SVKM’S PRAVIN GANDHI COLLEGE OF LAW, MUMBAI
EXCEPTIONS TO PRESUMPTIONS UNDER THE NEGOTIABLE INSTRUMENTS
ACT, 1881
BANKING LAWS
GARIMA SHARMA
5TH YEAR
A048
2020-25
ABSTRACT
In India, the laws governing negotiable documents including checks, bills of exchange, and promissory
notes are governed by the Negotiable documents Act, 1881. The Act simplifies the enforcement of
these documents by introducing certain statutory presumptions under Section 118 to promote smooth
business transactions. These assumptions, however, are not always true and could be refuted in certain
situations. The scope and limitations of these presumptions are examined in this article, along with
the exceptions that courts have recognized and several significant rulings that show how judicial
interpretation has influenced these exceptions. In order to ensure both business certainty and legal
justice, the study's conclusion emphasizes the necessity of striking a balance between statutory
presumptions and protections against fraud, coercion, and unfair acts.
INTRODUCTION
In contemporary business, negotiable instruments are essential because they provide a safe and
effective way to move money and credit. A thorough legislative framework for regulating these
instruments and guaranteeing their legitimacy and enforceability is provided by the Negotiable
Instruments Act of 1881. Section 118, one of the main components of the Act, reduces the burden of
proof and streamlines dispute resolution by establishing presumptions in favor of the holder.
These assumptions are not absolute, though, and they could be contested in some situations, especially
if there are doubts about the document's legality or the existence of a duty.
The nature of these legislative presumptions, the legal justifications for challenging them, and the
judicial interpretation of exceptions are all examined in this paper.
Section 118 - Presumptions as to negotiable instruments
Until the contrary is proved, the following presumptions shall be made:-
(a) of consideration--that every negotiable instrument was made or drawn for consideration, and that
every such instrument, when it has been accepted, indorsed, negotiated or transferred, was accepted,
indorsed, negotiated or transferred for consideration;
(b) as to date--that every negotiable instrument bearing a date was made or drawn on such date;
(c) as to time of acceptance--that every accepted bill of exchange was accepted within a reasonable
time after its date and before its maturity;
(d) as to time of transfer--that every transfer of a negotiable instrument was made before its maturity;
(e) as to order of indorsements--that the indorsements appearing upon a negotiable instrument were
made in the order in which they appear thereon;
(f) as to stamps--that a lost promissory note, bill of exchange or cheque was duly stamped;
g) that holder is a holder in due course--that the holder of a negotiable instrument is a holder in due
course: provided that, where the instrument has been obtained from its lawful owner, or from any
person in lawful custody thereof, by means of an offence or fraud, or has been obtained from the maker
or acceptor thereof by means of an offence or fraud, or for unlawful consideration, the burden of
proving that the holder is a holder in due course lies upon him.
WHAT ARE PRESUMPTIONS?
The Negotiable documents Act of 1881 established legal presumptions that improve commercial
certainty and expedite the enforcement of negotiable documents. The burden of proof is shifted to the
person opposing the validity of the instrument under Section 118 of the Act (reproduced above), which
establishes numerous important presumptions.
A basic premise among these is that all negotiable instruments are issued for consideration, which
means that the law presumes they were performed in return for something of value. In order to ensure
clarity for establishing maturity and enforceability, the date on the document is assumed to be accurate.
The idea of commercial dependence is further supported by the presumption that a bill of exchange
was accepted prior to maturity.
Further, every transfer of a negotiable instrument is presumed to have occurred before its maturity,
ensuring that transactions involving such instruments retain their credibility. Similarly, endorsements
are presumed to have been made in the sequence they appear, reflecting a clear chain of title. The law
also assumes that the instrument has been duly stamped, complying with statutory requirements.
Perhaps most crucially, the holder of a negotiable instrument is presumed to be a holder in due course,
meaning they acquired it in good faith, for value, and without knowledge of any defect in the
transferor’s title. This presumption plays a pivotal role in protecting the integrity of commercial
transactions.
The enforceability of the document is further strengthened by the fact that any party whose name
appears on it is assumed to be accountable for payment. These statutory presumptions support
efficiency and confidence in business transactions and are more than just procedural conveniences.
The law guarantees that negotiable instruments continue to serve as uncontested means of credit and
trade by putting the burden of proof on the challenger to refute these presumptions. These assumptions
can, however, be refuted in certain situations, which will be examined in the sections that follow.
DO PRESUMPTIONS HAVE ANY EXCEPTIONS?
Although the presumptions made under the Act are strong, there are some situations in which they can
be refuted. In order to guard against abuse and guarantee equity in business dealings, the law
acknowledges a number of exceptions. When a negotiable instrument is issued without compensation,
such as when it was given as a gift or acquired under duress, the assumption of consideration is
nullified, making this one of the most basic exceptions. Similarly, the statutory presumptions do not
apply if the instrument was obtained by coercion, fraud, or undue influence.
Another important exception is forgery, which makes the presumptions legally void if the signature on
the document is falsified. Moreover, the presumptions are essentially revoked if the instrument is
materially altered without the agreement of all parties. This is particularly relevant when changes
impact the instrument’s essential terms, such as the amount payable or the date of maturity. Another
exception arises in cases involving parties who lack the legal capacity to contract, such as minors or
persons declared incompetent by law — here, their liability is not presumed.
