Presumptions - Negotiable instruments Act(1881), Business Law | Business Law - B Com PDF Download

DEFINITIONS FOR PRESUMPTION

A presumption is a rule of law that is used by courts or juries from where they obtain  a particular inference from a particular fact or evidence, unless and until the truth of such an inference is disproved. It is only an inference as to the existence of one fact from the existence of some other fact, founded upon a previous experience of their connection. The three classes of presumptions include:

1. Presumptions of law

2. Presumptions of fact

3. Mixed presumptions of fact and law.

Presumptions of law are defined as, a rule of law that a particular inference shall be drawn by a court or jury from a particular circumstance. Presumptions may also be rebuttable or irrebuttable. It is to be noted that the question of presumption must be placed distinct from the question of proof.

Section 118 – Presumptions as to negotiable instruments

Sections 118 and 119 of the Negotiable Instrument Act lay down certain presumptions which are presumed by the Court with regard to negotiable instruments. In other words these are presumed to exist in every negotiable instrument and the same need not be proved.

The presumption under s. 118 of the Negotiable Instruments Act is to be applied between parties to the instrument or those claiming under it. It is also to be noted that under ss. 43 and 44, certain pleas such as absence of consideration etc are permitted to be raised between immediate parties, but not against other holders, as held in Venkatarama Reddiar v. Valli Akkal

Before the presumptions can be drawn, execution of the instrument must be proved. If there is a denial of the execution by the opposite party, the plaintiff (who bases his claim on the instrument) must prove the execution. As soon as the execution is proved, s. 118 helps the plaintiff to shift the burden of proof to the defendant and the latter has to prove, with adequate proof or circumstantial evidence, that the promissory note was not supported by adequate or valid consideration. If he is successful in this, the burden again shifts to the plaintiff.

According to section 118, until the contrary is proved the following presumptions shall be made in case of all negotiable instruments:

1. Consideration: It shall be presumed that every negotiable instrument was made, drawn, accepted or endorsed for consideration. It is also presumed that, consideration is present in every negotiable instrument until the contrary is proved. The presumption of consideration however may be rebutted by proof that the instrument had been obtained from its lawful owner by means of fraud or undue influence.

The presumption under s 118 is a presumption of law and the court shall presume inter alia that the endorsement was made for a specific and valid consideration. Therefore, it throws the burden of proof of failure of consideration on the endorser, according to the facts and circumstances of the particular case. It is also presumed that the acceptance, negotiation or transfer of a negotiable instrument was also for a valid consideration.

There was such a presumption in Common Law also, and it was later given validity through the s. 30 of the English Bills of Exchange Act. It is also embodied in the 3^rd edition of Halsbury’s laws of England. Therefore, it can be inferred that this presumption arises because of equity, justice and good conscience.

Unlike a regular contract, where the burden of proof of proving the consideration lies with the party seeking to enforce it, in the case of a negotiable instrument, consideration is presumed. This is a special rule of evidence since the party denying the consideration has to rebut the presumption of consideration.

But it is to be noted that the mere fact that the plaintiff failed to adduce evidence to prove the passing of sufficient consideration is not relieve the defendants in any way from establishing the contrary of the presumption arising under s. 118 (b) of the Negotiable Instrument Act, as held in the case of Mukundbhaiv. Banthia Trading Co. The main reason behind enacting this presumption of consideration is that there are millions of transactions being entered into every day, and it would be very difficult and time consuming and would make the negotiability of the instrument very difficult. Thus, it is a medium through which negotiability and trade will be facilitated.

It was held in S. Narayana Menon v. State of Kerala that the defendant has the right to ask the Court to consider the non- existence of the consideration so probable that a prudent man ought, under the facts and circumstances of the case, to act upon the supposition that consideration did not exist. In the case of Narayanan Gangadhara Panicker v. T.R. Haridasan, it was held by the Kerala High Court that if the execution of the instrument is in question, the plaintiff has to prove both execution as well as the passing of the consideration.

Moreover, the presumption under S. 118 talks only about the passing of consideration and not the quantum of consideration. The quantum can be identified only from the recitals. The weight accorded to these recitals will be based on the facts and circumstances of each case. It is also seen that the presumption raised in favor of the holder of the cheque must be confined to the matters covered thereby. The presumption so raised will not extend that the cheque was issued for the discharge of any debt or liability which is to be proved by the complainant, as held in the case of P. Venugopal v. Madan. P. Sarathi.

