Negotiable Instruments Act, Section 85

Negotiable Instruments Act, Section 85: Cheque Payable to Order

Section 85 of the Negotiable Instruments Act, 1881 protects the drawee bank where payment of a cheque is made in due course, and it deals with both order cheques and bearer cheques.

The section ensures certainty and security in banking transactions by protecting bankers who make payment honestly and according to the apparent tenor of the cheque.

1. Scope and Purpose of the Provision

Section 85 applies to cheques and regulates the discharge of the drawee bank upon making payment, while protecting banks that make payment in good faith and facilitating smooth cheque transactions.

The section also avoids unnecessary disputes regarding endorsements and recognizes that banks often act upon the apparent validity of endorsements in the ordinary course of business.

2. Cheque Payable to Order

Sub-section (1) deals with cheques payable to order, which are payable to a specified person or to his order and generally require endorsement by the payee before negotiation or payment.

i) Requirement of Apparent Endorsement

The section provides that where a cheque payable to order appears to be properly endorsed by or on behalf of the payee, the drawee is discharged by payment in due course without further inquiry.

ii) Endorsement by or on Behalf of the Payee

The endorsement may be made personally by the payee or by a person appearing to act on the payee’s behalf, and if the endorsement appears proper and regular, the drawee bank may safely act upon it.

iii) Payment in Due Course

The section protects the drawee bank where payment is made in due course, in good faith and without negligence to the person apparently entitled to receive payment, even if the endorsement is later found defective.

iv) Effect of Discharge

Once payment in due course is made, the bank is discharged from liability and the payment is treated as valid and proper for banking purposes.

3. Purpose of Protection

Banks handle large numbers of cheques daily and cannot practically investigate every endorsement in depth, and therefore the law protects banks that act honestly and follow ordinary banking standards.

The law also protects banks that make payment on apparently regular endorsements, since without such protection cheque transactions would become uncertain and inefficient.

4. Cheques Originally Payable to Bearer

Sub-section (2) deals with cheques originally payable to bearer, which are payable to any person who possesses and presents the cheque for payment.

i) Payment to Bearer

The section provides that where a cheque is originally payable to bearer, the drawee is discharged by payment in due course to the bearer, without requiring the bank to verify title beyond possession.

ii) Effect of Endorsements on Bearer Cheques

The section provides that the bank is discharged notwithstanding any endorsement in full, blank, or restricting further negotiation, since a cheque originally payable to bearer continues to retain its character as a bearer instrument.

iii) Endorsement in Full or Blank

An endorsement in full specifies the payee, while an endorsement in blank makes the instrument payable by delivery, but such endorsements do not affect the drawee bank’s protection when a bearer cheque is paid in due course.

iv) Restrictive Endorsements Ignored for Banker’s Protection

Even where an endorsement seeks to restrict negotiation, the bank remains protected if it pays the bearer in due course, thereby ensuring certainty and simplicity in dealing with bearer instruments.