Write note on: (a) Material alteration. (b) Liability of Banker on a forged cheque.

(a) Material Alteration

The Concept and Its Statutory Basis

A negotiable instrument, once executed, embodies the agreed terms between the parties who signed it. Any subsequent interference with those terms — without the consent of the parties bound by them — strikes at the very integrity of the contract. Section 87 of the Negotiable Instruments Act, 1881 gives legal expression to this principle: any material alteration of a negotiable instrument renders it void as against any party who was a party at the time of the alteration and did not consent to it, unless the alteration was made to carry out the common intention of the original parties. The section further provides that if the alteration is made by an indorsee, it discharges the indorser from all liability to him in respect of the consideration thereof.

The policy behind this rule is explained lucidly in Gour Chandra Das v Prasanna Kumar Chandra (1906 ILR 33 Cal 812): no man shall be permitted to take the chance of committing a fraud without running any risk of loss, and by the alteration, the identity of the instrument is destroyed — to hold the other party liable on such an altered instrument would be to bind him to a contract to which he never agreed. The principle is one of stern but wise policy, said the court, aimed at punishing tampering with written securities and deterring fraud.

What is a Material Alteration?

The Negotiable Instruments Act, 1881 does not define "material alteration." The courts have supplied the definition through a long line of decisions. The most authoritative formulation comes from the Supreme Court in Seth Loonkaran Sethia v Ivan E. John (AIR 1977 SC 366), quoting from Halsbury's Laws of England: a material alteration is one which varies the rights, liabilities, or legal position of the parties as ascertained by the instrument 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 and as such void, or which may otherwise prejudice the party bound by the instrument as originally executed.

More simply, any change in an instrument which causes it to speak a different language in legal effect from that which it originally spoke — which changes the legal identity or character of the instrument, either in its terms or in the relation of the parties — is a material alteration. The Supreme Court in Kaliana Gounder v Palani Gounder (AIR 1970 SC 1942) adopted this formulation. Importantly, whether the alteration is beneficial or prejudicial to the maker does not matter. As Lord Justice Brett stated in Suffell v Bank of England (1882 9 QBD 555), "any alteration of any instrument seems to be material which would alter the business effect of the instrument if used for any ordinary business purpose."

It bears emphasis that material alteration takes in not only a case where something already written has been changed or erased, but also a new insertion that did not form part of the original document.

Instances of Material Alteration

The following alterations have been judicially recognised as material:

• Alteration of the date — the date of a promissory note is not merely a description; it is vital for calculating the period of limitation. Any alteration of the date avoids the instrument, as held in A. Subba Reddy v Neelapareddi (AIR 1966 AP 267)

• Alteration of the sum payable — the classic illustration from English law is Scholfield v Earl of Londesborough (1896 AC 514), where a bill for £500 was fraudulently altered to read £3,500

• Alteration of the time of payment — changing a bill payable "three months after date" to "three months after sight" is material, for it varies the time when liability falls due

• Alteration of the place of payment — scoring out the name of the specified bank and substituting another, without the acceptor's consent

• Alteration of the rate of interest — filling in the blank for interest without the promisor's consent was held to be a material alteration vitiating the note 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 promissory note without the consent of the existing makers

• Alteration of the payee's name — the alteration of the payee's name affects the character of the instrument and the relationship of the parties

• Additional or unauthorised stamping — affixing stamps to a note executed on an unstamped paper without the promisor's knowledge is a material alteration

• Alteration of the drawer's or payee's signature

Alterations that do not Vitiate the Instrument

Not every alteration, however, renders the instrument void. Section 87 itself provides that the material alteration will not avoid the instrument if it was made to carry out the common intention of the original parties. Courts have also held that an alteration does not vitiate the instrument in the following circumstances:

• Where the alteration is made before the instrument is issued, for no party has yet incurred liability

• Where the alteration corrects a bona fide mistake — as where a bill dated "1832" was corrected to "1823"

• Where the alteration is with the consent of all parties bound — consent may be express or implied

• Where the alteration falls within the statutory permissions in the Act itself — filling up an inchoate instrument under Section 20, converting a blank indorsement into a full indorsement under Section 49, qualifying an acceptance under Section 86, and crossing or adding a crossing to a cheque under Section 125 — these are not material alterations, even if they change the instrument, because the Act itself authorises them

• An immaterial alteration — one that does not adversely affect the interests of the other side and does not change the legal effect of the instrument

The Division Bench of the Kerala High Court in Bhaskaran Chandrasekharan v Radhakrishnan (1999 ISJ Banking 109) held that putting a date on an undated cheque by the payee does not amount to material alteration, because there is an implied consent from the drawer — when a cheque is issued without a date, the inference is that the payee has the authority to fill in the date when required.

The important interplay between Sections 20 and 87 was considered in Hitenbhai Parekh v State of Gujarat (2010 CrLJ NOC 455). An accused had signed a blank cheque and given it to the complainant, who filled in the amount due. The Gujarat High Court held that Section 87 must be read harmoniously with Section 20, which authorises the holder to complete an inchoate instrument. The legally permissible completion of an inchoate instrument cannot be construed as a material alteration.