This section is distinct from s. 114 of the Indian Evidence Act as the latter provides for only a general rule where the court has an unfettered discretion to presume a fact, until it is disproved. But in the case of s. 118 of the Negotiable Instruments Act, the court is bound to start with the presumption in favor of passing of consideration. Section 118 operates between parties to the instrument or people claiming under them in a suit of a proceeding of the court related to the bill of exchange and therefore, it doesn’t affect the rule in s. 114 of the Indian Evidence Act.

Also, acceptance of a past consideration is also valid to hold that the document was executed for valuable consideration. The standard of proof evidently is preponderance of probabilities. Inference of preponderance of probability can be adduced not only from the materials on record, but also from the facts and circumstances of the case.

2. Presumption as to Date: Where a negotiable instrument is dated, the presumption is that it has been made or drawn on such date, unless the contrary is proved. In the case of Muller MacleanKhaderbhoy Mulla Esmaili, where according to the terms of the bills they were to be paid the current rate for Bank Demand Drafts at the date of payment, it was held that the rate of the exchange should be calculated at the due date.

The presumptions under s. 118 (a) and (b) can be drawn separately. If one of the presumptions is displaced, the other is also not necessarily displaced, as held in the case of Fulchand v. Laxminarayan. If there is ample evidence to show that a promissory note is ante- dated, no presumption arises, under s. 118 that it was executed on the date that it bears.

3. Time of acceptance: Unless the contrary is proved, every accepted bill of exchange is presumed to have been accepted within a reasonable time after its issue and before its maturity. This presumption only applies when the acceptance is not dated; if the acceptance bears a date, it will prima facie be taken as evidence of the date on which it was made.

4. Time of transfer: Unless the contrary is proved, it shall be presumed that every transfer of a negotiable instrument was made before its maturity. But it is also seen that there is no presumption as to the exact date of negotiation.

5. Order of indorsement: Until the contrary is proved, it shall be presumed that the indorsements appearing upon a negotiable instrument were made in the order in which they appear thereon. For example, in a situation where no evidence is adduced by the defendant, and when the instrument is signed by the second defendant below the indorsement signature of first defendant (who is the payee in the promissory note), the presumption will be made that the indorsement signatures were made in the order in which they occur, according to s. 118(e).

6. Stamp: Unless the contrary is proved, it shall be presumed that a lost promissory note, bill of exchange or cheque was duly stamped. In the case of Atmoram Mohanlal Notandas Devi Dayal, where a hundi was lost, it was presumed under s 118(f) that it was duly stamped and the stamp was duly cancelled.

7. Presumption that the Holder is a Holder in due course: The term ‘holder in due course’ as defined in s. 9 of the Negotiable Instruments Act means a person who gives consideration. Therefore, when a plaintiff institutes a pro note as a holder in due course, the presumption under s. 118(g) is that that he has given valuable consideration and the burden of proving the contrary is on the defendant, as held in the case of M. Chokalingam Chettyar v. R.N.Subramania Pillay. In section 118 (g), it is held that until the contrary is proved, it shall be presumed that the holder of a negotiable instrument is the holder in due course. Every holder of a negotiable instrument is presumed to have paid consideration for it and to have taken it in good faith. But if there is an allegation that the instrument was obtained from its lawful owner by means of an offence or fraud or by use of unlawful consideration, the holder has to prove that he is a holder in due course, i.e., he has to prove the following:

8. That he gave consideration

9. At the time he took the instrument, he took it without having sufficient cause to believe that any defect existed in the title of the person from whom he derived title.

However, the mere failure on the part of the holder in due course to prove the bona fide of absence of negligence on his part would not negative his claim.

Section 119- Presumption on proof of protest

The section states that in a suit upon an instrument which has been dishonored, the Court shall, on proof of the protest, presume the fact of dishonor, unless and until such fact is disproved.

The special advantages of protest are listed below :

1. It affords authentic and satisfactory evidence of dishonor to a drawer of indorser living abroad, who may find it inconvenient to make inquiries into the matter. Otherwise, he will have to rely on the word of the holder.

2. The court presumes the fact of dishonor by the protest.

3. There is a possibility of getting an acceptor for the honour.

The main object of noting and protesting is to get some person to accept it for the honour of any other party liable thereon, or for the honour of the person for whose account the bill is drawn. In the case of foreign bills, it is necessary to preserve the recourse against all previous parties. Noting and protesting are dispensed with, if the bill doesn’t appear to be a foreign bill at the face of it. Inland bills may or may not be protested. The slightest deviation from the rules as to the notice of dishonor can lead to heavy losses, as seen in Hamilton Finance Co. Ltd v. Coverly

RULES OF ESTOPPELS APPLICABLE TO INSTRUMENTS

Section 120 – Estoppels against denying original validity of instrument

The maker and the drawer, by their agreements are directly responsible to bring the relevant documents into existence. Additionally, if at all the position of one of them acting on the agreement is altered, they should not be allowed to deny the validity of the bill originally drawn by them. Section 120, presupposes the existence of an instrument which the court has looked into before applying the estoppels under the section. This section enacts a rule of estoppel against denying the original validity of the instrument in the one case and the capacity of the payee to indorse in the other hand. The proviso under s. 118(g) of the Negotiable Instruments Act must also be kept in view while reading s. 120. If fraud is established, then no such estoppel arises.

