NEGOTIABLE INSTRUMENTS

Exchange of goods and services is the basis of every business activity. Goods
are bought and sold for cash as well as on credit. All these transactions
require flow of cash either immediately or after a certain time. In modern
business, large number of transactions involving huge sums of money takes
place everyday. It is quite inconvenient as well as risky for either party to
make and receive payments in cash. Therefore, it is a common practice for
businessmen to make use of certain documents as means of making payment.
Some of these documents are called negotiable instruments.

Definition of Negotiable Instrument

According to section 13 of the Negotiable Instruments Act, 1881, a
negotiable instrument means
“Promissory note, bill of exchange, or cheque, payable either to
order or to bearer”.

FEATURES OF NEGOTIABLE INSTRUMENTS

1. Easy Transferability-
A negotiable instrument is freely transferable. Usually, when we
transfer any property to somebody, we are required to make a transfer deed,
get it registered, pay stamp duty, etc. But, such formalities are not required
while transferring a negotiable instrument. The ownership is changed by
mere delivery (when payable to the bearer) or by valid endorsement and
delivery (when payable to order). Further, while transferring it is also not
required to give a notice to the previous holder.

3. Must be in writing-
A negotiable instrument must be in writing. This includes
handwriting, typing, computer print out and engraving, etc.

4. Unconditional Order-
In every negotiable instrument there must be an unconditional
order or promise for payment.
5. Payment-
The instrument must involve payment of a certain sum of money
only and nothing else. For example, one cannot make a promissory note on
assets, securities, or goods.

6. The time of payment must be certain-

It means that the instrument must be payable at a time which is
certain to arrive. If the time is mentioned as ‘when convenient’ it is not a
negotiable instrument. However, if the time of payment is linked to the death
of a person, it is nevertheless a negotiable instrument as death is certain,
though the time thereof is not.

7. The payee must be a certain person-

It means that the person in whose favour the instrument is made
must be named or described with reasonable certainty. The term ‘person’
includes individual, body corporate, trade unions, even secretary, director or
chairman of an institution. The payee can also be more than one person.

8. Signature-
A negotiable instrument must bear the signature of its maker.
Without the signature of the drawer or the maker, the instrument shall not be
a valid one.

9. Delivery-
Delivery of the instrument is essential. Any negotiable
instrument like a cheque or a promissory note is not complete till it is
delivered to its payee. For example, you may issue a cheque in your brother’s
name but it is not a negotiable instrument till it is given to your brother.

15. Number of transfer-

These instruments can be transferred indefinitely till they are at

maturity.

17. Exchange-

These instruments relate to payment of certain money in legal

tender, they are considered as substitutes for money and are accepted in
exchange off goods because cash can be obtained at any moment by paying a
small commission.
 NOTES, BILLS AND CHEQUES.

According to the Negotiable Instruments Act, 1881 there are just three types
of negotiable instruments i.e., promissory note, bill of exchange and cheque.
However many other documents are also recognized as negotiable
instruments on the basis of custom and usage, like hundis, treasury bills,
share warrants, etc., provided they possess the features of negotiability.

 Promissory Note

Promissory Note, in the law of negotiable instruments, written instrument

containing an unconditional promise by a party, called the maker, who signs
the instrument, to pay to another, called the payee, a definite sum of money
either on demand or at a specified or ascertainable future date. The note may
be made payable to the bearer, to a party named in the note, or to the order of
the party named in the note.

Definition of Promissory Note

According to section 4 of the Negotiable Instruments Act, 1881, a
promissory note means
“Promissory Note is 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.”
 Features of a promissory note

1. The promissory note must be in writing-

Mere verbal promises or oral undertaking does not constitute a

promissory note. The intention of the maker of the note should be signified
by writing in clear words on the instrument itself that he undertakes to pay a
particular sum of money to the payee or order or to the bearer

2. It must contain an express promise or clear undertaking to pay-

The promise to pay must be expressed. It cannot be implied or
inferred. A mere acknowledgement of indebt ness is not enough.

