'A material alteration of a Negotiable Instrument makes the instrument void.' Explain the scope of the rule and its exceptions, if any.

Material Alteration of a Negotiable Instrument — Scope of the Rule and Its Exceptions

Introduction and Statutory Foundation

The rule that any material alteration of a negotiable instrument renders it void has its authoritative basis in Section 87 of the Negotiable Instruments Act, 1881. The section declares that "any material alteration of a negotiable instrument renders the same void as against anyone who is a party thereto at the time of making such alteration and does not consent thereto, unless it was made in order to carry out the common intention of the original parties." The section further provides that an alteration made by an indorsee discharges his indorser from all liability in respect of the consideration.

The rule rests on a twin foundation of public policy. As the Calcutta High Court classically stated in Gour Chandra Das v Prasanna Kumar Chandra (1906 ILR 33 Cal 812), first, no man shall be permitted to take the chance of committing a fraud without running the risk of loss if detected, and second, by the alteration, the identity of the instrument is destroyed, and to hold a party liable on a changed instrument would be to make for him a contract to which he never agreed.

What Constitutes a Material Alteration

The phrase "material alteration" is not defined in the Act, but the courts have supplied a clear and consistent test. The Supreme Court, in Seth Loonkaran Sethia v Ivan E. John (AIR 1977 SC 366), stated that a material alteration is "one which varies the rights, liabilities, or legal position of the parties as ascertained by the deed in its original state, or otherwise varies the legal effect of the instrument as originally expressed, or reduces to certainty some provision which was originally unascertained." Crucially, the test is not whether the alteration is prejudicial or beneficial — whether the change increases or decreases liability is beside the point. As Brett LJ observed in Aldous v Cornwell (1868 LR 3 QB 573), any alteration is material "which would alter the business effect of the instrument if used for any ordinary business purpose." It takes in not merely erasure or change of what is already written, but also a fresh insertion that formed no part of the original document.

Essentials for Section 87 to Apply

For a material alteration to render the instrument void under Section 87, four conditions must co-exist:

• The alteration must be material — it must change the legal identity or character of the instrument

• It must be made after the instrument is executed

• It must be made without the consent of the party sought to be charged

• It must not have been made to carry out the common intention of the original parties

Instances of Material Alteration

The following have been held to be material alterations:

• Alteration of the date — the date is material because it determines the time of payment and, critically, the period of limitation; its insertion without consent, as in Jayantilal Goel v Zubeda Khanum (AIR 1986 AP 120), is a material alteration

• Alteration of the sum payable — changing a bill of Rs. 500 to Rs. 3,500, as in Scholfield v Earl of Londesborough (1896 AC 514)

• Alteration of the time of payment — changing a bill payable three months after date into one payable three months after sight, as in Long v Moore (1790 3 Esp 155)

• Alteration of the place of payment — scoring out the Union Bank and substituting another bank, as in Tidmarsh v Grover (1813 1 M&S 735)

• Alteration of the rate of interest — filling in a blank interest column without consent, as held in Seth Tulsidoss Lalchand v Rajagopal (1967 2 Mad LJ 66)

• Addition of a new party — adding a new maker to a joint and several note, as in Garner v Walsh (1855 5 EB 83)

• Alteration of the payee's name, or addition, deletion, or change thereof without the drawer's consent — confirmed by the Kerala High Court in State Bank of India v Kerala State Co-op Marketing Federation (1995 2 KLJ 621)

Effect of Material Alteration

The effect of a material alteration is categorical — it renders the instrument void, and the effect is "exactly the same as that of cancelling the deed," as stated by the Privy Council in Nathu Lal v Mt. Gomti Kuar (AIR 1940 PC 160). However, the avoidance is not retrospective. It operates only from the time of alteration and only against parties who were parties at the time and who did not consent. Parties who become parties after the alteration — acceptors or indorsers — are fully bound by their acceptance or indorsement notwithstanding any previous alteration, as Section 88 makes clear.

Exceptions to the Rule

Section 87 itself, in its concluding paragraph, subjects the general rule to the provisions of four other sections, each of which constitutes a statutory exception.

1. Filling up of Inchoate Instruments — Section 20
When a person signs and delivers a stamped paper, wholly or partly in blank, he gives a prima facie authority to the holder to complete it. Such completion is authorised by statute and does not render the instrument void, even against the maker. In Hitenbhai Parekh v State of Gujarat (2010 CrLJ NOC 455 Guj), the court held that Section 87 must be read harmoniously with Section 20 — the legally permissible completion of an inchoate instrument cannot be construed as material alteration.

2. Conversion of Blank Indorsement into Indorsement in Full — Section 49
The holder of an instrument endorsed in blank may, without fresh signature from the indorser, convert it into a special indorsement by writing upon it a direction to pay any other person. Though this alters the instrument, it is expressly permitted and does not vitiate it.

3. Qualified Acceptance — Section 86
Where the holder of a bill of exchange acquiesces in a qualified acceptance — one that is conditional, partial, or varied as to place or time — all previous parties who have not consented are discharged. However, the transaction is governed by Section 86 alone and does not attract the voiding consequence under Section 87.

4. Crossing of Cheques — Section 125
The holder of an uncrossed cheque may cross it; a generally crossed cheque may be converted into a specially crossed one; and the banker to whom a cheque is crossed may re-cross it to an agent. These crossings, though they alter the mode of the instrument's use, are expressly permitted and do not avoid the cheque.

Beyond the four statutory exceptions, the following situations also do not vitiate the instrument:

• Alteration before the instrument is issued — an alteration before the instrument is operative against any party falls outside Section 87 entirely

• Alteration to correct a mistake — as where a bill dated 1832 was corrected to 1823, held not material in Brutt v Pickard (1824 Ry M 37)

• Alteration to carry out common intention — Section 87 itself preserves alterations made to effectuate the original common intention; in Charminar Co-op Urban Bank Ltd. v Chaitanyakala Samithi (AIR 2008 NOC 132 AP), insertion of the payee's name in a blank column was held to be in furtherance of common intention and valid

• Alteration with consent — if all parties consent to the alteration, the instrument remains binding, though it becomes, in effect, a new contract and may require a fresh stamp

• Alteration by a stranger without fraud or laches of the holder — the holder is not affected when a stranger makes the alteration without his knowledge or collusion, as held in Gourochandro v Krushnacharana (AIR 1941 Mad 383)

Protection of Paying Bankers — Section 89

A special and practical exception is provided by Section 89. Where a promissory note, bill, or cheque has been materially altered but the alteration does not appear on its face, and a person or banker pays it in good faith according to its apparent tenor, such payment fully discharges the payer. The Supreme Court in Bank of Maharashtra v Automotive Engineering Co. (1990 77 Comp Cas 87) held that a bank is not required to subject every cheque to an ultraviolet-ray examination, and payment made without negligence after a reasonable visual scrutiny is entitled to full protection under this provision.

Burden of Proof

Where an instrument appears in an altered and suspicious state, the burden falls heavily on the plaintiff to explain the alteration. As the Andhra Pradesh High Court stated in Allampati Subba Reddy v Neelapareddi (AIR 1966 AP 267), the party who presents a negotiable instrument in an apparently altered condition must fail from the mere infirmity of the document unless he can satisfactorily explain its state. However, once the defendant admits his signature, the burden shifts back to him to prove that the alteration is material and was made without his consent.