CLASS

NEGOTIABLE INSTRUMENTS ACT 1881

What is a Negotiable Instrument?

Negotiable Instruments are essentially credit instruments with features of negotiability. Therefore, to clearly understand them one should first understand their commercial character. Credit is the privilege to buy now and pay later. It also includes borrowing of money now with a view to pay later. Instruments which evidence or acknowledge such credits are called Credit Instruments.

What is a Negotiable Instrument?

There are some credit instruments which are not negotiable. That is they are credit instruments but they do not have the features of negotiability. postal order is an example of such nonnegotiable credit instruments.

What is a Negotiable Instrument?

Of the negotiable instruments, some are negotiable under law (i.e. Negotiable Instruments Act of 1881). Others are negotiable because of mercantile usage and custom. Bills of exchange, promissory notes, and the cheques are the three instruments which are negotiable under law. Government of India Bonds and dividend warrants are examples of instruments which are negotiable according to usage and custom. This is so because Government of India Bonds are similar to promissory notes and dividend warrants are similar to cheques.

WHY NIs
Suppose A sells goods worth Rs. 1,000 to B on credit. The credit so allowed may be secured by means of different instruments . 1.A may draw an unconditional order on B to pay the money to himself or some other specified person, which B accepts and signs. Such an order is called a Bill of exchange. 2. B may execute an unconditional promise to pay the money to A or his order. The instrument containing the promise is called promissory note. 3. B may draw a unconditional order on his banker (with whom he has deposited money on Current Account) to pay A or his order a sum of Rs. 1,000 only. Such an order on the banker is called a cheque.

DEFINITION OF NI
13. "Negotiable instrument". (l) A negotiable instrument means a promissory note, bill of exchange or cheque payable either, to order or to bearer. Explanation (I). --- 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, and does not contain words prohibiting, transfer or indicating an intention that it shall not be transferable. Explanation (II). 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.

DEFINITION OF NI
Explanation (III), 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. (2) A negotiable instrument may be made payable to two more payees jointly, or it may be made payable in the alternative to one of two, or one or some of several payees

Definition of Negotiable Instruments - Explanation

The Negotiable Instruments Act does not define a negotiable instrument and merely states that a negotiable instruments means a promissory note, bill of exchange of cheque payable either to order or bearer (Section 13). This does not indicate the characteristics of negotiable instrument but only states that three instruments-cheque, bill of exchange and promissory note are negotiable instruments. These three instruments are, therefore, negotiable instruments by statute. Section 13 does not prohibit any other instruments, which satisfy the essential features of negotiability, to be treated as negotiable instrument

Definition of Negotiable Instruments - Explanation

Justice K.C. Willis defines a negotiable instrument as one the property in which is acquired by any one who takes it bonafide, and for value not withstanding any defect of title in the person from whom he took it. Another useful definition is given by Thomas who states that an instrument is negotiable when it is, by a legally recognized custom of trade or by law, transferable by delivery or by endorsement and delivery, without notice to the party liable, in such a way that a) the holder of its for the time being may sue upon it in his own name, and b) the property in it passes to a bona fide transferee for value free from any defect in the title of the person from whom he obtained it.

Definition of Negotiable Instruments - Explanation

These definitions clearly reveal the true nature of a negotiable instrument. A negotiable instrument is a transferable document either by the application of the law or by custom. The special feature of such an instrument is the privilege it confers on the person who receives it bona fide and for value, to posses good title thereto even if the transferor had no title or had defective title to the instrument.

Three essential qualities of a negotiable instrument

Firstly, a negotiable instrument must be transferable, that is the property in it - the legal ownership - must be transferable by mere delivery, accompanied, in the case of an instrument payable to order, by endorsement. No instrument of transfer is required and no notice of transfer need be given to the party/parties liable on the instrument. Secondly, it must give to the person who takes it in good faith, for value and without notice of any defect in the title of the transferor, an indefeasible title against all comers. Also the title passes free from equities and counterclaims between previous parties of which the transferee has no notice.

Three essential qualities of a negotiable instrument

Thirdly, a negotiable instrument must contain a right of action in itself, the possessor of it is deemed to be the true owner capable of enforcing any claims thereon-he is under no duty to justify his title in the first instance.

