Negotiable Instruments Act, 1881
Meaning of Negotiable Instruments
A negotiable instrument is a piece of paper that
guarantees the payment of a certain sum of money, either
immediately upon demand or at any predetermined
period, and whose payer is typically identified.
It is a document that is envisioned by or made up of a
contract that guarantees the unconditional payment of
money and may be paid now or at a later time.
According to Section 13 (a) of the Act, “Negotiable
instrument means a promissory note, bill of exchange or
cheque payable either to order or to bearer, whether the
word “order” or “ bearer” appear on the instrument or
not.”
Although the Act mentions only three instruments e. g.,
a promissory note, a bill of exchange and cheque, it
does not exclude the possibility of adding any other
instrument that satisfies the following two conditions of
negotiability:
1. The instrument should be freely transferable (either by
simple delivery or by endorsement and delivery) by the
custom of the trade; and
2. The person who obtains it in good faith and for value,
should get it free from all defects, and be entitled to
recover the money of the instrument in his own name.
The word “instrument” refers to a written document by
virtue of which a right is created in favour of some
individual.
And the word “negotiable” indicates transferable from
one person to another in exchange for payment.
Therefore, any document that confers ownership over a
quantity of money and that can be transferred (like
currency) by delivery is considered to be a “negotiable
instrument.”
Consequently, a document that can be delivered is a
negotiable instrument. The Negotiable Instruments Act,
1881, however, does not define the phrase “negotiable
instrument” as such.
As such, documents like share warrants payable to bearer,
debentures payable to bearer and dividend warrants are
negotiable instruments.
But the money orders and postal orders, deposit receipts,
share certificates, bill of lading, dock warrant, etc. are not
negotiable instruments.
Although these documents are also transferable by
delivery and endorsements, yet they are not able to give
better title to the bonafide transferee for value than what
the transferor has.
In the words of Justice, Willis, “A negotiable instrument is
one, the property in which is acquired by anyone who takes
it bonafide and for value notwithstanding any defects of
the title in the person from whom he took it”.
The distinction between a negotiable instrument and other
documents is that, in the case of a negotiable instrument,
the transferee acquires a good title in good faith and for
consideration even though the transferor’s title may have
a flaw; in contrast, in the case of other documents, the
transferee receives a similar title (or, to put it another way,
no better title) than the transferor.
Negotiable means something that is transferable, or
capable of being passed on from one person to another.
Instrument can be understood as a tool used for doing a
particular job or task. Here, it specifically refers to such
transferable documents.
Characteristics of Negotiable Instruments
A negotiable instrument is a written document that promises or
orders the payment of a specific amount of money and is
transferable from one party to another. These instruments
facilitate commerce and financial transactions.
The key characteristics of a negotiable instrument, as defined by
the Uniform Commercial Code (UCC) in the United States and
similar laws in other jurisdictions, include:
1. In Writing: A negotiable instrument must be in writing. While
this traditionally meant a physical paper document, electronic
records and digital signatures may also satisfy this requirement
in some jurisdictions.
2. Unconditional Promise or Order to Pay: The instrument must
contain an unconditional promise to pay a specific sum of money
or an order to pay. Any conditions or qualifications attached to
the payment may affect negotiability.
3. Fixed Amount: The amount of money to be paid must be
certain and fixed. It should be easily determinable without
the need for extrinsic evidence.
4. Payable on Demand or at a Definite Time: The payment
must be either on demand or at a specific time. If the
instrument is payable on demand, it means that the payee
can demand payment at any time. If it is payable at a
definite time, the payment must occur at a specific future
date or upon a specified event.
5. Payable on Order or to Bearer: A negotiable instrument can
be payable to the order of a specific person or to the bearer.
If it is payable to the order, it requires an endorsement for
transfer. If it is payable to the bearer, it can be transferred
by mere possession.
6. No Other Undertakings or Instructions: The promise or
order to pay should not be subject to any other undertakings
or instructions. Any additional conditions may affect the
negotiability of the instrument.
7. No Unauthorized Signatures: The signatures on the
instrument must be authorized. Unauthorized signatures
may render the instrument non-negotiable.
8. Transferability: The instrument must be transferable from
one party to another by delivery or endorsement. The ease
of transfer is a fundamental characteristic of negotiable
instruments.
9. Good Faith Acquisition: A person who acquires a negotiable
instrument in good faith and for value, without notice of any
defects, holds the instrument free from most defenses and
claims that could be asserted against the original payee.
10. Complete and Regular: The instrument should be complete
and regular on its face. Any erasures, alterations, or
incomplete terms may affect its negotiability.
11. Having the right to sue: A negotiable instrument’s transferee
(payee) is not required to notify the party (drawer) responsible
for making or honouring the payment. In the event of
dishonour, the transferee may bring a claim against the
instrument in its own name without notifying the original
debtor of the transfer.
