Negotiable Instruments Definition and Characteristics

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 Willis___ “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 recognize 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,and
  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 of the Negotiable Instruments Act,”A negotiable instrument means a promissory note, bill of exchange,or cheque payable either or order or to bearer”. “A negotiable instrument may be made payable to two or more payee jointly,or it may be made payable in the alternative to one of two,or one or some of several payees”[Section 13(2)].

Characteristics of Negotiable Instruments

1. Writing and signature: Negotiable Instruments must be written and signed by the parties according to the rules relating to promissory notes,bills of exchange and cheques. Demand Drafts are also construed as negotiable instruments in the limiting case as they have the same property as Negotiable Instruments.

2. Money: Negotiable Instruments are payable by legal tender money of India. The liabilities of the parties of Negotiable Instruments are fixed and determined in term of legal tender money.

3. Freely Transferability: The property in a negotiable instrument is freely transferable. They can be transferred from one person to another by a simple process. In the case of order instruments,two things are required for a valid transfer:Endorsement and delivery.

4. Title of Holder Free from all Defect: A person taking an instrument ‘bona fide’ and ‘for value’ or the transferee of a negotiable instrument,when he fulfills certain conditions, Known as a holder in due course,gets the instrument free from all defects in the title of the transferor. The holder in due course gets a good title to the instrument even in cases where the title of the transfer is defective. He is not in any way affected by any defect in the title of the transferor or of any prior party.

5. 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.

6. Presumptions: A negotiable instrument is always subject to certain presumptions. They will be applicable unless countrary is proved.

7. Special Procedure: A special procedure is provided for suits on promissory notes and bills of exchange. A decree can be obtained much more quickly than it can be ordinary suits.

8. Popularity: Negotiable instruments are popular in commercial transactions because of their easy negotiability and quick remedies.

9. Evidence: A document which fails to qualify as a negotiable instrument may nevertheless be used as evidence of the fact of indebtedness.

Examples of Negotiable Instruments

The following instruments have been recognized as negotiable by statute or by usage or custom:

 

  1. Bill of exchange.
  2. Promissory notes.
  3. Cheques.
  4. Government promissory notes.
  5. Treasury bills.
  6. Dividend warrants.
  7. Share warrants.
  8. Bearer debentures.
  9. Port trust of improvement Trust debentures.
  10. Hundis.
  11. Railway bonds payable to bearer.

Examples of Non-Negotiable Insteruments

  1. Money orders.
  2. Postal orders.
  3. Fixed deposit receipts.
  4. Share certificates.
  5. Letter of credit.