Negotiable Instruments Introduction Act

A negotiable instrument is a piece of paper which entitles a person to a sum of money

and which is transferable from person to person by mere delivery or by endorsement
and delivery. The person to whom it is so transferred becomes entitled to the money
also to the right to further transfer it. Thus, negotiable instruments play a major role in
the trade world.

The maxim of law nemo dat quod non-habet (no one can transfer a better title than he
himself has). This is the general principle relating to transfer of property is that no one
can become the owner of any property unless he purchases it from the true owner or
with his authority.[1]

According to professor Goode, instrument is described as a document of title of

money Therefore an instrument is a document which physically expresses the payment
obligation. An instrument will be in deliverable state only if it is signed by the possessor
or it should be with the authority of that person. The instrument clearly states the
contractual right to payment and the right will be transferred only after the complete
delivery. The person who has that entitlement and posses the instrument is consider as
the true owner.

Purpose

Main purpose of negotiable instruments is to avoid the carriage of higher amount of

money and to reducing the risk of theft; robbery etc.
To give legal effect to negotiable instruments there is legislation and the name of that
legislation is The Negotiable Instruments Act, 1881.

Introduction To Negotiable Instruments Act, 1881

The Negotiable Instruments Act was enacted, in India, in 1881.Prior to its enactment,
the provision of the English Negotiable Instrument Act were applicable in India, and the
present Act is also based on the English Act with certain modifications. It extends to the
whole of India except the State of J&K.

What are Negotiable Instruments?

Documents of a certain type, used in commercial transactions and monetary dealings, are
called Negotiable instruments. The word 'negotiable' means transferable from one person to
another and the term 'instrument' means 'any written doc. by which a right is created in favor of
some person.' Thus, the negotiable instrument is a doc. by which rights vested in a person can
be transferred to another person in accordance with the provisions of the Negotiable
Instruments Act, 1881.
Definition:
According to section 13 of Negotiable Instruments Act, 1881- A 'negotiable instrument' means a
promissory note, bill of exchange or cheque payable either to order or to bearer.

Main Features of A Negotiable Instrument

An instrument may be negotiable either by
# Statute - Promissory notes, bills of exchange and cheques are negotiable instruments under
the Negotiable Instruments Act, 1881; or
# By usage - Bank notes, bank drafts, share warrants, bearer debentures, dividend warrants,
scripts and treasury bills.
# An instrument is to be called 'negotiable' if it possesses the following characteristic features:
# Freely transferable - Transferability may be by
1. delivery, or
2. By endorsement and delivery.

a. Holder's title free from defects: The holder (of the negotiable instrument) in due course
acquires a good title not withstanding any defect in a previous holder's title.
b. The Holder can sue in his own Name - Another characteristic feature of a negotiable
instrument, is that its holder in due course, can sue on the instrument in his own name.
c. A negotiable instrument can be transferred infinitum, i.e., can be transferred any number of
times till its maturity.
d. A negotiable instrument is subject to certain presumptions.

Presumptions
1. Consideration: Every negotiable instrument is deemed to have been drawn and accepted,
endorsed, negotiated, or transferred for consideration.
2. Date: Every negotiable instrument must bear the date on which it is made or drawn.
3. Acceptance: Every bill of exchange was accepted within a reasonable time after the date
mentioned therein and before the date of its maturity.
4. Transfer: Every transfer should be made before the expiry.

Meaning of Endorsement:
# When a maker or holder writes the person’s name on the face or back of the instrument &
puts his signatures thereto for the purpose of negotiation, it is called ‘endorsement’.
# Person who signs – endorser
# To whom it is endorsed – endorsee.
Promissory Note [Section 4]:

Definition According to section 13 of Negotiable Instruments Act, 1881- A promissory

note is an instrument in writing (not being a bank note or a currency note) containing an
unconditional undertaking, signed by the maker to pay a certain sum of money to, or to
the order of, a certain person or to the bearer of the instrument.

A promissory note is a promise in writing by a person to pay a sum of money to a

specified person or to his order.[3]
Maker: The person who makes the promissory note and promises to pay is called the
maker.
Payee: The person to whom the payment is to be made is called the payee.

