What Is Material Alteration?
The term material alteration refers to a modification or change in the instrument’s material components. It can be described as any modification that affects the instrument’s basic essence. Therefore, the alterations can transform and damage the original instrument’s legal identity, causing it to speak a different language in legal effect than what it previously spoke.
A significant change, for example, renders the instrument null and void and alters the rights and duties of the parties to the instrument. However, It does not apply to anybody who becomes a party to an instrument after any significant changes have been made.
What Constitutes A Material Alteration?
Every modification or alteration to a negotiable document cannot be proven as a substantial alteration. It would not necessarily invalidate the instrument or impair the rights and duties of the parties hereto.
The Negotiable Instruments Act is silent on the definition of a significant change. In this regard, Indian courts of law have followed English Common Law, which holds that anything that changes the legal relations between the parties, the nature of the instrument, or the quantity due constitutes a significant change.
As a result, a significant modification modifies or seeks to modify the nature of the instrument and affects or attempts to influence the contract that the instrument contains. It may occur due to altering, changing, or erasing something already written on the instrument and as a result of a new insertion.
Meaning of Alteration in Law
Contract modification refers to the change of the terms of the contract with the permission of both parties. The following are the elements of the change:
When the changed document does not include the parties’ duties but depends on them to carry out the contract, the change does not always operate to release the parties from their underlying responsibilities.
The result of contract modification is that a new contract is established, and both parties must obey the new contract’s provisions. When the agreement changes are changed, both parties must provide their consent.
Furthermore, contract parties do not change. Suppose the parties decide to change or amend the terms of the agreement. In that case, the change must be done either by express agreement or necessary inference—which would invalidate the theory of acceptance sub silentio.
This theory was established in the case of Satya Pal Anand v. State of Madhya Pradesh and Ors. You may do any novation, rescission, and change of contract only bilaterally and with the mutual consent of all parties.
A contract’s terms and conditions can be changed, but not unilaterally, only if there is a requirement in the contract or any legislation or an implicit agreement via silence.
In the scenario of Suresh Kumar Wadhwa v. State of Madhya Pradesh, they indicated that the party to the contract has no right to change the terms and conditions of the unilateral agreement, nor do they have the right to add any additional terms and conditions unless both parties agree to change such terms in the agreement.
Under the previous agreement, the parties’ responsibility is canceled in a contract change, and the new amended agreement binds the parties.
Instances of Material Alteration
The following are examples of material changes.
- Modification of the instrument’s date
- Changes to the payable amount
- Changes in payment terms
- Changes to the payment location
- Changes in interest rates or any changes in the parties involved, if any
- Tearing of the instrument’s material component
- When a bill is accepted in general, the input of a payment location is required.
- A new party has been added to the instrument.
- Addition of words to a blank-endorsed bill of exchange to turn it into a special endorsement.
What Are The Example of Material Alteration?
Here are the Examples of Material Alterations in a sentence:
1. Borrowers are not required to pay any substantial sums to any Tenant under a Lease—save for common area maintenance and other regular reconciliations—and no Tenant has the authority to demand lenders to make or finance any Material Alterations or upgrades to the space covered by its Lease.
2. Tenant shall not perform any Capital Alterations or Material Alterations without the prior written approval of Landlord, and such contract shall not be unreasonably withheld.
3. If the Lender has provided cash security, such cash shall be released by the Lender to fund such Material Alterations, and if Borrower has provided non-cash security.
Such deposit shall be released and returned upon Lender’s satisfaction with the preceding sentence requirements, except to the extent applied by Lender to fund such Material Alterations.
4. The Modifications and the Equipment shall not be destroyed or demolished, and no Material Alterations shall be made to them without the approval of Mortgagee—save for regular replacement or disposal of the Equipment and as otherwise explicitly authorized in the Loan Agreement.
Effects of Material Alteration
The principal impact of a substantial modification is that it renders the instrument invalid. For instance, it discharges the instrument against any person who was a party to the instrument at the time of the material alteration and did not grant their consent to it.
All preceding parties to a negotiable instrument who were afterward amended without their agreement shall not be responsible even to holder-in-due-course if they had no notice or awareness of the significant alteration.
It makes no distinction between whether the change was beneficial or harmful to any party to the instrument. Furthermore, it makes no difference whether the holder altered the instrument in person or whether a foreigner altered it while the instrument was in the holder’s possession because a party in the custody of an agent is obligated to keep it in its original state.
However, it is worth emphasizing that a significantly changed document is not entirely invalid, i.e., it is not unenforceable against all of the parties to it.
It is null and void solely against those who did not consent to or accomplish the change, and they can enforce it against those who agreed to or effected the change. Such an instrument is also enforceable against individuals who become participants in the instrument due to the modification. However, this rule has an exception too.
A negotiable instrument acceptor or endorser is obligated by his acceptance or endorsement regardless of any past changes to the instrument.
Section 89 of the Negotiable Instruments Act, on the other hand, protects a party who pays a materially altered bill of exchange, promissory note, or cheque provided that the alteration does not appear on the face of the instrument in question and that the payment is made in good faith and without negligence on its part.
Such a party is discharged if it pays a person in possession of the instrument under circumstances that do not provide a reasonable basis for believing it is not entitled to such payment. Furthermore, in the conditions mentioned above, the payer has the right to debit the person whose account you made the payment with the amount paid.
Effect Of Alteration Of Contract Without The Consent Of Parties
When one of the parties changes the contract without following the party’s agreement, the contract is considered invalid. The consequence of contract modification without the parties’ permission is not specified in the Indian Contract Act—although legal law authorities are recognized in India.
If there is an illegal change of the contract’s papers or terms and conditions, the agreement is invalid. The Indian Contract Act has no provision for the unlawful modification of contract documents.
Indian courts follow the English norm in this regard. The Blue Pencil Theory is a legal doctrine that allows courts to declare certain parts of a contract defective or unenforceable while leaving other parts of the contract binding.
The words that are not binding or are invalid are ruled void under the Blue Pencil Doctrine, making the rest of the contract enforceable. It’s also known as the doctrine of severability.
Sometimes there is a contract modification in which some elements of the contract are changed, which is forbidden and unlawful. However, with the aid of the blue pencil theory, this modification can be ruled unenforceable since it is invalid and not binding.
An agreement is created when both parties who agree to engage in an agreement agree to it. When a deal is legally enforceable, it becomes a contract. An agreement becomes a contract with four criteria.
The parties must meet some contract terms and conditions. The contract is considered to be discharged whenever the party accomplishes the specific act. A contract discharge indicates that the contract’s contractual obligations are terminated. They can cancel a contract in a variety of ways, one of which is modification.
Contract modification refers to modifications to the contract’s terms. Both parties must agree to change the terms of the agreement. Furthermore, there should be a significant change in the agreement prior to the performance of the contract or deed with the approval of both parties. If the change is made without the permission of either party, it is considered to be invalid.
The Blue Pencil Doctrine declares that words or clauses that are not binding or changing that contract and declares the remaining portion of the contract enforceable. When the combined firms wish to make changes in their company, they must also amend the contract’s provisions, terms, and conditions.