NI Act | Promissory Note Conferring On Payer A Right To Recover As Per Law Does Not Dilute Unconditional Undertaking: Karnataka HC

The Karnataka High Court has held that a mention in promissory note, that the payer is at liberty to proceed against the note creator's property if he fails to repay, is an additional condition that does not contravene Section 4 of the Negotiable Instruments Act, which stipulates that a promissory note must contain an unconditional undertaking to pay.

A Single Judge Bench of Justice Sachin Shankar Magadum dismissed an appeal filed by a defendant against order of the first appellate court, which reversed the decree of the Trial Court and allowed the plaintiff's suit seeking recovery of Rs.66,000 based on a promissory note.

Pithily put, the plaintiff had approached the court alleging that the defendant had availed a hand loan but, in spite of repeated requests, failed to repay the amount as agreed by him under the promissory note. This promissory note contained a stipulation that if the maker/defendant failed to repay, the plaintiff would be at liberty to recover the amount by initiating proceedings against the properties held by the defendant.

The defendant disputed the promissory note in question, contending that the plaintiff misused the signatures obtained by him on blank papers. He stoutly denied the claim of the plaintiff that a hand loan had been obtained by him.

While dismissing the suit, the Trial Court had opined that in terms of Section 4 of the Act, an undertaking given by a payer should be unconditional. Since the pronote in question contemplated right to seek recovery in the event the defendant failed to repay, it was said that the document could not be treated as a demand promissory note. The order was reversed by the Appellate court.

Justice Magadum referred to Section 4 and reiterated that a document, in order to constitute a promissory note, should contain a promise at the hands of a maker to pay the amount unconditionally. However, it was added that the Trial Court erred in interpreting the provision.

"What can be inferred from the wordings in Section 4 of the Act is that there should be an "unconditional undertaking"; the promise must not depend upon the happening of some outside contingency or events. It must be payable absolutely and the maker must be certain. The note itself must show clearly who is the person agreeing to undertake the liability to pay the amount. The promise should be to pay money and money only and the amount should be certain...The trial Court though has culled out the relevant portion of the promissory note, but, however, has misread the provisions of Section 4 of Act and has also misread and misunderstood the object of securing an unconditional undertaking from the maker.”

Referring to the undertaking in the pronote, the court said that, “...it nowhere indicates that it contravenes the provisions of Section 4 of the Act. What the maker has stated while offering an undertaking is that in the event he fails to pay the amount, the payer is at liberty to proceed against his property. This latter part of the undertaking does not alter the express undertaking given by him. The latter part of the undertaking even otherwise is available to the payer in the event the maker of the instrument fails to honour the undertaking given under the instrument.”

It was added that the emphasis on an unconditional commitment serves as a shield for the payer by fostering certainty and predictability in financial transactions. It ensures that the payer, whether an individual or entity, can rely upon the unequivocal promise made by the note's creator. This legal construction mitigates the risk of arbitrary revocation or alteration of the payment obligation, thereby safeguarding the interests of the payer.

It was concluded that the right conferred on a payer to recover in accordance with law does not dilute an unconditional undertaking, which is requisite to constitute a document as a pronote.

“What Section 4 contemplates is that the promissory note should contain an unconditional undertaking signed by the maker to pay a certain sum of money. This unconditional undertaking is found in the present promissory note. However, the maker, i.e., the defendant herein, has further indicated that the payer is at liberty to proceed against the property in the event he fails to repay the amount. This additional condition, which is found in the latter part of the document, does not, in my view, contravene the provisions of Section 4 of the Act.”

Advocate Venkatarami Reddy E appeared for Appellant

Advocate GM Ananda appeared for Respondent

Citation No: 2023 LiveLaw (Kar) 494

Case Title: D L Ramesh v. Marilingaiah

Case No: Regular Second Appeal No 151 OF 2016

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