Essentials or Characteristics of a Promissory Note:

From the definition, it is clear that a promissory note must have the following essential
elements.
1. In writing - A promissory note must be in writing. Writing includes print and
typewriting.
2. Promise to pay - It must contain an undertaking or promise to pay. Thus, a mere
acknowledgement of indebtedness is not sufficient. Notice that the use of the word
‘promise’ is not essential to constitute an instrument as promissory note.
3. Unconditional - The promise to pay must not be conditional. Thus, instruments
payable on performance or non- performance of a particular act or on the happening or
non-happening of an event are not promissory notes.
4. Signed by the Maker – The promissory note must be signed by the maker, otherwise
it is of no effect.
5. Certain Parties - The instrument must point out with certainty the maker and the
payee of the promissory note.
6. Certain sum of money - The sum payable must be certain or capable of being made
certain.
7. Promise to pay money only - If the instrument contains a promise to pay something in
addition money, it cannot be a promissory note.
8. Number, place, date etc. - These are usually found in a promissory note but are not
essential in law. If a promissory note does not bear a date, it is deemed to have been
made when it was delivered.
9. Installments - It may be payable in installments.
10. It may be payable on demand or after a definite period - Payable 'on demand'
means payable immediately or any time till it becomes time-barred. A demand
promissory note becomes time barred on expiry of 3 years from the date it bears.
11. It cannot be made payable to bearer on demand or even payable to bearer after a
certain period
12. It must be duly stamped under the Indian Stamp Act - It means that the stamps of
the requisite amount must have been affixed on the instrument and duly cancelled
either before or at the time of its execution. A promissory note, which is not so stamped,
is a nullity.[4]
Bill Of Exchange [Section 5]:

According to section 5 of Negotiable Instruments Act, 1881- A 'bill of exchange' is an

instrument in writing, containing an unconditional order, signed by the maker, directing a
certain person to pay a certain sum of money only to or to the order of a certain person,
or to the bearer of the instrument.
It is also called a Draft.

Characteristic Features of a bill of exchange:

1. It must be in writing.
2. It must contain an order to pay and not a promise or request.
3. The order must be unconditional.
4. There must be three parties, viz., drawer, drawee and payee.
5. The parties must be certain.
6. It must be signed by the drawer.
7. The sum payable must be certain or capable of being made certain.
8. The order must be to pay money and money alone.
9. It must be duly stamped as per the Indian Stamp Act.
10. Number, date and place are not essential.

Parties To A Bill Of Exchange:

# Drawer: The maker of a bill of exchange is called the drawer.
# Drawee: The person directed to pay the money by the drawer is called the drawee.
# Payee: The person named in the instrument, to whom or to whose order the money
are directed to be paid by the instruments are called the payee.
Cheque [Section 6]

According to section 6 of Negotiable Instruments Act, 1881- A cheque is defined as 'a bill of
exchange drawn on a specified banker and not expressed to be payable otherwise than on
demand’.
Thus, a cheque is a bill of exchange with two added features, viz.:
# it is always drawn on a specified banker; and
# It is always payable on demand and not otherwise.

Essentials Of Cheque:

1. In Writing: The cheque must be in writing. It cannot be oral.

2. Unconditional: The language used in a cheque should be such as to convey an unconditional
order.
3. Signature of the Drawer: It must be signed by the maker.
4. Certain Sum of Money: The amount in the cheque must be certain.
5. Payees Must be certain: It must be payable to specified person.
6. Only Money: The payment should be of money only.
7. Payable on Demand: It must be payable on demand.
8. Upon a Bank: It is an order of a depositor on a bank. [5]

Parties To A Cheque
# Drawer: Drawer is the person who draws the cheque.
# Drawee: Drawee is the drawer‟s banker on whom the cheque has been drawn.
# Payee: Payee is the person who is entitled to receive the payment of a cheque.