Effect of Material Alteration

The effect of a material alteration is equivalent to cancellation of the instrument. The instrument becomes void against all parties who were parties at the time of the alteration and who did not consent. It does not, however, affect parties who become parties subsequent to the alteration — they are bound by the instrument as altered, for they dealt with the instrument in its altered state.

A material alteration in a cheque renders it unenforceable for the purpose of prosecution under Section 138 of the Act as well. The Kerala High Court in Ramachandran v Dinesan (2005 1 JCC NI 89) clearly held that when a cheque is materially altered, no criminal prosecution under Section 138 can be maintained on the basis of such a cheque.

It also follows that a materially altered instrument cannot ordinarily be used to prove the original consideration on which it was based. The Madras High Court in Rangaswami Reddi v K. Doraiswami Reddi (AIR 1957 Mad 715) held that a plaintiff who is guilty of material alteration of a promissory note cannot fall back upon the original consideration. However, the Kerala High Court in C.K. Antony v Mathai M. Paikeday (ILR 2014(4) Kerala 297) took a broader view, holding that the suit is also on original consideration and therefore the plaintiff can rely on the altered instrument for the collateral purpose of proving that original consideration, obtaining a decree on the underlying debt even if the instrument itself is void.

Section 89 — Protection for Paying on an Unapparently Altered Instrument

Section 89 carves out an important exception in favour of a paying banker. Where a negotiable instrument has been materially altered but does not appear to have been so altered, and a person or banker pays the amount according to the apparent tenor of the instrument in good faith and without negligence, that person or banker is discharged from all liability and the payment cannot be questioned merely because the instrument was altered. The key condition is that the alteration must be not apparent — if the alteration would be noticed by any person exercising reasonable care and scrutiny, the bank cannot claim protection under Section 89.

Burden of Proof

Where a negotiable instrument appears to be materially altered, the burden falls heavily on the party who presents and relies upon the instrument to explain the alteration and to show when it was made. The Andhra Pradesh High Court in A. Subba Reddy v Neelapareddi (AIR 1966 AP 267) stated this general rule clearly: "ordinarily, the party who presents a negotiable instrument which is an essential part of his case in an apparently altered and suspicious state must fail from the mere infirmity or doubtful complexion of the instrument unless he can satisfactorily explain the existing state of the document." A person who has custody of a document subsequent to its execution has to discharge the burden of establishing that it is not altered if alteration is alleged.

(b) Liability of Banker on a Forged Cheque

The Mandate of the Cheque and Its Absence in Forgery

The liability of a paying bank on a forged cheque flows from a foundational principle: every cheque presented to a bank carries a mandate — the legal authority of the customer directing the bank to pay. As the Supreme Court of India held in Canara Bank v Canara Sales Corporation (AIR 1987 SC 1603), whenever a cheque purporting to be by a customer is presented before a bank, it carries a mandate to pay. But if the cheque is forged, there is no such mandate. A forged cheque is, in the words of settled law, a mere nullity. The question of the bank's liability turns upon which element of the cheque has been forged — the drawer's own signature, or the payee's indorsement — for the law treats the two situations very differently.

I. Forgery of the Drawer's Signature — Bank Bears the Loss

The General Rule

When the drawer's signature on the face of a cheque is forged, the paying bank has no statutory protection. It is the professional duty and special obligation of every bank to know its customer's signature — it holds specimen signatures and deals with the customer regularly. If it pays on a forged signature, it has failed in this duty. The legal consequence is direct: the bank cannot debit the customer's account with the amount so paid. Payment made on a forged instrument is not a payment in due course within Section 10 of the Act, because it lacks the essential element of a genuine mandate.

The Supreme Court settled this conclusively in Bihta Co-operative Development and Cane Marketing Union Ltd v Bank of Bihar (AIR 1967 SC 389). The bank argued that the customer's negligence in allowing the forgery should disentitle it from recovering. The Supreme Court rejected this categorically — a forged cheque carries no mandate, and no degree of general negligence on the customer's part can give the bank the authority to debit the customer's account on such an instrument. Payment made on a forged cheque is simply not the bank's to debit.

This principle was affirmed and extended in Canara Bank v Canara Sales Corporation (AIR 1987 SC 1603), where the company's Chief Accounts Officer forged 42 cheques over four years for a total of Rs. 3,26,047. The bank contended that by accepting monthly statements without objection for four years, the company had ratified the payments and was estopped from claiming. The Supreme Court repelled every argument: there is no duty on a customer to examine pass-books and detect forgeries; the bank can escape liability only if it proves the customer's actual knowledge of the forgery; and mere inaction, in the absence of knowledge, cannot constitute estoppel or ratification.

The Allahabad High Court in L. Prabhu Dayal v The Jwala Bank (AIR 1938 All 374) expressed the philosophy of the rule memorably, quoting from Beven on Negligence: "The banker's obligation is to honour his customer's cheque. To that end he is bound to know his customer's handwriting. If in any way he is deceived without the instrumentality of his customer, he must himself abide the loss." Even where the customer had left the cheque book in an unlocked box, the court held the bank liable — the customer's general negligence in keeping the cheque book was not the proximate cause of the loss. The bank's failure to verify the signature was.

