEN NOTICE MAY BE SENT TO THE LAST

RESIDENCE OR PLACE OF BUSINESS
1. If his death is not known to the party giving notice.
2. Or although his death is known to the party giving notice
but there is no
personal representative.
3. If there be one but he cannot be found with reasonable diligence

Sec. 99. Notice to partners. - Where the parties to be notified are

partners, notice to any one partner is notice to the firm, even
though there has been a dissolution.

Sec. 100. Notice to persons jointly liable. - Notice to joint persons who
are not partners must be given to each of them unless one of them has
authority to receive such notice for the others.

PROVISION WOULD APPLY ONLY TO JOINT DRAWERS

Sec. 101. Notice to bankrupt. - Where a party has been adjudged a

bankrupt or an insolvent, or has made an assignment for the
benefit of creditors, notice may be given either to the party himself or
to his trustee or assignee.

APPLICATION OF SECTION
1. Where the party secondarily liable has been declared a bankrupt
or an insolvent
2. Where he has made an assignment of his properties for the
benefits of creditors.
• In such cases, notice be given to the party himself or his
trustee or assignee.

Sec. 102. Time within which notice must be given. - Notice may be
given as soon as the instrument is dishonored and, unless delay is
excused as hereinafter provided, must be given within the time fixed
by this Act.

MAY NOTICE OF DISHONOR BE GIVEN BEFORE THE

DATE OF MATURITY?
• No, such notice would be insufficient because an instrument
cannot be said to be dishonored for non-payment unless
presented and presentment must be made on the date of maturity
unless of course, presentment is excused
• But even in such cases, the instrument cannot be said to
be dishonored by non-payment unless it is overdue and unpaid
• Notice of dishonor can be given only after the instrument
has been actually dishonored, and notice given before the paper
due is premature and insufficient, regardless of the indorser’s
knowledge that the maker was in default

MAY NOTICE OF DISHONOR BE GIVEN ON THE DATE OF

MATURITY?
• Yes, provided that the instrument has been presented for
payment and is has been dishonored
• But if the instrument is payable at a bank, it is not dishonored if
the maker deposits the amount of the instrument before the
close of banking hours.
Hence, notice of dishonor must be given after the close of banking
hours on the date of maturity.

PURPOSE OF PROMPT NOTICE

• To give the persons secondarily liable every opportunity to
secure themselves such as to enable the party to be charged to
preserve and protect his rights against prior parties.

Sec. 103. Where parties reside in same place. - Where the person
giving and the person to receive notice reside in the same
place, notice must be given within the following times:

(a) If given at the place of business of the person to receive

notice, it must be given before the close of business hours on the day
following.

(b) If given at his residence, it must be given before the usual

hours of rest on the day following.

(c) If sent by mail, it must be deposited in the post office in

time to reach him in usual course on the day following.

Sec. 104. Where parties reside in different places. - Where the

person giving and the person to receive notice reside in different
places, the notice must be given within the following times:

(a) If sent by mail, it must be deposited in the post office in

time to go by mail the day following the day of dishonor, or if there be
no mail at a convenient hour on last day, by the next mail
thereafter.
 (b) If given otherwise than through the post office, then within the
time that notice would have been received in due course of
mail, if it had been deposited in the post office within the time
specified in the last subdivision. (TO REACH HIM IN USUAL COURSE THE
DAY FOLLOWING)

TIME FOR GIVING NOTICE IN GENERAL

• The law provides for a different period for giving notice of
dishonor depending on whether—the party giving notice and the
party to receive notice reside in the same place; or the party giving
notice and the party to receive reside in different places.

MEANING OF “THE SAME PLACE”

• Refers to the corporate limits of a town or city where the
presentment is made or where the holder resides.

EFFECT OF NOTICE GIVEN OUT OF TIME

• Unless excused, notice given out of time would be
considered not to have been given.
• Hence, the party to receive notice would be discharged.

Sec. 105. When sender deemed to have given due notice. - Where
notice of dishonor is duly addressed and deposited in the post
office, the sender is deemed to have given due notice,
notwithstanding any miscarriage in the mails.

