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Dishonor of a Negotiable Instrument

Dishonor refers to either non- acceptance or non- payment of the instrument. Dishonor by non- acceptance is limited to Bills of exchange since a cheque and a promissory note do not require presentment for acceptance hence they could be dishonored by non- payment only.

The effect of dishonor is that it allows the holder to bring an action against parties liable on the instrument for the recovery of the amount. Art 780 (2) (a) of the commercial code states that the holder may exercise his right of recourse on a bill of exchange even before maturity provided there is total or partial non- acceptance. Partial non- acceptance here refers to a qualified acceptance by the drawee as indicated in Article 762 (1) of the code. so at maturity, there will be dishonor by non- payment of the bill, hence entitling holder to pursue his action provided payment has not be made [780 (1)]

As stated above only a bill of exchange could be dishonored by non- acceptance [780 (2) (a)].However regarding promissory notes Art 825 (1) (c) makes a reference to Art 780, creating an impression that the provision is applicable to promissory notes. Clearly Art 780 (2) (a) which talks about dishonor by non- acceptance is not applicable to promissory notes.  It should be noted that according to Art 825 provisions regarding bills of exchange are similarly applicable to promissory notes so for as they are not inconsistent which the nature of promissory notes. This means that due to the nature of a promissory note, which is a non- acceptable note, Art 780 (2) (a) is not applicable.

This being the case it should be underlined that the law should attain maximum clarity, as for as possible, and not create any condition leading to further disputes. It is incidentally recommended that the commercial code provisions dealing with negotiable instruments be redrafted in a comprehensive way so that every provision is applicable to every commercial instrument with regard to common matters and special provisions should be inserted by way of exception to the general rule. There is no need for separate provisions for bills, notes and cheques. That is also the approach adopted by the Indian Negotiable instruments act and the uniform commercial code. 

As regards dishonor for non-payment of a promissory note it is similarly governed by Art 780(1) due to the reference in Article 825(1) .  A cheque is considered as dishonored by non payment if it is presented in due time and not paid or there is refusal of payment by the drawee (Art 868)

Once we conclude that a commercial instrument is considered as dishonored either by non-acceptance or non payment it is proper to investigate what constitutes non-acceptance or non payment.  The commercial code states only instance constituting non-acceptance or non-payment.  Which is refusal to accept or refusal to pay by the drawee.  However it should be noted that other cases may also give rise to non-acceptance or non-payment

  Dishonor by non-acceptance

Generally a bill of exchange may be considered as dishonored in the following cases.

  1. When after due presentation, the bill is not accepted by the drawee.  This refers to refusal of the drawer to put his signature or the bill and be bound by it.  When there are several drawees (who are not partners) refusal by any one of the drawees will amount to dishonor.
  2. Where the drawee is incompetent to be bound by contractual obligations (Art 733), the bill may be treated as dishonored.
  3. If the acceptance is restrictive or qualified (Art 760(2)) the bill may be considered as dishonored
  4. If the instrument not being payable at any specified place, the drawee can not be found after due search, or if the instrument being payable out some other specified place, neither  drawee nor any other person authorized to pay it attends at such place during the usual business honurs, or if the instrument being payable at Drawee’s place of business, he closes such place or business day during the usual business honurs, in all the above cases the bill may be considered as dishonored.
  5. Where a drawee in case of need is named in a bill, or in any endorsement thereon, the bill is not dishonored until it has ben dishonored by such drawee. 

Dishonor by non-payment

A promissory note, bill of exchange or cheque is dishonored by non-payment when the maker of the note or the acceptor of the bill of exchange or drawee of the cheque makes default in payment upon being duly required to pay the same.  When there is partial payment, the instrument is considered to be dishonored for the remaining amount.  The holder can not refuse partial payment and treat it as dishonored for the total amount.

Effect of dishonor

When an instrument is dishonored either for non-acceptance or non-payment it gives the holder a go-ahead to bring an action on all parties liable on the instrument and recover the amount due from such parties.  In other words dishonor is a pre-requisite for the holder to exercise his right of recourse on the instrument.  Bringing an action before dishonor entitles parties liable  on it to raise the defense of lack of the necessary conditions to bring a proceeding (Art 717(2)).  Such defense relieves such parties from liability.

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