The Exception — Customer's Proximate Negligence

The one and only situation in which the bank may escape liability despite paying on a forged cheque is where the customer's own negligence in drawing the cheque was the proximate cause of the loss. This exception derives from London Joint Stock Bank v Macmillan and Arthur (1918 AC 777), approved by the Supreme Court — if a customer drew a cheque so carelessly as to leave blank spaces that facilitated the fraudulent interpolation of a higher amount, the customer must bear the loss, because it was the customer's negligence in the very act of drawing the instrument that enabled the fraud.

The critical qualification, repeatedly emphasised by the Supreme Court, is that this negligence must be intimately connected with the transaction itself and must be the proximate, not remote, cause of the loss. A customer who failed to examine his bank statement, or who kept his cheque book carelessly, or who simply failed to detect the fraud for a long period, is not guilty of the proximate negligence that would disentitle him from claiming. General negligence in business operations is insufficient.

The Standard of Care — No Obligation to Use Advanced Technology

What standard of care does the law impose on the bank? The Supreme Court answered this in Bank of Maharashtra v Automotive Engineering Co. (1993 2 SCC 97). The High Court had held that a bank was negligent for not having an ultraviolet ray lamp in its branch to detect forged cheques, while other branches had such lamps. The Supreme Court set aside this finding. It held that as long as no forgery could be detected on careful visual examination, the bank had discharged its duty. A bank cannot be held negligent for failing to subject every cheque to ultraviolet scrutiny. The standard is that of reasonable visual care — specimen signature comparison, scrutiny of the serial number, and normal examination of the cheque.

II. Forgery of the Indorsement — Statutory Protection Under Section 85

The Rule Under Section 85(1)

The law takes a markedly different approach when the forgery relates to the payee's indorsement rather than the drawer's signature. Section 85(1) of the Act provides: "Where a cheque payable to order purports to be indorsed by or on behalf of the payee, the drawee is discharged by payment in due course."

This section grants the paying bank a statutory discharge even if the indorsement subsequently turns out to be a forgery, provided the bank paid in due course — in good faith, without negligence, according to the apparent tenor of the instrument, to a person who did not appear to be unauthorised. The purpose is entirely practical: the volume of cheque transactions in banking makes it impossible for any bank to verify the authenticity of every payee's signature on every indorsement. The law therefore deliberately allocates the risk of forged indorsements away from a careful bank, placing it instead on the party best positioned to have prevented the fraud.

As the Calcutta High Court stated in Pranendu Mohan Das v Central Bank of India (AIR 1978 Cal 55), the bank is protected if it pays in accordance with the apparent tenor of the instrument, in good faith and without negligence, under circumstances not affording a reasonable ground for believing that the presenter is not entitled to receive the payment.

Conditions for Claiming the Protection

Three conditions must be simultaneously satisfied for the bank to claim the shield of Section 85(1):

1. The cheque must be payable to order — bearer cheques are governed by Section 85(2), which provides a separate, simpler protection to the bank

2. The cheque must purport to be indorsed by or on behalf of the payee — there must be an indorsement that on its face appears to be the payee's

3. The payment must be in due course as defined in Section 10 — in good faith, without negligence, according to the apparent tenor, and to a person who does not appear to be unauthorised

Negligence Destroys the Protection

Where the bank has been negligent, the protection of Section 85 is lost entirely. The burden of proving good faith and the absence of negligence lies on the bank claiming the protection. Whether negligence exists is always a question of fact.

The principle is illustrated by the Woodbriar Estate case — Woodbriar Estate Ltd v Catholic Bank of India (AIR 1958 Ker 316), where two demand drafts payable clearly to the company were collected by the bank but the amount was credited to the managing director's personal account. The indorsements on the drafts plainly showed they were payable to the company, not to the director personally. The bank's failure to notice this obvious discrepancy was negligent — the protection was forfeited.

Similarly, in Central Bank of India v Gopinathan Nair (AIR 1970 Ker 74), a draft was drawn in favour of a sole proprietary concern which had maintained an account with the branch for a long time. The forged indorsement was not in the form in which the proprietor customarily signed, and it was made out in favour of a third party. The bank ought to have noticed the departure from the usual practice. Its failure to make inquiry was held negligent.

The Governing Philosophy

Underlying both rules is a single equitable principle stated by the Supreme Court in Canara Bank v Canara Sales Corporation (AIR 1987 SC 1603): "If there are two innocent parties, the one whose negligence led to the ultimate loss is primarily responsible." Where the bank fails to recognise a forged drawer's signature despite having the duty to do so, the loss falls on the bank. Where a careful bank pays on a forged indorsement on an order cheque, the law through Section 85 deliberately protects the bank, because verifying every indorsement is impractical. And where a customer's own negligence in drawing the instrument was the proximate cause, the loss returns to the customer. The law, through these carefully balanced rules, always looks for the party whose negligence created the opportunity for the fraud — and places the burden of loss upon that party.