Unit 13

1. What is a negotiable instrument

A negotiable instrument is a document guaranteeing the payment of a specific amount

of money,
- either on demand, or at a set time, with the payer named on the document.

According o Section 13 of the Act, a negotiable instrument means

-"a promissory note, bill of exchange, or cheque payable either to order or bearer,
whether the words "order" or "bearer" appear on the instrument or not.

Thus the Negotiable Instrument Act has mentioned only three types of instruments,
namely,
- a promissory note, bill of exchange and cheque.

However it does not exclude the other types of instruments, which satisfy the
characteristics of negotiability, as detailed below.

a. It must be transferable by delivery or by endorsement and delivery.

b. The property in it must pass to a bona fide transferee for value, free from any
defect in the title of the transferor.
c. The holder must be able to sue upon it in his own name.

2. Negotiable Instrument in law

Negotiable Instrument in law is a written contract or other instrument whose benefit

can be passed on from the original holder to new holders.

The original holder (the transferor) must countersign the instrument (as in the case of a
cheque) or merely deliver it (as in the case of a bank note) to the new holder.

The new holder is then entitled to the benefit of the instrument (in the case of a
cheque, to the money from the bank; in the case of the bank note, to the sum promised
on the note).
3. Features of negotiable instrument

The term "negotiable" in a negotiable instrument refers to the fact that they are
transferable to different parties.
- If it is transferred, the new holder obtains the full legal title to it.

Non-negotiable instruments, on the other hand, are set in stone and cannot be altered
in any way.

Negotiable instruments
- enable its holders to either take the funds in cash or transfer to another person.

The exact amount that the payer is promising to pay is indicated on the negotiable
instrument and must be paid on demand or at a specified date.
- Like contracts, negotiable instruments are signed by the issuer of the document.

4. Object of the Act

The main object is to legalize the system by which instruments could pass from hand
to hand by negotiation like any other goods.

Rules of law relating to the negotiable instruments provide special procedure

- in case the obligation under the instrument was not discharged.

Main purpose of negotiable instruments is

- to avoid the carriage of higher amount of money and to reducing the risk of theft;
robbery etc.

5. Essential Elements of negotiable instruments

a. It must be in writing

b. Promise to pay

c. Unconditional

d. Money only and a certain sum of money

e. Certainties of parties

f. Signed by the maker.

6. Types of Negotiable Instruments

Negotiable Instruments can be of two kinds:

1. Negotiable by Statute:

- The Act mentions only three kinds of instruments by Law, i.e. Promissory Note, Bill
of Exchange and Cheque.

2. Negotiable by Custom or Usage:

- Other than above three, all other custom and usage based locally negotiable
instruments belong to this type. Ex: - Hundis, Bankers Draft, Treasury Bill..Etc

7. Major features of negotiable instruments

Easy Transferability

A negotiable instrument is freely transferable.

Usually, when we transfer any property to somebody, we are required to make a

transfer deed, get it registered, pay stamp duty, etc.

But, such formalities are not required while transferring a negotiable instrument.

The ownership is changed by mere delivery (when payable to the bearer) or by valid
endorsement and delivery (when payable to order).

Further while transferring it is also not required to give a notice to the previous holder.

Title

Negotiability confers absolute and good title on the transferee

It means that a person who receives a negotiable instrument has a clear and
undisputable title to the instrument.

However, the title of the receiver will be absolute, only if he has got the instrument in
good faith and for a consideration.
Recovery

The holder in due course is entitled to sue on the instrument in his own name.

He need not give any notice of transfer to the person liable for payment on the
instrument.

There is no need for the transferee to inform all the parties to the instrument.

Must be in writing

A negotiable instrument must be in writing.

This includes handwriting, typing, computer printout and engraving, etc.

Unconditional Order

In every negotiable instrument there must be an unconditional order or promise for

payment.

Payment

The instrument must involve payment of a certain sum of money only and nothing
else.

For example,
- one cannot make a promissory note on assets, securities, or goods.

The time of payment must be certain

It means that the instrument must be payable at a time which is certain to arrive.

If the time is mentioned as 'when convenient' it is not a negotiable instrument.

However, if the time of payment is linked to the death of a person, it is nevertheless a

negotiable instrument as death is certain, though the time thereof is not.
The payee must be a certain person

It means that the person in whose favor the instrument is made must be named or
described with reasonable certainty.

The term 'person' includes individual, body corporate, trade unions, even secretary,
director or chairman of an institution.

The payee can also be more than one person.

Signature

A negotiable instrument must bear the signature of its maker.

Without the signature of the drawer or the maker, the instrument shall not be a valid
one.

Delivery

Delivery of the instrument is essential.

Any negotiable instrument like a cheque or a promissory note is not complete till it is
delivered to its payee.

For example,
- you may issue a cheque in your brother's name but it is not a negotiable instrument
till it is given to your brother.

Stamping

Stamping of Bills of Exchange and Promissory Notes is mandatory.

This is required as per the Indian Stamp Act, 1899.

The value of stamp depends upon the value of the pro-note or bill and the time of their
payment.

Right to file suit

The transferee of a negotiable instrument is entitled to file a suit in his own name for
enforcing any right or claim on the basis of the instrument.
 Notice of transfer

It is not necessary to give notice of transfer of a negotiable instrument to the party

liable to pay.

Number of transfer

These instruments can be transferred indefinitely till they are at maturity.

Rule of evidence

These instruments are in writing and signed by the parties, they are used as evidence
of the fact of indebtedness because they have special rules of evidence.

Exchange

These instruments relate to payment of certain money in legal tender.

They are considered as substitutes for money and are accepted in exchange off goods
because cash can be obtained at any moment by paying a small commission.

8. Presumptions of Sec 118 and 119

1. Date - It is considered to have been made or drawn on the date which appears on it.
It does not matter whether the instrument is ante dated, post-dated, drawn on public
holiday, etc.

2. Time of acceptance - It’s deemed to be accepted within a reasonable time after

being made, and before maturity.

3. Time of transfer - Every transfer of a negotiable instrument is presumed to have

been made before its maturity.

4. Order of endorsement - Endorsement appear upon a negotiable instrument are

presumed to have been made in order in which they appear.

5. Holder in due course - Every holder of a negotiable instrument is presumed to be a

holder in due course.
 6. Consideration - Every negotiable instrument is presumed to be drawn, accepted
endorsed, made, or transferred for consideration.

7. Proof of protest - In a suit upon dishonored instrument, the court shall on proof
protest, presume that it was dishonored until this fact is disproved.

9. Advantages of Negotiable Instrument

One of the biggest advantages of bills of exchange is

- that the consideration between the debtor and the creditor is presumed.

So we will assume that the purchaser is in debt of the seller, the seller need not prove
this fact.
- Since, the bill has been accepted by the debtor the court will assume that such debt
legitimately exists.