Delivery
Delivery is defined as a transfer of possession from one person to another and is essential for the negotiation of a negotiable instrument. If an instrument is to be negotiable, it must be possible to pass title of the instrument and the rights embodied in it by mere delivery or by delivery and endorsement, depending upon whether it is payable to bearer or order. A document is not negotiable if title to it can only be transferred by some separate document of transfer and/or the transfer is to be recorded in some register of title as, for example, shares registered in the books of the issuing company and represented by a share certificate.

Delivery
On the other hand, a share warrant in bearer form and a bearer debenture which can be transferred by delivery, are negotiable. Delivery may be actual or constructive (Sec. 46).

Delivery
Actual delivery takes place by actual change of possession of the instrument from one person to another. The instrument must be handed over physically to whom it is actually intended to be delivered or to his authorized agent. For instance, when A, the holder of a negotiable instrument payable to bearer, delivers it to Bs agent to be kept for B, the instrument has been negotiated.

Delivery
Constructive delivery implies that the instruments is not delivered or handed over to the person to whom it is interned to be delivered but the possession of the instrument is in law deemed to have been transferred when delivery is completed by some act which change the possession in the eyes of law from the transferor to the transferee. In such a case the question of intention comes in. For example A, the holder of a negotiable instrument payable to bearer, which is in the hands of As banker directs the banker to transfer the instrument to Bs account with him. The bank on accepting the instructions now holds the instrument as an agent of B. The instrument has been negotiated and B has become the holder of it.

Mode of Transfer
The mode of transfer provided by the Negotiable, Instruments Act depends upon the character of instrument. According to Section 13 a negotiable instrument may be payable to : i) bearer, or ii) specified person or order While a bearer cheque passes by simple delivery, an order cheque passes by endorsement and delivery. An instrument is said to be payable to bearer which is simply so expressed Pay bearer, or which is expressed thus. Pay to Sham Lal or bearer.

Mode of Transfer
Or an instrument which having been made payable to a specified payee or his order has been endorsed in blank, that is, he has written nothing more than his signature. In effect, an endorsement in blank converts the order instrument into a bearer instrument. The legal right to the proceeds of a bearer cheque passes from the drawer to whoever presents it for pay.

Mode of Transfer
An instrument is payable to order which is payable to order of a specified person or which is payable to a specified person or his order. An instrument in the form of Pay to the order of A is of the same effect as one drawn payable to A or order which is payable to A or his order. With an order cheque the legal right to the proceeds of the cheque passes from the drawer to the payee. If the payee wishes it to pass to another person be must endorse the cheque to pass on the title.

Mode of Transfer
An instrument made payable to a particular person and not containing word prohibiting transfer or indicating an intention that it shall not be transferable is defined to be instrument payable to order and is negotiable. Thus, the word order or bearer are not necessary to render a cheque negotiable. For example, if a cheque is drawn Pay A without the words or order or or bearer the cheque is transferable and negotiable and not payable only to A in person.

Notice or Instrument of Transfer Not Necessary

Notice of Transfer or Instrument of Transfer Not Necessary: When a negotiable instrument, say a cheque, is endorsed to someone, there is no need for either the endorser or endorsee to inform the drawer or to complete any ancillary document. This characteristic is not true of non-negotiable instruments, as, for example, when any life insurance policy is assigned to a banker as security for an advance, notice of assignment will have to be given to the insurance company.

Transfer of Title
The phrases free from equities and perfect title occur frequently in describing the rights of a holder of a negotiable instrument. Other common phrase is free from defects of title. These phrases all have the same ultimate meaning and it is important that the meaning is grasped soundly.

Transfer of Title
An equity defence or a defect refers to a sustainable reason for disputing or refusing payment of the bill. If a cheque is issued for goods which prove to be defective or substandard, the drawer has grounds for stopping the cheque and refusing payment. This is an equity or defence against the payee. A bearer cheque which has been lost or stolen has thereafter an equity or defence attached to it. The finder or thief is a wrongful possessor.

Transfer of Title
The drawer has the right to refuse payment as the finders or thiefs title is defective. In both these instances, under the basic rule of transferability, the new holder would take the cheque subject to equities. That is he would inherit all the weaknesses in the title of his transferor and any defence or argument which could be raised against the transferee could be sustained equally well against the new holder.

