Negotiable Instruments • Banking Exams
Payment in Due Course: Definition, Conditions, Effects & Examples
Payment in due course means payment made as per the apparent tenor of the instrument, in good faith and without negligence, to a person in possession who appears entitled to receive it. When these conditions are met, the payer—especially a paying banker—gets statutory protection and the instrument is discharged. Table of Contents
- Meaning
- Essential Conditions
- Protection of Paying Banker
- Effects of Payment in Due Course
- Practical Examples
- Common Red Flags
- Exam Pointers
- FAQs
- Quick MCQ Practice
1) Meaning
Under the Negotiable Instruments framework (cheques, bills, promissory notes), payment in due course is a legal standard that validates payment and protects the payer. It requires the payer to act exactly as the instrument appears to require, pay the person apparently entitled, and exercise ordinary prudence.
In short: Pay as the instrument reads, to the person who seems entitled, in good faith, and without negligence.
2) Essential Conditions (Checklist)
- According to apparent tenor: Amount, date, place, and other terms must match the face of the instrument.
- Good faith: Honest intention; no knowledge of defects in title.
- Without negligence: Reasonable care in verifying the instrument and the presenter.
- Proper holder: Payment to the person in possession who appears entitled (e.g., payee, endorsee, or bearer as applicable).
- Regularity on the face: No material alterations, erasures, or suspicious endorsements.
- Instrument payable: Presented on or after due date; cheque within six months (or as per current banking practice); not stale or post-dated at time of payment.
- Identity & mandate: For “order” instruments, endorsement chain must be regular; for cheques, drawer’s signature must agree with mandate.
AspectWhat to CheckIf Irregular Tenor/TermsAmount in words & figures, date, payeeDo not pay; return for confirmation AlterationAny overwriting/chemical erasureRequire drawer’s full authentication EndorsementsContinuous & regular chainRefuse or seek rectification StalenessWithin validity (e.g., 6 months for cheques)Return as stale IdentityPhoto ID / KYC (as policy)Decline if identity doubtful
3) Protection of Paying Banker
When a banker pays a cheque in due course, the banker is protected even if the title of the person paid turns out defective. For bearer cheques, payment to the bearer in due course discharges the banker. For order cheques, a regular endorsement chain is vital. Payment contrary to mandate (e.g., forged drawer’s signature) is not protected.
Remember: Genuine drawer’s signature is essential. A forged drawer’s signature makes the cheque a nullity—no protection.
4) Effects of Payment in Due Course
- Discharge of instrument: The instrument is extinguished against prior parties to the extent of payment.
- Discharge of payer: The paying banker/drawee is discharged from further liability to rightful owners.
- No restitution from payer acting in good faith: Subsequent claims fail if all conditions were met.
5) Practical Examples
- Bearer cheque, regular on face: Bank pays the presenter. Later, the true owner alleges loss. Since payment was in due course, the bank is protected and the drawer’s account is correctly debited.
- Order cheque with broken endorsements: Last endorsement missing. Payment made—this is not in due course. Bank may be liable to the true owner.
- Altered amount without authentication: Figures overwritten; no confirmation by drawer. Payment would be negligent—no protection.
- Stale cheque: Presented after validity. Paying it could be negligent—banker loses protection.
6) Common Red Flags (Do Not Pay)
- Mismatch between amount in words and figures.
- Suspicious or non-continuous endorsements.
- Visible erasures/alterations without drawer’s full signature.
- Stale/post-dated instruments presented prematurely.
- Presenter’s identity doubtful or behavior suspicious.
7) Exam Pointers & One-Liners
- Keyword trio: apparent tenor • good faith • without negligence.
- Bearer cheques: Payment to bearer in due course discharges the bank.
- Forged drawer signature: No protection; cheque is a nullity.
- Order instruments: Regular endorsement chain is essential.
- Material alteration: Requires drawer’s confirmation; otherwise, do not pay.
8) FAQs
What does “apparent tenor” mean?
It means the clear, literal terms visible on the instrument—amount, date, payee, place—without delving into external facts. Is a paying banker protected if the payee’s title is defective?
Yes, if the payment met all conditions of due course. The protection fails if the banker was negligent or the cheque bore a forged drawer’s signature. Does payment in due course apply only to cheques?
No. It applies to negotiable instruments generally—cheques, bills of exchange, and promissory notes. What about post-dated cheques?
Paying before the date is not according to the apparent tenor; it will not be payment in due course.
9) Quick MCQ Practice
- Payment in due course requires:
(a) Good faith only (b) Good faith and absence of negligence (c) Payment to payee only (d) Bank manager’s approval
Answer: (b) - Which of the following does not confer protection to a paying banker?
(a) Payment of bearer cheque in due course (b) Payment against forged drawer’s signature (c) Payment of order cheque with regular endorsements (d) Payment of cheque within validity
Answer: (b) - “Apparent tenor” refers to:
(a) Terms stated on the instrument’s face (b) Oral instructions (c) Bank’s internal policy (d) Customer’s intention
Answer: (a)
10) বাংলা নোট (Bangladesh Context)
Payment in due course বলতে বোঝায়—ইন্সট্রুমেন্টে যা লেখা আছে তার আলোকে, সৎভাবে এবং অবহেলা ছাড়া, যিনি পাওয়ার অধিকারী বলে প্রতীয়মান তাকে পরিশোধ করা। এভাবে পরিশোধ করলে সাধারণত পেয়িং ব্যাংকার সুরক্ষা পান এবং ইন্সট্রুমেন্টটি পরিশোধিত/ডিসচার্জড ধরা হয়।
Posted in: Banking Law & Practice | Series: Negotiable Instruments — Part 8 (Payment in Due Course)
Prepared for: Banking Professional Exam Assistant
