Negotiable Instruments Act, Section 31

Negotiable Instruments Act, Section 31: Liability of Drawee of Cheque

Section 31 of the Negotiable Instruments Act, 1881 defines the legal duty and liability of the drawee of a cheque. 

In the context of a cheque, the drawee is ordinarily a bank upon which the cheque is drawn. 

This provision establishes the obligation of the bank to honour the cheque when certain conditions are satisfied and also prescribes the consequences of wrongful refusal.

1. Meaning of Drawee of a Cheque

The drawee of a cheque is the bank or financial institution with which the drawer maintains an account and upon which the cheque is drawn. 

The drawer issues the cheque directing the drawee bank to pay a specified sum to the payee or holder.

Thus, the relationship between the drawer and the drawee bank is contractual in nature, arising out of the banker-customer relationship.

2. Condition of Sufficient Funds

Section 31 states that where the drawee has sufficient funds of the drawer in its hands, which are properly applicable to the payment of the cheque, it must honour the cheque when duly required to do so.

The phrase “sufficient funds” means that the drawer’s account must contain an adequate balance to cover the amount mentioned in the cheque. 

It also means that the funds must not be subject to any legal restriction, lien, attachment, or other limitation preventing their use for payment of the cheque.

3. Duty to Pay Upon Proper Demand

The drawee bank must pay the cheque when it is duly presented for payment in accordance with law. 

This includes presentation within the period of validity and in compliance with banking rules.

If the cheque is properly presented and sufficient funds are available, the bank has a statutory and contractual duty to honour it. Refusal to do so without lawful justification constitutes a breach of duty.

4. Liability for Default

If the drawee wrongfully refuses to honour the cheque despite having sufficient and properly applicable funds, the bank is liable to compensate the drawer for any loss or damage caused by such default.

This means that the drawer may claim damages from the bank if he suffers harm due to the wrongful dishonour. 

Such loss may include financial loss, injury to business reputation, or damage to credit standing.

The law recognizes that wrongful dishonour of a cheque can seriously affect the drawer’s credibility and commercial standing.

5. Nature of the Bank’s Liability

The liability imposed under Section 31 is owed to the drawer, not to the holder of the cheque. 

The holder’s remedy in case of dishonour lies against the drawer under other provisions of the Act.

However, where the dishonour is caused by the bank’s wrongful refusal despite sufficient funds, the drawer is entitled to seek compensation from the bank for the consequences of such refusal.

6. Rationale of the Provision

The purpose of Section 31 is to uphold trust in banking transactions and protect customers from arbitrary refusal of payment. 

Since cheques are widely used as instruments of payment, the reliability of banking institutions is crucial for commercial stability.

By imposing liability on the drawee bank for wrongful dishonour, the law ensures discipline and accountability in the discharge of banking functions.