Law regarding Material Alteration
Section 87 of the Negotiable Instrument act clearly states that
any material alteration of a negotiable instrument renders the same void as against anyone who is a party thereto at the time of making such alteration and does not consent thereto, unless it was made in order to carry out the common intention of the original parties.
Effects of Material Alteration
The main effect of a material alteration is that it makes the instrument void, i.e., it discharges the instrument itself as against any person who was a party to such instrument at the time of material alteration and did not give his approval to it.
All the prior parties to a negotiable instrument, which was altered subsequently without their consent thereto, shall not be liable even to holder-in-due-course, having no notice or knowledge of the material alteration.
It makes no discrimination whether the alteration was for the benefit or detrimental to any party to the instrument. Moreover, it is also immaterial whether the holder himself altered the instrument or any stranger altered it while the instrument was in the custody of the holder because a party, who is in custody of an instrument, is bound to preserve it in its original state.
It is, however, worth noting that a materially altered instrument is not absolutely void, i.e., not unenforceable against all the parties thereto.
It is void only against those who did not give their approval to the alteration, and can be enforced against those who consented to the alteration or effected the alteration. Such an instrument is also operative against those who become parties to the instrument subsequent to the alteration. There is, however, an exception to this rule.
An acceptor or endorser of a negotiable instrument is bound by his acceptance or endorsement notwithstanding any previous alterations of the instrument.
On the other hand, Section 89 of the Negotiable Instrument Act provides protection to a party who pays a materially altered bill of exchange or promissory note or cheque provided that the alteration does not appear on the face of the instrument in-question and pays so in good faith and without negligence on its part.
Such a party shall stand discharged if it makes payment to a person in the possession of the instrument under the circumstances, which do not afford a reasonable ground for believing that it is dis entitled to such payment. Besides, the payer under the above circumstances is also entitled to debit the party on whose account the payment was made with the amount paid.
Example of Material Alteration
For instance, A drew a cheque of Rs 500 in favour of B, who altered the figure 500 into 5,000 without taking the consent of the maker. The instrument appeared to be drawn for Rs 5,000 on the face of it. The drawee banker paid Rs 5,000 to B on the presentment of cheque for payment. The banker did so according to the apparent tenor of the instrument and in good faith. In this case, since the banker acted bona fide and without negligence, it is entitled to debit A with Rs 5,000.