NEGOTIABLE INSTRUMENTS ACT, 1881

• The term ‘negotiable instrument’ consists of two parts – ‘negotiable’

and ‘instrument’. The word ‘negotiable’ means ‘transferable by
delivery’ and the word ‘instrument’ means ‘a written document by
which a right is created in favour of some person’.
• Thus, a negotiable instrument means a written document whose ownership cam
be transferred by one person to another by delivery alone or by delivery and
endorsement.
• Section 13 of the NI Act defines a negotiable instrument to mean “promissory
note, bill of exchange or cheque, payable either to order or to bearer, whether
the words ‘order’ or ‘bearer’ appear on the instrument or not”.
• Though the Act recognises only three types of instruments; a promissory note, a
bill of exchange and a cheque as negotiable instrument, but it does not exclude
the possibility of other instruments which satisfy the characteristics of
negotiability, being included in the list.
• Justice Mookerjee defined negotiable instrument as the instrument “which
when transferred by delivery or by endorsement and delivery as the case
may be, passes to the transferee a good title than the transferor, provided he
is a bona fide transferee for value.”
• An instrument is a negotiable instrument if it satisfies the following
conditions :
(a) that the instrument is freely transferable like cash
(i) by delivery or (ii) by endorsement and delivery; and
(b) that it is in a form which is capable of being sued upon by the person
who holds it for the time being in his own name;
(c) that the holder has the right to transfer. The negotiability continues till
maturity.
• The general principle of law relating to transfer of property is that no one
can pass a better title than he himself has. The exceptions to this general
rule arise by virtue of statute or by custom. A negotiable instrument is one
such exception. Thus a bona fide transferee of a negotiable instrument for
consideration without notice of any defect of title, acquires the instrument
free of any defect i.e., he acquires a better title than that of the transferor.
• Negotiable instrument may be :
(a) Negotiable by statute, or
(b) Negotiable by custom or usage.

NEGOTIABLE BY STATUTE : The NI Act recognises only three instruments u/s. 13 :

