Sections 43 and 44 of Negotiable Instruments Act 1881: Consideration and Partial Failure
Sections 43 and 44 of the Negotiable Instruments Act, 1881 deal with the effect of absence or failure of consideration on liability under a negotiable instrument. Section 43 lays down the general rule where an instrument is made, drawn, accepted, indorsed or transferred without consideration, or where consideration fails. Section 44 specifically deals with partial absence or partial failure of money consideration between parties standing in immediate relation.
- Section 43: absence or failure of consideration ordinarily creates no obligation of payment between the parties to that transaction, subject to the protection given to a holder for consideration and the statutory exceptions.
- Section 44: where money consideration is partly absent or partly fails, the amount recoverable by a holder in immediate relation with the signer is proportionately reduced.
Section 43 - Negotiable instrument made, etc., without consideration
A negotiable instrument made, drawn, accepted, indorsed or transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties to the transaction. But if any such party has transferred the instrument with or without indorsement to a holder for consideration, such holder, and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transferor for consideration or any prior party thereto.
Exception I: No party for whose accommodation a negotiable instrument has been made, drawn, accepted or indorsed can, if he has paid the amount thereof, recover thereon such amount from any person who became a party to such instrument for his accommodation.
Exception II: No party to the instrument who has induced any other party to make, draw, accept, indorse or transfer the same to him for a consideration which he has failed to pay or perform in full shall recover thereon an amount exceeding the value of the consideration, if any, which he has actually paid or performed.
Meaning and effect of Section 43
Consideration is the value given or promised for a transaction. Section 43 applies where a negotiable instrument is made, drawn, accepted, indorsed or transferred without consideration, or where the consideration later fails. As between the parties to that transaction, the absence or failure of consideration means that the instrument does not create an obligation of payment merely by reason of that transaction.
The section also protects a holder who receives the instrument for consideration. Where a party transfers the instrument, with or without indorsement, to such a holder, that holder and subsequent holders deriving title from that holder may recover the amount due from the transferor for consideration or any prior party, subject to the Act.
Exception I - Accommodation parties
The first exception concerns an accommodation transaction. A person for whose accommodation an instrument was made, drawn, accepted or indorsed cannot, after paying the instrument, recover that amount from a person who became a party to the instrument for the former person's accommodation.
Exception II - Consideration promised but not fully paid or performed
The second exception restricts recovery where a party induced another person to become a party to the instrument for consideration but failed to pay or perform that consideration in full. The inducing party cannot recover more than the value of the consideration actually paid or performed.
Section 44 - Partial absence or failure of money-consideration
When the consideration for which a person signed a promissory note, bill of exchange or cheque consisted of money, and was originally absent in part or has subsequently failed in part, the sum which a holder standing in immediate relation with such signer is entitled to receive from him is proportionally reduced.
Explanation: The drawer of a bill of exchange stands in immediate relation with the acceptor. The maker of a promissory note, bill of exchange or cheque stands in immediate relation with the payee, and the indorser with his indorsee. Other signers may by agreement stand in immediate relation with a holder.
Meaning and effect of Section 44
Section 44 deals specifically with money consideration that is partly absent from the beginning or subsequently fails in part. In such a case, a holder standing in immediate relation with the signer cannot recover the full face amount merely because that amount appears on the instrument. The recoverable sum is reduced proportionately to reflect the actual money consideration.
What is "immediate relation"?
The statutory explanation identifies important relationships. The drawer of a bill of exchange stands in immediate relation with the acceptor. The maker of a promissory note, bill of exchange or cheque stands in immediate relation with the payee. An indorser stands in immediate relation with the indorsee. Other signers may also stand in immediate relation with a holder by agreement.
Illustration under Section 44
The statutory illustration describes A drawing a bill on B for Rs. 500 payable to A's order. B accepts it but later dishonours it by non-payment. When A sues B, B proves that only Rs. 400 represented value and the balance was accommodation to A. The illustration states that A can recover only Rs. 400.
Difference between Sections 43 and 44
Section 43 addresses complete absence or failure of consideration and also deals with the position of a later holder for consideration and two specific exceptions. Section 44 deals with a narrower situation: the consideration consists of money but is partly absent or partly fails, and the claim is by a holder standing in immediate relation with the signer. In that situation the recoverable amount is proportionately reduced.
Related definitions under the NI Act
A promissory note is defined in Section 4, a bill of exchange in Section 5 and a cheque in Section 6 of the Negotiable Instruments Act, 1881. The expressions holder and holder in due course are defined in Sections 8 and 9 respectively. These definitions may be relevant when determining how Sections 43 and 44 operate in a particular transaction.
Official statutory source
The current text of the Negotiable Instruments Act, 1881 is available through the Government of India's India Code portal. The statutory text and applicable amendments should be verified when the provision is relied upon in a legal proceeding.