3. The promise to pay must be definite and unconditional-

The promise to pay contained in the note must be unconditional. If the

promise to pay is coupled with a condition, it is not a promissory note.

4. The maker of the pro-note must be certain-

The instrument should show on the fact of it as to who exactly is

liable to pay. The name of the maker should be written clearly and
ascertainable on seeing the document.

5. It should be signed by the maker-

Unless the maker signs the instrument, it is incomplete and of no legal
effect. Therefore, the person who promises to pay must sign the instrument
even though it might have been written by the promisor himself.

6. The amount must be certain-

The amount undertaken to be paid must be definite or certain or not

vague. That is, it must not be capable of contingent additions or subtractions.
7. The promise should be to pay money-

The promissory note should contain a promise to pay money and

money only, i.e., legal tender money. The promise cannot be extended to
payments in the form of goods, shares, bonds, foreign exchange, etc.

8. The payee must be certain-

The money must be payable to a definite person or according to his

order. The payee must be ascertained by name or by designation. But it
cannot be made payable either to bearer or to the maker himself.

10. It should be dated-

The date of a promissory note is not material unless the amount is

made payable at particular time after date. Even then, the absence of date
does not invalidate the pro-note and the date of execution can be
independently proved. However to calculate the interest or fixing the date of
maturity or lm\imitation period the date is essential. It may be ante-dated or
post-dated. If post-dated, it cannot be sued upon till ostensible date.

11. Demand-

The promissory note may be payable on demand or after a certain

definite period of time.

Parties to a Promissory Note

There are primarily two parties involved in a promissory note. They are-

i. The Maker or Drawer –

The person who makes the note and promises to pay the amount
stated therein.

ii. The Payee –

The person to whom the amount is payable. In course of transfer

of a promissory note by payee and others, the parties involved may be
 OR

a. The Endorser –

The person who endorses the note in favor of another person.

b. The Endorsee –

The person in whose favor the note is negotiated by

endorsement.

 Bill of Exchange

A "bill of exchange" is 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, a certain person or to the
bearer of the instrument.

A promise or order to pay is not "conditional", within the meaning of

this section and section 4, by reason of the time for payment of the amount or
any installment thereof being expressed to be on the lapse of certain period
after the occurrence of a specified event which, according to the ordinary
expectation of mankind, is certain to happen, although the time of its
happening may be uncertain.
The sum payable may be "certain", within the meaning of this section
and section and section4, although it includes future indicated rater of
change, or is according to the course of exchange, or is according to the
course of exchange, and although the instrument provides that, on default of
payment of an installment, the balance unpaid shall become due.

The person to whom it is clear that the direction is given or that

payment is to be made may be a "certain person," within the meaning of this
section and section 4, although he is misnamed or designated by description
only.

Definition of Bill Of Exchange

According to section 5 of the Negotiable Instruments Act, 1881, defines Bill
Of Exchange as
 “A bill of exchange is 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, a certain person or to the bearer of the
instrument.”

Features of a bill of exchange

1. A bill of Exchange is an instrument in writing

2. The instrument must contain an order to pay, which is express, certain
and unconditional.
3. The drawer must be certain.
4. The drawee must be certain
5. The payee must be certain.
6. The in instrument must be duly signed by the drawer.
7. The amount of the money paid must be certain and ascertainable.
8. The payment must be in legal tender money.
9. The money must be payable to a definite person or according to his
order.
10.The bill may be payable on demand or after a specified or definite period
of time. But no one except the Reserve Bank of India (RBI) and
Government of India can draw a bill payable on demand to the bearer of
the bill.
11.It must b properly stamped as prescribed by the Indian Stamp Act.
12.It must be dated. The date of the bill necessary for the calculation of the
due date of the bill.

Parties to a Bill of Exchange

There are three parties involved in a bill of exchange. They are-

i. The Drawer –
The person who makes the order for making payment.
ii. The Drawee –
The person to whom the order to pay is made. He is generally a
debtor of the drawer.

iii. The Payee –

The person to whom the payment is to be made.

