Negotiable Instruments Act, Section 117

Negotiable Instruments Act, Section 117: Rules as to Compensation

Section 117 of the Negotiable Instruments Act, 1881 lays down the rules for determining compensation payable when a promissory note, bill of exchange, or cheque is dishonoured.

The provision allows holders and indorsers to recover the amount due along with interest, exchange differences, and expenses incurred because of dishonour, thereby ensuring full compensation for the loss suffered.

1. Purpose of the Provision

The object of Section 117 is to provide a clear framework for calculating compensation arising from the dishonour of negotiable instruments and to protect holders and indorsers from financial loss.

The section ensures reimbursement of legitimate expenses, maintains confidence in negotiable instruments, promotes certainty in commercial transactions, and recognizes the additional financial burdens caused by dishonour.

2. Applicability of the Section

The section applies to the dishonour of promissory notes, bills of exchange, and cheques, and governs the compensation payable by the parties liable on such instruments.

3. Compensation to Holder

The first rule provides that the holder is entitled to recover the amount due on the instrument, ensuring receipt of the principal sum that was originally payable.

The holder may also recover expenses properly incurred in presentment, noting, and protest, including legitimate procedural and notarial charges arising from the dishonour.

4. Compensation Where Parties Reside at Different Places

Where the person liable and the holder reside at different places, the holder is entitled to compensation according to the current rate of exchange between those places, thereby protecting against any loss arising from exchange rate differences.

5. Rights of Indorser Who Has Paid

An indorser who has paid the amount due on the instrument is entitled to recover the amount paid together with interest at the statutory rate of eighteen percent per annum from the date of payment until realization or tender.

The indorser may also recover expenses incurred in connection with the dishonour and payment of the instrument, thereby compensating for financial loss and protecting him from financial disadvantage.

6. Exchange Difference for Indorser

Where the indorser and the person charged reside at different places, the indorser is entitled to compensation according to the current rate of exchange between those places.

This rule mirrors the protection available to holders under clause (b) and prevents losses arising from geographical distance and exchange-rate differences.

7. Right to Draw a Bill for Compensation

The section further provides that a party entitled to compensation may draw a new bill upon the party liable to compensate him.

Such bill may be payable at sight or on demand, thereby enabling recovery through another negotiable instrument.

8. Amount Recoverable Through Such Bill

The new bill may include the amount due, interest, and properly incurred expenses, thereby enabling the party entitled to compensation to consolidate the entire claim into a fresh bill.

9. Requirement of Accompanying Documents

The compensatory bill must be accompanied by the dishonoured instrument and any protest relating to it, thereby providing documentary proof of dishonour and entitlement.