Negotiable Instruments Act,1881

1. Negotiable Instruments: The word negotiable means “transferable from one person to another in return for consideration” and instrument means “written document by which a right is created in favor of some person”. Thus, a Negotiable Instrument is a document which can be used to secure the payment of money. It is transferable by mere delivery or by endorsement and delivery. Delivery means to hand-over the document. Endorsement means to sign the document for the purpose of negotiation. For EX: Promissory notes, cheques etc.

2. Non-Negotiable Instrument: In the case of non-negotiable instruments, negotiability is restricted. The ownership of these instruments can be transferred only after fulfilling certain legal condition. For EX: Share warrants, postal orders,bill of landing.

The law relating to ‘Negotiable Instruments’ is contained in the Negotiable Instruments Act,1881. This law is based almost entirely on the principles of the mercantile law of England’. The Act applies to persons resident in India, whether foreigner or Indian. The provision of this Act are not applicable to hundis and other native instruments. Special customs and local usages govern such instruments. Where no such custom is established, the act will equally apply to hundis.

Commencement of Negotiable Instrument Act

This act may be called the Negotiable Instruments Act,1881 came into force on 1st March 1881. It extends to the whole of India except the state of Jammu and Kashmir. The Act deals with the law relating to three specific classes of negotiable instruments., Promissory Notes, bill of exchange and cheque. The act does not apply to:

  1. Indian Paper Currency Act 1871.
  2. The local usage relating to any instrument in an oriental language.

Definition of Negotiable Instrument

The word negotiable means ‘transferable by delivery’, and the word instrument means ‘a written document by which a right is created in favor of some person’. Thus, the term “negotiable instrument” literally means “a written document transferable by delivery”.

According to Justice Wills___” A negotiable instrument is one, the property in which is acquired by anyone who takes it bona fide and for value notwithstanding any defect of title in the person from whom he took it”.

According to Thomas___” A negotiable instrument is one which is, by a legally recognized custom of trade or bylaw:

  1. Transferable by delivery or by endorsement and delivery.
  2. Without notice to the party liable, in such a way that the holder of it for the time being may sue upon it in his own name.
  3. The property in it passes to a bona fide transferee for value free from equities and free from any defect in the title of the person from whom he obtained it”.

According to section 13(2) of the Negotiable Instrument Act they are three kinds of negotiable instruments, namely:

  1. Notes.
  2. Bills.
  3. Cheques.

negotiable instruments

Characteristics of Negotiable Instrument

  • Written and Signature: Negotiable Instrument must be written and signed by the parties according to the rules relating to promissory notes, bills of exchange and cheque.
  • Money: Negotiable instruments are payable by legal tender money of India. The liabilities of the parties of negotiable instrument are fixed and determined in terms of legal tender money.
  • Freely Transferability: The property in a negotiable instrument is freely transferable. They can be transferred from one person to another by a simple process.
  • Title of Holder Free from all Defects
  • Notice: It is not necessary to give notice of transfer of a negotiable instrument to the party liable to pay. The transferee can sue in his own name.
  • Popularity: Negotiable instrument are popular in commercial transactions because of their easy negotiability and quick remedies.
  • Evidence: A document which fail to quality as a negotiable instrument may nevertheless be used as evidence of the fact of indebtedness.

Examples of Negotiable Instruments

  • Bills of exchange.
  • Promissory notes.
  • Cheques.
  • Government promissory notes.
  • Treasury bills.
  • Dividend warrants.
  • Share Warrants.
  • Bearer debentures.
  • Hundis.
  • Railway bonds payable to bearer.

Examples of Non-Negotiable Instrument

  • Money orders.
  • Postal orders.
  • Fixed deposit receipts.
  • Share certificates.
  • Letters of credit.