Above characteristics are designed to provide a legal
framework that promotes free flow and transferability of
negotiable instruments in commercial transactions. Specific
requirements may, however, vary from country to country or
by jurisdiction, and it is, therefore, important to consult local
laws for better understanding.
Types of Negotiable Instruments
The Negotiable Instruments Act of 1881 recognizes the types
of negotiable instruments and provides a legal framework for
the instruments. Following are the main types of negotiable
instruments as per the NI Act, 1881:
1. Promissory Note: A promissory note is an instrument in writing
containing an unconditional undertaking, signed by the maker,
to pay a certain sum of money only to or to the order of a
certain person or to the bearer of the instrument.
As per Sec. 4 of the NI Act, 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 on demand or at a fixed or determinable future
time a certain sum of money only to, or to the order of, a
certain person, or to the bearer of the instrument.
Illustrations
A signs instruments in the following terms:
a)“I promise to pay B or order Taka 500.”
b)“I acknowledge myself to be indebted to B in Taka 1,000 to be paid on
demand, for value received.”
c)“Mr. B, I O U Taka 1,000.”
d)“I promise to pay B Taka 500 and all other sums which shall be due to him.”
e)“I promise to pay B Taka 500, first deducting thereout any money which he
may owe me.”
f)“I promise to pay B Taka 500 seven days after my marriage with C.”
g)“I promise to pay B Taka 500 on D's death, provided D leaves me enough to
pay that sum.”
h)“I promise to pay B Taka 500 and to deliver to him may black horse on 1st
January next.”
The instruments respectively marked (a) and (b) are promissory notes. The
instruments respectively marked (c), (d), (e), (f), (g) and (h) are not
promissory notes.
Given below are the important characteristics of a promissory
note:
It must be signed, sealed, and written down;
There must be a commitment or undertaking to pay;
The mere admission of debt is insufficient;
There must be no conditions;
It must include a commitment to pay just money;
A promissory note’s maker and payee, or its parties,
must be certain;
It is repayable immediately or following a specific date;
and
The amount owing must be certain.
2. Bill of Exchange: A “bill of exchange” is an instrument in writing
containing an unconditional order, signed by the maker, directing
a certain person to pay on demand or at fixed or determinable
future time a certain sum of money only to, or to the order of, a
certain person or to the bearer of the instrument. [Sec. 5]
A bill of exchange, therefore, is a written acknowledgement of
debt, written by the creditor and accepted by the debtor. There
are usually three parties involved in a bill of exchange e.g.,
drawer, acceptor or drawee and payee. Drawer himself may be
the payee.
Essential conditions of a Bill of Exchange
2. It must be in writing.
3. It must be signed by the drawer.
4. The drawer, drawee and payee must be certain.
5. The sum payable must also be certain.
6. It should be properly stamped.
7. It must contain an express order to pay money and money alone.
2. Cheque: A cheque is a bill of exchange drawn on a specified
banker and not expressed to be payable otherwise than on
demand [Sec. 6].
Cheque is a negotiable instrument with two more
qualifications, e.g., (i) it is always drawn on a specified
banker, and (ii) it is always payable on demand.
Consequently, all cheque are bill of exchange, but all bills are
not cheque.
A cheque must satisfy all the requirements of a bill of
exchange; that is, it must be signed by the drawer, and must
contain an unconditional order on a specified banker to pay a
certain sum of money to or to the order of a certain person
or to the bearer of the cheque. It does not require
acceptance.
Bearer Instrument: An instrument payable to the bearer of the
instrument is called a bearer instrument. It can be transferred
by mere delivery and does not require endorsement.
Order Instrument: An instrument payable to a specific person
or their order is called an order instrument. It requires an
endorsement for transfer.
Incomplete Instrument: An incomplete instrument is one
where any of the necessary details, such as the amount, payee,
or time of payment, is left blank. It becomes negotiable when
the missing details are filled in.
Delivery Order: A delivery order is an order given by the holder
of a bill of exchange directing the drawee to deliver goods to
the payee. It is a document of title to the goods.
Crossing of Cheques: Crossing of cheques involves drawing two
parallel lines across the face of the cheque, with or without
additional words like "account payee" or "not negotiable."
Crossing provides additional security and restricts the
negotiability of the cheque.
Hundi: A Hundi is an indigenous instrument used in trade and
credit transactions. It is similar to a promissory note but follows
certain local customs and practices.
Traveler's Cheque: A traveler's cheque is a preprinted, fixed-
amount cheque designed to be used by the holder in lieu of
currency. It is often used for travel-related expenses and is
considered a safe form of payment.
The above mentioned negotiable instruments are used in
financial transactions and govern the rights and obligations of
parties involved in the negotiation of such instruments.
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