Payment in due course

Payment in due course is a fundamental concept in the law of negotiable instruments, referring to a payment made in accordance with the terms of the instrument and under circumstances that discharge the payer from further liability. It ensures that the person making the payment—usually the drawee or acceptor of a negotiable instrument—fulfils their legal obligation properly and gains protection against future claims.
This principle is primarily governed by Section 10 of the Negotiable Instruments Act, 1881 (India), which defines and regulates the conditions under which a payment is considered valid and conclusive.

Definition

According to Section 10 of the Negotiable Instruments Act, 1881,

“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 for believing that he is not entitled to receive payment of the amount therein mentioned.”

In simpler terms, a payment is said to be made “in due course” when:

• It is made as per the terms of the instrument,
• It is made to the right person (the holder or holder in due course), and
• It is made in good faith, without negligence or suspicion of defect in title.

Once such a payment is made, the payer is discharged from any further liability on that instrument.

Essential Conditions of Payment in Due Course

To qualify as a valid payment in due course, the following conditions must be satisfied:

1. Payment according to the apparent tenor of the instrument:
   • The payment must conform to the terms mentioned in the negotiable instrument (such as amount, date, and conditions).
   • It must be made at or after maturity, not before it, unless authorised.
   • Partial or conditional payments generally do not constitute payment in due course.
2. Payment must be made in good faith:
   • The payer should act honestly and with due care, without any intention to defraud or evade liability.
   • There must be no knowledge or suspicion that the holder has a defective title or is not entitled to payment.
3. Absence of negligence:
   • The payer must take reasonable precautions to verify the identity of the holder.
   • Payment made negligently—for example, to a wrong person or on a forged instrument—cannot be deemed payment in due course.
4. Payment to a person in possession of the instrument:
   • The person receiving the payment must be in lawful possession of the negotiable instrument (such as the holder or holder in due course).
   • Payment made to someone not in possession, or to a person not entitled, is invalid.
5. No reasonable ground for doubt:
   • There should not be any circumstance that reasonably gives rise to suspicion that the receiver is not entitled to the payment (e.g., endorsement irregularities, missing signatures, or visible alterations).

Illustration

• A cheque is drawn by Mr. X in favour of Mr. Y or order. Mr. Y endorses it to Mr. Z, who presents it to the bank for payment on the due date. The bank verifies Mr. Z’s identity and pays him the amount. The payment is made in due course since it was made according to the tenor of the instrument, in good faith, and without negligence.
• Conversely, if the bank pays on a forged endorsement, the payment is not in due course, and the bank remains liable to the true owner.

Legal Effects of Payment in Due Course

1. Discharge of Liability:
   • Once payment is made in due course, the payer (e.g., drawee or acceptor) is discharged from any further obligation on the instrument, even if the payee’s title later turns out to be defective.
2. Protection to the Payer:
   • The paying party gains legal protection under Section 10.
   • For instance, a banker paying a cheque in due course is not liable if the endorsee’s title is later disputed.
3. Extinguishment of Rights:
   • The rights of previous holders or true owners are extinguished once payment is made properly and lawfully.
4. No Recovery from Payer:
   • If a payment has been made in due course, the true owner cannot recover the amount from the payer, even if the person paid was not legally entitled, provided the payment met all the statutory conditions.

Payment Not in Due Course

A payment is not considered to be in due course in the following cases:

• When payment is made before maturity of the instrument.
• When payment is made to a wrong person or someone not in lawful possession of the instrument.
• When payment is made on a forged or materially altered instrument.
• When the payer acts negligently, failing to verify the payee’s authority.
• When payment is made after a stop-payment order or notice of dishonour has been received.

Illustrative Examples

• Example 1: If a banker pays a cheque to a person other than the true holder due to failure to verify signatures, it constitutes negligent payment and not payment in due course.
• Example 2: If a bill of exchange is paid before its maturity date without specific authority, the payment is premature and not in due course.
• Example 3: If a crossed cheque is paid in cash at the counter instead of being credited to the payee’s account, the payment is irregular and not protected under the law.

Relationship with Other Provisions

Payment in due course is closely related to other sections of the Negotiable Instruments Act:

• Section 85: Protects a banker who pays a cheque in due course, even if the endorsement is forged.
• Section 82: States that the maker, acceptor, or endorser is discharged from liability upon valid payment in due course.
• Section 78: Specifies that payment must be made to the holder of the instrument or their authorised agent to be valid.

Thus, the concept ensures the smooth functioning of negotiable instruments by protecting honest and diligent payers while encouraging trust in financial transactions.

Importance of Payment in Due Course

• Ensures finality: Once payment is made properly, the transaction is settled, and no further claim can arise against the payer.
• Protects banking institutions: Shields paying bankers and drawers from liability if they act without negligence.
• Promotes commercial confidence: Encourages smooth negotiability and circulation of instruments such as cheques and bills of exchange.
• Defines responsibility: Clarifies the standard of diligence expected from those handling negotiable instruments.