Facts of the Case
- ‘A’, the holder of a bill, endorses it to ‘B’ or order.
- The endorsement is made with an express instruction that ‘B’ should only get the bill discounted.
- Instead of following the instruction, ‘B’ negotiates the bill to ‘C’.
- ‘C’ receives the bill in good faith and for value (i.e., he is a holder in due course).
Issues in the Case
- What is the legal position of ‘C’ who received the bill contrary to the endorsement’s condition?
- Does the instruction to ‘B’ restrict the transferability of the bill?
- Can a holder in due course like ‘C’ acquire good title despite a breach of instruction between previous parties?
Principles Associated With It
- Under Section 9 of the Negotiable Instruments Act, a holder in due course is one who takes the instrument:
- For consideration,
- In good faith,
- Before maturity,
- Without notice of any defect or restriction.
- The bill was negotiated to C, and C had no knowledge of the instruction between A and B.
- Once a bill is endorsed in blank or to order, it becomes negotiable unless specifically restricted (e.g., “not negotiable”).
- Internal agreements or collateral instructions between A and B do not affect the rights of a holder in due course.
Judgement
- ‘C’, having taken the bill bonafide and for value, is a holder in due course under Section 9.
- The breach of instruction by B does not affect the title of C, who was unaware of the restriction.
- Therefore, C acquires a valid and enforceable title to the bill and can claim payment.
- ‘A’ cannot deny liability to C, even though B acted contrary to his instructions.