OR
a. The Endorser –

The person who endorses the bill in favor of another person.

b. The Endorsee –

The person in whose favor the bill is negotiated by

endorsement.

 Cheque

Cheque is a very common form of negotiable instrument. If you have a

savings bank account or current account in a bank, you can issue a cheque in
your own name or in favor of others, thereby directing the bank to pay the
specified amount to the person named in the cheque. Therefore, a cheque
may be regarded as a bill of exchange; the only difference is that the bank is
always the drawee in case of a cheque. The Negotiable Instruments Act, 1881
defines a cheque as a bill of exchange drawn on a specified banker and not
expressed to be payable otherwise than on demand.

Features of a cheque

1. A cheque must be in writing and duly signed by the drawer.

2. It contains an unconditional order.
3. It is issued on a specified banker only.
4. The amount specified is always certain and must be clearly mentioned
both in figures and words.
5. The payee is always certain.
6. It is always payable on demand.
7. The cheque must bear a date otherwise it is invalid and shall not be
honored by the bank.
8. A cheque must be in order to pay money only.
9. The cheque must be signed by the maker or drawer.
10. Delivery of the cheque is essential.

Parties to a cheque

i. The Drawer –
The person who makes the order for making payment.

ii. The Drawee –

The person to whom the order to pay is made. He is generally a
debtor of the drawer.

iii. The Payee –

The person to whom the payment is to be made.

OR

a. The Endorser –

The person who endorses the cheque in favour of another

person.

b. The Endorsee –

The person in whose favor the cheque is negotiated by

endorsement
  Hundis

A Hundi is a negotiable instrument written in an oriental (vernacular)

language. The term ‘Hundi’ includes all indigenous negotiable instruments
whether they are in the form of notes or bills. But they are mostly of the
nature of bills of exchange. They are virtually inland bills of exchange and
recognized by custom and law in India. The term comes from the Sanskrit
word Hund which means to collect. It means that Hundis were used as
means of collection of debts. Hundis are very popular among the Indian
merchants and indigenous bankers from ancient times.

The Negotiable Instruments act does not apply to Hundis. Hundis are
governed by the custom and usages of the locality in which they are intended
to be used. In case there is no customary rule known as to a certain point, the
court can apply the rules of the Negotiable Instruments Act. It is also open to
the parties to exclude expressively the applicability of any custom relating to
Hundis by agreement and include the provision of the Negotiable Instrument
Act.

A Hundi is a negotiable instrument by usage. It is often in the form of a bill

of exchange drawn in any local language in accordance with the custom of
the place. Some times it can also be in the form of a promissory note. A
hundi is the oldest known instrument used for the purpose of transfer of
money without its actual physical movement. The provisions of the
Negotiable Instruments Act shall apply to hundis only when there is no
customary rule known to the people.

Types of Hundis

There are a variety of hundis used in our country. Let us discuss some of the
most common ones.
Shah-jog Hundi:
This is drawn by one merchant on another, asking the latter to
pay the amount to a Shah. Shah is a respectable and responsible person, a
man of worth and known in the bazaar. A shah-jog hundi passes from one
hand to another till it reaches a Shah, who, after reasonable enquiries,
presents it to the drawee for acceptance of the payment.

Darshani Hundi:
This is a hundi payable at sight. It must be presented for
payment within a reasonable time after its receipt by the holder. Thus, it is
similar to a demand bill.

Muddati Hundi:
A muddati or miadi hundi is payable after a specified period of
time. This is similar to a time bill. There are few other varieties like Nam-jog
hundi, Dhani-jog hundi, Jawabee hundi, Jokhami hundi, Firman-jog hundi,
etc.

 CLASSIFICATION OF NEGOTIABLE INSTRUMENTS

1) Inland Instrument-
A promissory note, bill of exchange or cheque which is 1) both
drawn or made in India and made payable in India, or 2) drawn upon any
person resident in India, is deemed to be an inland instrument. A bill of
exchange drawn upon a resident in India is an inland bill irrespective of the
place where it was drawn.