(i) Promissory Notes
(ii) Bills of Exchange, and
(iii) Cheques
NEGOTIABLE BY USAGE OR CUSTOM : The instruments which have acquired the
character of negotiability by the usage or customs of trade are :
(i) Hundis
(ii) Share Warrants
(iii) Dividend Warrants
(iv) Banker’s drafts
(v) Railway Receipts (RR)
(vi) Delivery Orders.
• ESSENTIAL FEATURES OF A NEGOTIABLE INSTRUMENT :
The main features or characteristics of a negotiable instrument are :
(a) Free transferability :
The ownership or property in negotiable instruments can be transferred freely
from one person to another. In case the instrument is payable to bearer, the
property can be transferred by a mere delivery of the instrument, and if the
instrument is payable to order then the property in it can be transferred by
endorsement and delivery.
(b) Better title to transferee :
A person who takes the instrument bona fide and for value is known as a holder
in due course. The holder in due course gets a title free from all defects in the
title of the transferor. He is not in any way affected by the defect in the title of
the transferor or of any prior party. The general rule of law that ‘no one can give
a better title than that of his own’ is not applicable in case of negotiable
instruments. However, where the transferability of the instrument is restricted
(pay A only) then the title of the transferee is the same as that of the transferor.
(c) Holder is the owner :
A negotiable instrument is not affected by certain defences
which might be available against previous holders, for
example, fraud etc. provided he himself is not a party to it.
(d) Suit for recovery by transferee :
The transferee of a negotiable instrument can sue in his
own name in case of dishonour for the recovery of the
amount. He need not give any notice of transfer to the
debtor.
(e) Transferability till maturity :
The instrument is transferable till maturity and in case of
cheques, till it becomes stale (on expiry of 3 months from
the date of issue).
 TYPES OF NEGOTIABLE INSTRUMENT :
• Promissory note :
Section 4 defines a promissory note as “an instrument in writing (not being a
bank note or a currency note) 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”. A Promissory Note is also called
‘Pronote”.
There are two parties to a P/N :
(i) the person who makes or executes and promises to pay is called the “maker”
(ii) the person to whom payment is to be made is called the “Payee”.
Example : (a) I promise to pay to B or order Rs. 1000.
(b) I acknowledge myself to be indebted to B in Rs. 1000 to be paid on demand,
for value received.
(c) Mr. B, IOU Rs. 1000. (d) I promise to pay B Rs. 1000 seven days after my
marriage with C.
The instruments marked (a) and (b) are P/N while (c) and (d) are not P/N because
they are not an unconditional promise to pay.
• Bearer P/N are banned : Under section 31 of the RBI Act, 1934, no person
in India except the RBI or the Central Government can make or issue a
P/N payable to bearer. However, a P/N payable to order, if it is indorsed
in blank, it becomes payable to bearer and is a valid instrument.
• Essential characteristics of a P/N:
1. Instrument in writing : A P/N should, for its validity, be in writing. An
oral promise or an undertaking to pay is not a P/N.
2. Undertaking to pay : A P/N should contain an undertaking or a promise
to pay. It is not necessary to use the word ‘Promise’ but the words used
should clearly indicate that the maker undertakes to pay. Accordingly, a
mere acknowledgement of a debt is not a P/N. Even an implied
undertaking is insufficient.
3. The undertaking to pay is unconditional : The promise or undertaking to
pay must be definite and unconditional. The payment should not
depend upon contingencies, which may or may not happen.
4. It must be signed by the maker
5. The maker must be a certain person : The person
who is making the promise to pay must be definite.
He may be described by his name or designation. A
pronote may be made by two or more persons and
they may be liable thereon jointly or severally.
6. The amount payable must be certain.
7. The amount payable should be in money and money
only.
8. The payee must be certain : It may be made payable
to two or more payees jointly or it may be made
payable in the alternative to one of the two payees.
• Bill of Excahange :
Section 5 of the Act defines a Bill of Exchange as “an
instrument in writing containing an unconditional
order, signed by the maker, directing a certain person
to pay a certain sum of money only to, or to the order
of certain person or to the bearer of the instrument.”
A bill of exchange, therefore, is a written
acknowledgement of the debt, written by the creditor
and accepted by the debtor.
• There are usually three parties to a bill of exchange :
drawer, acceptor or drawee and payee. Drawer
himself may be the payee.
• Essential characteristics of a Bill of exchange :
1. It must be in writing.
2. It must contain an order to pay.
3. The order to pay should be unconditional
4. It must be signed by the drawer.
5. The parties to the bill of exchange must be certain and
identifiable.
6. The amount ordered to be paid must be certain.
7. The order must be to pay money and money only.
• A B/E is drawn by a creditor whereas a P/N is drawn/ written
by a debtor. There are three parties in B/E but only two in P/N.
A B/E requires acceptance of the drawee before it is presented
for payment. No acceptance is required in case of P/N.
• Cheque :
Section 6 of the Act defines a Cheque as “a bill of
exchange drawn upon a specified banker and payable on
demand.”
It is clear that a cheque is a bill of exchange but it has two
additional qualifications :
1. It is always drawn on a specified banker, and
2. It is also payable on demand.
In essence, a cheque may be defined as a written order,
signed by a customer of a Bank, directing the Bank to pay
on demand out of his account a stated sum of money to
or to the order of a specified person, or to the bearer.
• Essential Characteristics of a Cheque :
1. A cheque must be in writing.
2. Cheque is an order on a specified Bank to pay the amount.
3. The order to pay the amount must be an unconditional
order.
4. A cheque is always drawn on a Banker.
5. It must be signed by the drawer.
6. The amount ordered to be paid must be certain
7. It is always payable on demand without any days of grace.
8. A cheque requires no acceptance.
9. A cheque to be valid must be made payable to, or to the
order of a certain person or to the bearer of the
instrument.
10. A cheque may be crossed.