APPLICATION OF SECTION 105

• A party giving notice is deemed to have given due notice
where the notice of dishonor is duly addressed and deposited in the
post office, even when there is miscarriage of mail

CONCLUSIVE PRESUMPTION
Sec. 106. Deposit in post office; what constitutes. - Notice is deemed
to have been deposited in the post-office when deposited in any
branch post office or in any letter box under the control of the post-
office department.

DEPOSIT IN LETTER BOX

• The letter box must be under the control of the post office
department
• Otherwise, notice wouldn’t deemed to have been deposited in the
post office
• Thus, a notice of protest properly addressed and left in a
place in a notary’s office where mail was usually collected by his
postman was held not a mailing of the notice as required by the
statute

Sec. 107. Notice to subsequent party; time of. - Where a party

receives notice of dishonor, he has, after the receipt of such notice,
the same time for giving notice to antecedent parties that the
holder has after the dishonor.

Sec. 108. Where notice must be sent. - Where a party has added an
address to his signature, notice of dishonor must be sent to that
address; but if he has not given such address, then the notice must be
sent as follows:

(a) Either to the post-office nearest to his place of residence or to

the post-office where he is accustomed to receive his letters; or

(b) If he lives in one place and has his place of business in

another, notice may be sent to either place; or

(c) If he is sojourning in another place, notice may be sent to the

place where he is so sojourning.

But where the notice is actually received by the party within the
time specified in this Act, it will be sufficient, though not sent in
accordance with the requirement of this section.

Sec. 109. Waiver of notice. - Notice of dishonor may be waived

either before the time of giving notice has arrived or after the
omission to give due notice, and the waiver may be expressed or
implied.

WHEN WAIVER MAY BE MADE

1. Before the time of giving notice, such as express waiver in
the body of the instrument or added to the signature of the party.
2. After omission to give due notice.

IMPLIED WAIVER
• Waiver may be implied from acts, declarations, or silence

Sec. 110. Whom affected by waiver. - Where the waiver is embodied in the
instrument itself, it is binding upon all parties; but, where it is written above
the signature of an indorser, it binds him only.

WHOM AFFECTED BY WAIVER IN GENERAL

• The persons affected by waiver depends upon whether the waiver
is in the instrument itself or is written above the signature of the
indorser.
• If the waiver is embodied in the instrument itself, it is binding
upon all parties
• If the waiver is written above the signature of an indorser, it binds
him
only.

Sec. 111. Waiver of protest. - A waiver of protest, whether in the case

of a foreign bill of exchange or other negotiable instrument, is deemed
to be a waiver not only of a formal protest but also of
presentment and notice of dishonor.

WHERE PROTEST IS WAIVED, THE FOLLOWING ARE INCLUDE

D AND AREDEEMED WAIVED ALSO
1. Presentment
2. Notice of dishonor
• Where presentment for payment is waived, notice of dishonor is
also waived
• But where notice of dishonor is waived, presentment for
payment is not waived

Sec. 112. When notice is dispensed with. - Notice of dishonor is dispensed with
when, after the exercise of reasonable diligence, it cannot be given to or does not
reach the parties sought to be charged.

WHEN NOTICE EXCUSED

• When political disturbances interrupt and obstruct the
ordinary negotiations of trade, they constitute a sufficient excuse
for want of presentment or notice, upon the same principle that
controls in cases of military operations or interdictions of commerce
• Prevalence of a malignant, contagious, infectious disease…
Sec. 113. Delay in giving notice; how excused. - Delay in giving
notice of dishonor is excused when the delay is caused by
circumstances beyond the control of the holder and not imputable to
his default, misconduct, or negligence. When the cause of delay ceases
to operate, notice must be given with reasonable diligence.

Sec. 114. When notice need not be given to drawer. - Notice of

dishonor is not required to be given to the drawer in either of the
following cases:

(a) Where the drawer and drawee are the same person;

(b) When the drawee is fictitious person or a person not having

capacity to contract;

(c) When the drawer is the person to whom the instrument is

presented for payment;

(d) Where the drawer has no right to expect or require that the
drawee or acceptor will honor the instrument;

(e) Where the drawer has countermanded payment.