2) Foreign Instrument-
An instrument, which is not an inland instrument, is deemed to
be a foreign instrument. Foreign bills must be protested for dishonor if such
protest is required by the law of the place where they are drawn. But protest
in case of inland bills is optional.

3) Insruments payable on demand-

A cheque is always payable on demand and it cannot be
expressed to be payable otherwise than on demand. A promissory note or bill
of exchange is payable on demand-
1) when no time for payment is specified in it.
2) when it is expressed to be payable ‘on demand’, or ‘at sight’ or ‘on
presentment’. The words ‘on demand’ is usually in a promissory note, the
words ‘at sight’ are in a bill of exchange.

4) Ambiguous Instrument-
When an instrument owing to its faulty drafting may be
interpreted either as a promissory note or a bill of exchange, it is called an
ambiguous instrument. Its holder has to elect once for all whether he wants to
treat it a as a promissory note or a bill of exchange. Once he does so he must
abide by his election.

 MATURITY AND DAYS OF GRACE

The maturity of a promissory note or a bill of exchange is the date on which

it falls due. Every instrument payable otherwise than ‘on demand’ is entitled
to three days of grace. These days of grace were originally allowed as a
gratuitous favor to the debtor. But now the custom of merchants has rendered
this favor as a matter of legal right.

In case of bills or notes entitled to days of grace, the ascertainment of the

date of maturity becomes important. All these instruments must be presented
for payment on the last day of grace. Where an instrument is payable by
installments, each installment is payable three days after the day fixed for the
payment of each installment.

DISHONOUR OF NEGOTIABLE INSTRUMENT

Dishonor by non- acceptance.- A bill of exchange is said to be dishonored

by non-acceptance when the drawee, or one of several drawee not being
partners, makes default in acceptance upon being duly required to accept the
bill, or where presentment is excused and the bill is not accepted.
Where the drawee is incompetent to contract, or the acceptance is qualified
the bill may be treated as dishonored.
Dishonors by non-payment.- A promissory note, bill of exchange or cheque
is said to be dishonored by non-payment when the maker of the note,
acceptor of the bill or drawee of the cheque makes default in payment upon
being duly required to pay the same.

By and to whom notice should be given.-

When a promissory note, bill of exchange or cheque is dishonored by non-
payment, the holder thereof, or some party thereto who remains liable
thereon, must given notice that the instrument has been so dishonored to all
other parties whom the holder seeks to make severally liable thereon, and to
some one of several partied whom he seeks to make jointly liable thereon.
Nothing in this section renders it necessary to give notice to the maker of the
dishonored promissory note, or acceptor of the dishonored bill of exchange
or cheque.

Mode in which notice may be given.-

Notice of dishonor may be given to a duly authorized agent of the person to
whom it is required to be given, or , where he has died, to his legal
representative, or, where he has been declared an insolvent, to his assignee,
maybe oral or written, may, if written, be sent by post, and may be in any
form, but it must inform the party to whom it is given, either in express terms
or by reasonable intendment that the instrument has been dishonored, and in
what way, and that he will be held liable thereon, and it must be given within
a reasonable time after dishonor, at the place of business or ( in case such
party has no place of business) at the residence of the party for whom it is
intended.
IF the notice is duly directed and sent by post and miscarries, such
miscarriage does not render the notice invalid.

When notice of dishonor is unnecessary.-

Notice of dishonor is necessary -
(a) when it is dispensed with by the party entitled thereto
(b) in order to charge the drawer, when he has countermanded payment
(c) when the party charged could not suffer damage for want of notice
(d) when the party entitled to notice cannot after due search be found, or the
party bound to give notice is, for any other reason, unable without any fault
of his own to give it.
(e) to charge the drawers, when the acceptors is also a drawer.
(f) in the case of a promissory note which is not negotiable.
(g) when the party entitled to notice, knowing the facts, promise
unconditionally to pay the amount due on the instrument.