Additionally, an instrument that has been fully discharged, whether through payment, cancellation, or
mutual agreement, no longer carries the presumptions attached to it. Another significant limitation
applies to instruments that are not duly stamped — under the Indian Stamp Act, such instruments
cannot be admitted as evidence in court, effectively overriding the presumptions under the Negotiable
Instruments Act. Lastly, if a holder had prior notice of a defect in the transferor’s title, they cannot
claim the protections afforded to a holder in due course.
This prevents bad-faith actors from benefiting from statutory presumptions. These exceptions serve as
necessary safeguards, ensuring that the presumptions do not operate unjustly and maintaining the
delicate balance between commercial certainty and legal fairness. While presumptions under the Act
are designed to facilitate the smooth enforcement of negotiable instruments, the law ensures that they
are not misused to the detriment of innocent parties.
JUDICIAL INTERPRETATION OF EXCEPTIONS TO PRESUMPTIONS
The Negotiable Instruments Act, 1881 (the “Act”) establishes statutory presumptions to facilitate the
enforceability of negotiable instruments, ensuring their smooth circulation in commercial transactions.
However, these presumptions are not absolute and can be rebutted under specific circumstances. The
judiciary has played a crucial role in interpreting these exceptions, balancing commercial expediency
with fairness.
1. Presumption of Consideration: Scope and Rebuttal
Every negotiable instrument is assumed to have been issued for legitimate consideration under Section
118(a) of the Act. Courts have maintained, nevertheless, that there is sufficient evidence to refute this
presumption. The Supreme Court held in Kundan Lal Rallaram v. Custodian, Evacuee Property that
the party contesting the legality of the document bears the initial burden of disproving consideration.
The party must provide convincing proof that there was no legitimate deliberation; a simple denial of
consideration is not enough. The Court subsequently reaffirmed in Bharat Barrel & Drum
Manufacturing Co. v. Amin Chand Payrelal that the burden of proof switches to the defendant after a
prima facie case is made in favor of consideration.
2. Forgery and Fraud:
Unwavering Defenses It is acknowledged that fraud and forgery are complete exceptions to the
statutory presumptions. Since a falsified document is void ab initio, all Section 118 presumptions are
nullified. The Supreme Court ruled in Canara Bank v. Canara Sales Corporation that a forged check
cannot result in liability because the drawer did not authorize it. The Court stressed that even if an
instrument seems legitimate on its face, a faked signature does not constitute any contractual duty.
In a similar vein, the Punjab and Haryana High Court held in Lily Hire Purchase Ltd. v. Darshan Lal
that a check obtained fraudulently is unenforceable, putting the onus on the bearer to demonstrate that
the document was obtained in good faith.
3. Material Alteration:
Effect on Presumptions Any unauthorized material alteration in a negotiable instrument renders it void
under Section 87 of the Act. Courts have repeatedly held that even minor modifications to an
instrument’s terms, if made without consent, vitiate the presumptions under Section 118.
The case Kali Ram v. State of Himachal Pradesh, though primarily deals with the presumption of
innocence in criminal law, is often referenced for its principle that presumptions must not override
substantive evidence, particularly in fraud-related matters.
Also, in K. Srikant Singh v. North East Securities Ltd., the Supreme Court reiterated that any material
alteration in a negotiable instrument without the consent of all parties renders the instrument void under
Section 87 of the Act. 4. Incapacity of Parties: Minors and Unsound Mind For a negotiable instrument
to be enforceable, the parties involved must have the legal capacity to contract. When an instrument is
executed by a minor or a person of unsound mind, the presumption of validity is automatically rebutted.
In Mohori Bibee v. Dharmodas Ghose, the Privy Council held that agreements entered into by minors
are void, and thus, a negotiable instrument executed by a minor is unenforceable. This principle was
later reaffirmed in in the case of P. Deeptha v. V.S. Chandrasekaran, where the court observed that a
cheque issued by a minor is not legally enforceable, as minors lack the contractual capacity to incur
such liabilities.
5. Discharge of the Instrument:
When Presumptions Cease to Apply Once a negotiable instrument is discharged, either through full
payment or other legally recognized means, the presumptions under Section 118 cease to operate.
In Balaji Seafoods Exports v. Mac Industries Ltd., the Madras High Court emphasized that when an
underlying debt is settled, the cheque loses its enforceability, and the burden of proof shifts to the
holder to establish any remaining liability.
The Supreme Court, in Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. and ors., further clarified
that once an instrument is satisfied, no further claims can be made under it.
CONCLUSION AND THE WAY FORWARD
The Negotiable Instruments Act of 1881's exclusions to presumptions have been interpreted by judges
in a nuanced manner, striking a balance between the legislative framework and equitable
considerations. Although presumptions under Section 118 facilitate the enforcement of negotiable
documents, courts have continuously maintained that they must not be abused to commit injustice or
fraud. Judicial rulings guarantee that the Act continues to be a strong legal foundation for business
dealings by clearly defining exceptions such as forgery, fraud, material alteration, incapacity, and
discharge. The judiciary's involvement in preserving equity and preserving the negotiability of
instruments is highlighted by the developing jurisprudence around these exclusions. More uniformity
and clarity in judicial rulings are required going forward, especially with relation to rebuttal
requirements.
Courts should continue emphasizing strict evidentiary requirements for rebutting presumptions to
prevent frivolous defenses while also safeguarding against genuine instances of fraud and coercion.
Strengthening mechanisms for electronic verification and digital signatures may further reduce
disputes regarding forgery and unauthorized alterations.