This section not only prevents the maker of the note from denying the validity of the instrument, but also disables the drawer of the instrument from denying the validity of the instrument. But this does not mean that the very instrument can be admitted to be executed. The validity of the instrument is different from the proving that the instrument is in accordance with the law.

Culpable negligence of a party may sometimes lead to a plea of estoppels against him. For this to arise, the negligence must be in the transaction itself and must be the proximate cause of the mistaken belief. This is very common in the case of a banker and the customer. One who signs a negotiable instrument in blank gives to any person, the implied authority to fill up the blanks left. In other words, the signatory is estopped, as against the holder in due course, from setting up the absence of such authority.

A famous case with respect to this principle is Young v. Grote, where the plaintiff left blank signed cheques with his wife when he went away. His wife, unaccustomed to business matters, passed one to the clerk to fill out, who filed it out in such a way that he could later fraudulently raise the amount to be cashed. The court held that the “gross negligence” of the customer estopped him from claiming that the bank should not debit his account, and he was held to be liable for the loss. The principle held in this case was accepted by the House of Lords in London Joint Stock Bank v. Macmillan and Arthur.

Further, if there is a duty as between the banker and the customer in drawing a cheque in the proper mode, in order to hold the customer liable for negligence of drawing cheques, it must be shown that there was a breach of duty by the neglect of some usual and proper precaution, as held in Mercantile Bank Of India v. Central Bank of India.

The act of acceptance of a bill is treated as an undertaking to pay to the order of the drawer and thus precludes the acceptor from subsequently denying the authority of the drawer. The difference between the English and Indian positions regarding the same is that in the former, the acceptor is precluded from denying the genuineness of his signature whereas under the latter, it is open to the acceptor to assert that in fact, the bill was not drawn by the person by whom it is supposed to have been drawn.

Thus, under s.120, it can be concluded that no maker of a promissory note, no drawer of a bill of exchange or cheque, no acceptor of a bill of exchange, for the honour of the drawer shall, in thereon, by a holder in due course be permitted to deny the validity of the instrument as originally made or drawn.

1. Estoppel against denying capacity of payee to endorse

It is seen that under s. 121, no maker of a pro note and no acceptor of a bill of exchange payable to or the order of a specified person shall, in a suit by a holder in due course be permitted to deny the payee’s capacity, at the date of the note or the bill, to endorse the same.

This is so because, by their respective engagements, the maker and the acceptor acknowledge the capacity of the payee to receive money and if the instrument is made payable to the order of a specified person, they admit the capacity of a payee to order the money to be paid to another person by an indorsement on the instrument. Thus, in a suit on a note by a holder in due course, the maker will not be permitted to say that the payee was a minor or that he was insane, etc. at the time of making the note. However, this does not estop the maker of the note or the acceptor of a bill from denying the validity of the payee’s indorsement.

2. Estoppels against denying signature or capacity of prior party

The indorser contracts with the indorsee that the original parties to the instrument were competent to bind themselves as maker, drawer or acceptor, and that the indorsers were competent to contract. Further, he contracts that the signatures of all prior parties from whom he derives titles are genuine. Therefore, in a suit brought about by a subsequent holder, no endorser of a negotiable instrument shall be permitted to deny the signature or capacity to contract to contract of any prior party to the instrument. This, however, does not estop the indorser from denying the genuineness or validity of the instrument, as held in Alagappa Chetty v. Alagappa Chttiar, where the instrument was one payable to the bearer on dement and hence invalid as it offended the provisions in s.31 of the Reserve Bank of India Act, 1934.

In R. Reghunathan v. P. Kashiraj,the plaintiff got a pronote indorsed in his favor from the original holder after payment of valid consideration. The evidence of the plaintiff was not challenged by the original holder and the endorsement stood proved. It was held that the plaintiff is entitled to benefits under the pronote sincethe executor and the original holder cannot deny the execution and endorsement of the pronote as per sections 120, 121 and 122.