Sec. 115. When notice need not be given to indorser. — Notice of
dishonor is not required to be given to an indorser in either of the
following cases:

(a) When the drawee is a fictitious person or person not having

capacity to contract, and the indorser was aware of that fact at the
time he indorsed the instrument;

(b) Where the indorser is the person to whom the instrument is

presented for payment;

(c) Where the instrument was made or accepted for his

accommodation.

WHEN NOTICE RELATIVELY EXCUSED

1. Where he has knowledge of the dishonor by means other
than through a formal notice, as when he is both the drawee
and drawer or when presentment is made to him
2. Where he has no reason to expect that the instrument will
be honored, as when he has countermanded payment or where
the drawee is fictitious or without capacity to contract

NO RIGHT TO EXPECT OR REQUIRE PAYMENT AS TO

DRAWER
1. Where the drawer of the check has no account with the
drawee bank
2. When the drawer of a check payable abroad has no funds with the
drawee bank to meet it
3. When the knowledge that previous drafts on the same consignee
had been dishonored.
• In the foregoing, the drawer has no right to receive notice of
dishonor

DRAWER HAS COUNTERMANDED PAYMENT

• A drawer tells drawee not to pay the bill. Holder need not give
notice to a drawer. An allegation that payment of a check had been
countermanded is sufficiently set out where the check was set
forth with the indorsement across the face “Payment stopped”

DRAWEE FICTITIOUS, ETC. MUST BE MADE KNOWN AS

TO INDORSERS
• The indorser must be aware of the fact that the drawee is
fictitious or not having capacity to contract. Otherwise, notice of
dishonor must be given to such indorser to charge him. But the fact
that that the indorser knew the maker to be insolvent or that
the instrument was dishonored doesn’t dispense with the necessity of
notice

Sec. 116. Notice of non-payment where acceptance refused. - Where

due notice of dishonor by non-acceptance has been given, notice
of a subsequent dishonor by non-payment is not necessary unless in
the meantime the instrument has been accepted.
Sec. 117. Effect of omission to give notice of non-acceptance. - An
omission to give notice of dishonor by non-acceptance does not
prejudice the rights of a holder in due course subsequent to the
omission.

SUMMARY AS TO NOTICE OF DISHONOR

1. Like presentment for payment, notice of dishonor need not be
given to persons primarily liable in order to charge them

2. But aside from presentment for payment to persons primarily

liable, notice of dishonor to persons secondarily liable is necessary to
charge the latter except—
a. When notice is waived
b. When dispensed with under Section 112
c. As to drawer, under Section 114
d. As to indorser, under Section 115
e. Where due notice of dishonor by non-acceptance has been given
f. As to a holder in due course without notice

Sec. 118. When protest need not be made; when must be made. -
Where any negotiable instrument has been dishonored, it may be
protested for non-acceptance or non-payment, as the case may be;
but protest is not required except in the case of foreign bills of
exchange.

WHEN PROTESTS NECESSARY

• Protest is necessary with regard foreign bills of exchange.
• Mere fact of protest is not conclusive upon the dishonor of
the instrument and due notice to the indorser; other evidence is
competent on these questions.
• While protest is not required in cases of promissory notes and
inland bills, it is usual to protest these instruments also when
dishonored since the notary’s certificate of protest is the most
convenient and certain mode of proving the facts.

Cheques and their Payment

Cheque defined in section 6 of negotiable instrument Act, 1881,

Cheques may be payable to bearer, order or cheques may be crossed.
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 of believing that he is not
entitled to receive payment of
the amount therein mentioned.

Cheques to be honored by the bank if following requirements are

fulfilled:

Cheque to be in proper form (printed form)

Crossed cheque shall not be payable at the counters of bank.

Cheque to be drawn on designated branch.

Cheque should not be mutilated. There should not be any material

alterations
(Date, amount, payee, signatures)

Sufficient credit balance in the account

Cheque should not be post -dated or ante-dated.

Cheque to be presented during business hours/counter hours.

Signature of the drawer on cheque must tally with specimen signatures

in bank record.