Rules of Compensation :
Under Section 117 of the Act, the compensation payable in case of dishonour of a promissory note, bill of exchange, or cheque, by any party liable to the holder or any endorsee, shall be determined by the following rules :
(a) The holder is entitled to the amount due upon the instrument, together with the expenses incurred in presenting, noting and protesting it;
The holder is entitled to receive: (1) the amount of the instrument; (2) interest on the principal sum as calculated in accordance with the rules mentioned in Sections 79 and 80; and (3) expenses properly incurred in presenting, noting and protesting the instrument.
(b) When the person charged resides at a place different from that at which the instrument was payable, the holder is entitled to receive such sum at the current rate of exchange between the two places;
(c) The endorser, who being liable,has paid the amount due under the instrument, is entitled to the amount so paid with interest at 18% per annum from the date of payment until tender or realisation together with all expenses caused by the dishonour and non-payment. But an endorser who has paid a bill or note is entitled to the amount so paid only if at the time of payment he was liable on the instrument. The endorser is only entitled to charge interest at the rate of 18% per annum on the amount paid by him, even though interest at a higher rate is mentioned in the instrument.
It is to be noted that the endorser can charge his prior party with all the expenses caused by dishonor. This may include expenses of postage, stamp for receipt of the payment etc.
(d) When the person charged and such endorser reside at different places, the endorser is entitled to receive such sum at the current rate of exchange between the two places.
Clause (d) lays down a rule with reference to endorsers similar to that laid down by clause (b) which deals with the case of a holder, but with this difference under clause (b) the rate of exchange in the case of a holder who pays the amount is to be determined at the current rate of exchange between the place where the person charged resides and the place at which the instrument was payable. Under this Clause if the person charged and the indorser are at different places the rate of exchange between the two places determines the quantum of liability. On principle there should be no difference between the rights of a holder and of an endorser in this respect the endorser too is entitled to receive the equivalent of the sum which he has paid according to the current rate of exchange. Clauses (b) and (c) relate to ‘re-exchange’. Re-exchange is the measure of damages occasioned by the dishonour of a bill in a country different from that in which it was drawn or endorsed. When a person sought to be charged resides at a place different from that at which the instrument was payable, the holder is entitled to receive such sum at the current rate of exchange between the two countries. Re-exchange, in its usual application, means the loss resulting from the dishonour of a bill in a country different from that in which it was drawn. [Williams vs. Ayres (1877) 3 A.C. 133, 146]. As the holder of the instrument sustains loss to the extent of the amount mentioned in the instrument on the day of dishonour, the rate of exchange should be taken for calculation as of the rate prevailing on the date of dishonour. [In re British American Continental Bank Ltd. (1972), 2 Ch. 575, 589; S.S. Celia vs. volturna (1921) A.C. vs. 544 Muller Maclean & Co. vs. Atanlla & Co., 51 Cal. 320].
(e) The party entitled to compensation may draw a bill upon the party liable to compensate him, payable at sight or on demand, for the amount due to him, together with all expenses properly incurred by him. Such bill must be accompanied by the instrument dishonoured and the protest thereof (if any). If such bill is dishonoured, the party dishonouring the same is liable to make compensation thereof in the same manner as in the case of the original bill.
The bill mentioned in this clause is called a re-draft. The party entitled to compensation is enabled to draw a bill payable at sight or on demand on party liable to compensate him for the amount due to him together with all expenses properly incurred by him. The re-draft must be accompanied by the dishonoured instrument and the protest thereof if there be any. In case the draft is dishonoured the party on whom it is drawn is liable to make compensation in accordance with the rules laid down in this section in the case of the original bill. Now the amount payable are of two kinds (a) the amount due upon the instrument; and (b) the amounts payable are the expenses incurred on presenting, noting, protesting and the like
| Key Points
♦ The compensation payable by any party liable to the holder or any endorsor in case of dishonour of an instruments shall be determined by the rules given under Section 117 of the Act. |