Transfer of Title
A negotiable instrument gives to a party who takes it in good faith, for value and without notice of any defect in the title of the transfer, an indefeasible title against all parties and he will not be affected by any prior defect in the title. The title to the instrument passes free from defects in the title of previous parties and from all counter-claims between the parties. So paramount is the quality of conferring a good title that a party taking a stolen negotiable instrument under the conditions just mentioned would have a good title against the party from whom it has been stolen.

Transfer of Title
The recipient party and the holders of the documents subsequent to him may disregard the defects in title and enforce the document as if it were in every respect perfect.

Transfer of Title
The legal relationship between the person first bound and the person first entitled on a negotiable instrument is one of contract and in law there is a basic principle that only the immediate parties to a contract may be entitled on and be bound by it. The principle of negotiation, applicable to bills of exchange (including cheques), is an exception to the aforesaid basic principle as shown above.

Transfer of Title
Again, in law there is a principle that a person with a defective title to property may not normally give a person to whom he transfers the property a better title than he himself has. This is often expressed in the Latin maxim nemo dat quod non habet (Nobody can give what he has not got). If the transferor had a defective title, the same defective title is the only title which he could transfer. When a person obtains property from one who is dealing with it without the authority of the true owner, no title is acquired against the true owner unless the principle of estoppels operates against him. Thus, a buyer cannot get a valid title to stolen goods sold to him by the thief even if the buyers has no notice of theft. Negotiability is also an exception to this principle.

Transfer of Title
In the case of negotiable instrument, a bonafide transferee for value acquires a good title subject to his satisfying certain conditions even if the title of the transferor were defective. Such a transferee is known as a holder in due course, and he may, in fact gets a better title than the transferor. For instance, if a bearer cheque is stolen and the thief transfers it for value to an innocent third party, the latter would get a perfect title provided he qualifies as holder in due course. The transferee is generally not required to investigate the transferors title to the instrument because the negotiable instruments are intended to be dealt with speedily

Transfer of Title
Thus, it is the exception to these two principles of nemo dat quod non habet and privity that constituties the essence of negotiability. In other words, when a bill of exchange (including cheque) is negotiated (either by delivery or by delivery plus endorsement) the new holder can, under specified circumstances, take the bill free from equities arguments, disputes or reasons for refusing payment against the original holder cannot be raised against the new holder. Because of the characteristics mentioned above, negotiable instruments can pass freely from hand to hand.

Transfer of Title
The negotiability can, however, be destroyed if it contains words to that effect as, for example, in the case of cheque crossed Not Negotiable If a cheque or bill is dishonoured when presented for payment, the holder can sue on it in his own right. He does not have to claim through who transferred the instruments to him. There is right of action in the instrument itself.

Restriction on Negotiability
Generally the negotiable instruments possess all the essential features discussed above. But sometimes the drawer or the holder may take away the essential characteristic of negotiability and thus the instrument ceases to be a transferable or negotiable instrument. Examples: i) If a cheque is payable to a specific person only and not to his order or the bearer, it cannot be transferred to any other person and hence it loses its negotiability.

Restriction on Negotiability
ii) if a cheque is crossed Not Negotiable, it can be transferred but without conferring on the transferee absolute and good title in all cases. The transferee of such a cheque will stand at par with the transferee of any other commodity and shall not posses title better than that of his transferor.

PARTIES TO A CHEQUE
A Buys goods from B A does not give cash. He issues to B a cheque on his account with SBI( says Pay B or orderRs) A is the DRAWER of the cheque SBI is the DRAWEE B is the PAYEE

PARTIES TO A PROMISORY NOTE

A borrows cash of Rs. 40,000/- from B and promises that he will return it when B makes a demand. What if A does not do so? The usual method of securing repayment is through a PROMISORY NOTE A is called the PROMISOR or the EXECUTOR of the PROMISORY NOTE. B is called the PROMISEE,CREDITOR,LENDER

PARTIES TO BOE
A Buys goods from B for Rs 10,000/ A does not give cash. (So A becomes a debtor of B who is the creditor) So, B the seller draws a bill for Rs.10,000/- on A In this Bill, B can order A to pay to any person the Rs.10,000/- owed by A to him. For example C A the accepts this bill and signs it

PARTIES TO BOE
A is the DRAWER of the Bill B is the DRAWEE of the Bill B is also the ACCEPTOR of the Bill C is the PAYEE of the Bill