Negotiable Instruments Act, Section 85A

Negotiable Instruments Act, Section 85A: Drafts Drawn by One Branch of a Bank on Another Payable to Order

Section 85A of the Negotiable Instruments Act, 1881 protects banks where payment in due course is made on a bank draft appearing to be properly endorsed by or on behalf of the payee.

The section applies to drafts drawn by one branch of a bank upon another branch of the same bank and ensures security in banking transactions.

1. Nature and Scope of the Provision

Section 85A applies specifically to a bank draft that is an order to pay money, drawn by one branch of a bank upon another branch of the same bank, and payable to order on demand.

The provision governs the circumstances under which the bank obtains a valid discharge upon making payment of such a draft in due course.

2. Meaning of Bank Draft

A bank draft is a financial instrument issued by one branch of a bank directing another branch of the same bank to pay a specified amount to a named person or his order.

Unlike ordinary cheques drawn by customers, a bank draft is issued by the bank itself and is commonly used for greater security and reliability in commercial transactions.

3. Draft Drawn by One Branch on Another

The section specifically contemplates drafts drawn internally within the same banking institution, where one branch of a bank may issue a draft directing another branch to pay a specified sum.

Although different branches are involved in the transaction, the draft remains an instrument operating within the same banking entity.

4. Draft Payable to Order on Demand

The provision applies where the draft is payable to order and payable on demand.

i) Payable to Order

A draft payable to order is payable to a specified person or to his order and generally requires endorsement by the payee before negotiation or payment to another person.

ii) Payable on Demand

Payable on demand means that payment becomes due immediately upon presentment of the draft without any future maturity date.

5. Requirement of Apparent Endorsement

The section provides that where the draft purports to be endorsed by or on behalf of the payee, the bank is protected upon payment.

The expression purports to be endorsed means that the endorsement appears regular and genuine on the face of the instrument.

The bank is entitled to rely upon the apparent validity of the endorsement in the ordinary course of business.

6. Endorsement by or on Behalf of Payee

The endorsement may be made personally by the payee or by a person appearing to act on behalf of the payee.

If the endorsement appears proper and regular on its face, the bank may safely proceed with payment of the draft.

7. Payment in Due Course

The bank obtains protection only where payment is made in due course, meaning payment made according to the apparent tenor of the instrument, in good faith, and without negligence.

Such payment must also be made to a person apparently entitled to receive it, and therefore good faith and absence of negligence are central to the statutory protection.

8. Effect of Discharge

Where payment is made in due course under the prescribed conditions, the bank is discharged from liability and protected against later claims relating to defective endorsements, even if the endorsement is subsequently found to be unauthorized or defective.