The payment of the amount due under a negotiable instrument must amount to ‘payment in due course’ in order to operate as a valid discharge of the instrument against the holder. Section 10 provides that in order to constitute a payment of a negotiable instrument as a ‘payment in due course,’ the following conditions must be fulfilled:
1. The payment must be in accordance with the apparent tenor of the instrument:
ADVERTISEMENTS:
It should be made at or after maturity. A payment before maturity is not a payment in due course so as to discharge the instrument. Thus if a bill of exchange is paid before the last day of grace and is subsequently indorsed over, it is valid in the hands of a holder in due course and the acceptor will be liable to pay again on the instrument.
Similarly, if the banker makes payment of a post dated cheque before the date mentioned therein, he acts against the apparent tenor of the instrument i.e., against the true intentions of the drawer and hence the payment will not be treated as payment in due course.
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2. The payment must be made in good faith and without negligence:
It must be honestly made in the bonafide belief that the person demanding payment is legally entitled to it. The payer must not be guilty of any negligence in making the payment.
ADVERTISEMENTS:
If there are suspicious circumstances and the payer fails to make necessary inquiry which may reveal the defects, the payment is not a payment in due course.
Thus, if a specially endorsed bill of exchange is paid without inquiry as to the payee or if a cheque with forged signature of the drawer is paid, it will amount to negligence on the part of the payer and the payment will not be treated as payment in due course.
3. The payment must be made to a person in possession of the instrument:
Under circumstances which do not arouse suspicion about his title to possess the instrument and to receive payment of the amount therein mentioned.
ADVERTISEMENTS:
A payment cannot be a payment in due course if it is made without requiring production of the instrument and, therefore, the payer must insist on seeing the instrument before making the payment and must obtain the instrument on payment.
4. The payment must be made in money only:
Unless the holder agrees to accept payment in any other medium or by cheque or draft
To sum up, ‘payment in due course’ implies payment (i) according to the apparent tenor of the instrument at or after maturity (ii) in good faith and without negligence (iii) in money (or by cheque if acceptable to the holder) (iv) to a person who is legally entitled to the instrument and is in possession of the same.