Negotiable Instrument

Section 13 of the Negotiable Instruments act 1881, defines a negotiable instruments as: A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.

Negotiable literally means transferable. Instrument means a document. Therefore negotiable instrument means a transferable document. However, it does not mean that an instrument in order to be valid must be negotiable. Instrument may be marked ‘not negotiable’ yet they are valid instruments and governed by the provisions of the Act.

The Act narrows down the meaning of an instrument. It regulates only three types of instruments, viz., Promissory Notes, Bills of Exchange and cheques. Bills of Exchange drawn in vernacular language (called hundis) are covered by the Act. It does not cover Bills of Lading, dividend warrants, Banker’s Drafts, etc. Hundis are generally governed by local usages and customs. These instruments have become important by custom or usage of trade. In the absence of any local usage or custom the Act applies to Hundis. If the usage or custom is inconsistent with the Act, such usage or custom will prevail and not the provisions of the Act. Scope of the Act is, therefore, very limited. The act does not affect any local usage relating to any instrument in an oriental language.

It may noted that though the act mentions only three kinds of negotiable instruments viz., bills of exchange, promissory notes and cheques, yet instruments by usage or custom may possess the characteristics of negotiability. In the absence of any custom or usage governing such instruments, provision s of the Act will be extended to such other instruments, for example, hundis, bills of lading, railways receipts etc.

In India, the Act merely regulates the issue and negotiation of bills, promissory notes and cheques, but does not provide for the transmission of rights in such instruments by operation by law or by transfer inter vivos. The Act does not affect the transfer of instruments under ordinary law otherwise than by negotiation, for example by assignment. The Act is, therefore, not exhaustive.

All negotiable instruments are chosen in action or actionable claims and are transferable under the Transfer of Property act by assignment.

Ordinarily, the transferor cannot give a better title than he himself has, ‘Nemo dat quod non habet’ for example, the transferee obtains the document with the same privileges, obligations and liabilities of the transferor. Therefore, if the transferor’s title is defective, transferee’s title will also be defective. However, negotiable instrument forms an exception to the have general rule. A bonafide transferee of a negotiable instrument for value, without notice of any defect acquires the instrument free of any defects, for example, he acquirers a better title than that of the transferor irrespective of the transferor’s title being defective.

A negotiable instrument is one which entitles the holder to the receipt of money. It gives him the right to transfer the same by mere delivery or endorsement thereon. The negotiability of the instrument continues till its maturity.

Characteristics of a negotiable instrument:

A negotiable instrument has the following characteristics:

Property: The possessor of the instrument is the holder and owner thereof. A negotiable instrument does not merely give possession of the instrument, but right to property. Whosoever gets possession of the instrument becomes its owner and is entitled to the sum mentioned there in as the holder. The complete right of ownership in a negotiable instrument passes by mere delivery where instrument is payable to bearer. Where instrument is payable to order, right of ownership passes by endorsement and delivery.

Defects in title: The holder in good faith and for value called the holder in due courses gets the instrument free from all defects of any previous holder.

Remedy: The holder can sue upon the negotiable instrument in his own name. All prior parties are liable to him. A holder in due course can recover the full amount on the instrument.

Rights: The holder in due course is not affected by certain defenses which might be available against previous holder, for example, fraud, to which he is not a party.

Payable to order: A promissory note, bill of exchange or cheque is payable to order which is expressed to be so payable, or which is expressed to be payable to a particular person. An instrument which does not restrict its transferability expressly or impliedly is negotiable whether the word ‘order’ is mentioned or not. The word ‘order’ or ‘bearer’ is no longer necessary to render an instrument negotiable. Where the instrument prohibits transfer or indicates that it shall not be transferable is nevertheless valid as between the parties thereto, but it is not negotiable instrument.

It must be noted that where a promissory note, bill of exchange or cheque, either originally or by endorsement is expressed to be payable to the order of a specified person, and not to him or his order, it is nevertheless payable to him or his order at his option.

Payable to bearer: A promissory note, bill of exchange or cheque is payable to bearer which is expressed to be so payable or on which the only or last endorsement is an endorsement in blank . It specifies that the person in possession of the bill or note is bearer of the instrument which is so expressed payable to bearer.

Payment: A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one or two, or some of several payees.

Considerations: Consideration is the case of a negotiable instrument is presumed.

Presumptions: Certain presumptions apply to all negotiable instruments. —

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