Difference Between Cheque And Bill Of Exchange: [6]

Basis For
Cheque Bill of Exchange
Comparison
A document used to make easy
A written document that shows the
payments on demand and can be
Meaning indebtedness of the debtor towards the
transferred through hand delivery is
creditor.
known as cheque.
Section 6 of The Negotiable Section 5 of The Negotiable Instrument
Defined in
Instrument Act, 1881 Act, 1881
Validity Period 3 months Not Applicable
Payable to bearer Cannot be made payable on demand as
Always
on demand per RBI Act, 1934
Not Applicable, as it is always
Grace Days 3 days of grace are allowed.
payable at the time of presentment.
A cheque does not require
Acceptance BOE needs to be accepted.
acceptance.
Stamping No such requirement. Must be stamped
Crossing Yes No
Drawee Bank Person or Bank
Noting or If the cheque is dishonored it cannot If a BOE is dishonored it can be noted or
Protesting be noted or protested. protested.
Difference B/W Bill Of Exchange And Promissory Note: [7]
Basis For Comparison Bill Of Exchange Promissory Note
A promissory note is a written
BOE is an instrument in writing promise made by the debtor to
Meaning showing the indebtedness of a buyer pay a certain sum of money to
towards the seller of goods. the creditor at a future specified
date.
Section 5 of Negotiable Instrument Section 4 of Negotiable
Defined in
Act, 1881. Instrument Act, 1881.
Three parties, i.e. drawer, drawee and Two parties, i.e. drawer and
Parties
payee payee
Drawn by Creditor Debtor
Liability of Maker Secondary and conditional Secondary and conditional
Can maker & payee be
Yes No
the same person?
Promissory Note cannot be
Copies Bill can be drawn in copies
drawn in copies
Notice is necessary to be given to all Notice is not necessary to be
Dishonor
the parties involved.  given to the maker.

Difference B/W Cheque And Promissory Note:[8]

Basis For
 Cheque Promissory Note
Comparison
Order And A promissory note contains
It contains order to pay.
Promise promise to pay.
In case of promissory note are only
Number Of In case of cheque there may be three
two parties, the maker and the
Parties parties, the drawer, drawee and payee.
payee.
Cheque is used because it is a simple and
It is used for receiving and giving
Object easy medium of exchange and serving of
credit.
metallic money.
Crossing A cheque may be crossed. A pro-note cannot be crossed.
Payable To A cheque is often drawn as payable to A pro-note cannot be drawn
Bearer bearer. payable to bearer.
Its payment can be stopped by giving the A pro-note payment cannot be
Stop Payment
notice to the bank. stopped if once issued.
In case of cheque when it is dishonored, the In case of promissory note liability
Liability Nature
drawer is liable. is primary.
Promissory note may be drawn on
It is drawn on a printed form issued by a
Use Of Form any paper and there is no need of
particular bank.
any particular form.
A cheque is always drawn to a particular A promissory note can be drawn
Drawee
bank where account is available. on any person.
Drawer and In case of cheque drawee and payee can be In case of pro-note there are two
 parties and maker cannot be the
Payee the same person.
payee.

Conclusion:
The above discussion makes clear that Negotiable instruments are the documents which are
related to the business transactions. Negotiable instruments play a major role in trade world. We
can use negotiable instruments for international trades. These instruments can either be
negotiable or non-negotiable. But they must come under one of the two categories. An
instrument can become negotiable either by statute or by mercantile usage. These instruments are
in written form so in case of non- payment the person to whom the payment to be made can sue
the other person by whom the payment shall be made. Bill of exchange, cheque and promissory
notes are three important negotiable instruments with different features.

These are the instruments which are broadly used for international trade. These instruments are
freely transferable by one person to another person any number of times. Cheque is a document
for easy payment but payment can only be made on demand and a cheque is valid only for
3months. There is no requirement of stamping. There is a particular form of cheque and it is an
order to pay. BOE is a written document that shows the indebtedness of the debtor towards the
creditor. It must be stamped and it cannot be made payable on demand. Promissory note is a
written promise to pay at a future specified date. These negotiable instruments are still in use
even after the electronic revolution. The electronics revolution is considered as the next major
step which replaces the negotiable instruments.