Law of Negotiable Instruments

Chapter

9
Law of Negotiable Instruments

Copyright 2001, S.S. Gulshan

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Law of Negotiable Instruments

Introduction
Meaning of an Instrument
The term instrument means any written document by which a right is created in favour of some person. The word negotiable has a technical meaning whereby

rights in an instrument can be transferred by one person to another. Thus, a

negotiable instrument is a document by which rights vested in a person can be transferred to another person in accordance with the provisions of the Negotiable Instruments Act, 1881.

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Law of Negotiable Instruments

Meaning and definition of a Negotiable Instrument

Meaning of a Negotiable Instrument. An Instrument as referred to in the Act is a legally recognised written document, whereby rights are created in favour of one and obligations are created on the part of another. The word negotiable means transferable from one person to another either by mere delivery or by endorsement and delivery, to enable the transferee to get a title in the instrument. An instrument is called negotiable if it possesses the following features:
i. Freely transferable

ii.
iii. iv. v.
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Holders title free from defects

The holder can sue in his own name A negotiable instrument can be transferred infinitum, i.e. A negotiable instrument is subject to certain presumptions
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Law of Negotiable Instruments

Essential Elements of a Negotiable Instrument 1. It must be in writing, which includes, typing, computer print out or engraving.

2.
3. 4.

The instrument must be signed by the person who is the maker or a drawer.
There must be an unconditional promise or order to pay. The instrument must involve payment of a certain sum of money only and nothing else.

5.
6.

The instrument must be payable at a time which is certain to arrive. If it is payable when convenient the instrument is not a negotiable one.
In case of a bill or cheque, the drawee must be named or described with reasonable certainty.

Forms in which an Instrument must be Payable so as to Constitute a Negotiable Instrument are: (i) Pay A; (ii) Pay A or order; (iii) Pay to the order of A; (iv) Pay A and B; (v) Pay A or B; (vi) Pay A or bearer; (vii) Pay bearer.
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Law of Negotiable Instruments

Certain important concepts and explanations of certain terms

1. 2. 3. 4. 5. 6. 7. Ambiguous Instrument (s.17) Amount Stated differently in Figures and Words (s.18) Inchoate Stamped Instruments (s.20) Parties Standing in Immediate Relationship Presumptions as to Negotiable Instruments As to consideration As to date As to acceptance As to transfer As to the order of endorsements As to lost instruments As to holder-in-due course Capacity of Parties to the Negotiable Instrument. The capacity of a party to draw, accept, make or endorse a negotiable instrument is coextensive with his capacity to enter into contract. Copyright 2001, S.S. Gulshan
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Law of Negotiable Instruments

Promissory Notes and Bills of Exchange

Definition of a Promissory Note. A promissory note is an instrument in writing (not being a bank or a currency note) containing an unconditional undertaking, signed by the maker to pay a certain sum of money to the bearer of the instrument (s.4). Essentials of a Promissory Note 1. A promissory must be in writing. 2. It must contain an undertaking or promise to pay. 3. The promise to pay must not be conditional. 4. The promissory note must be signed by the maker. 5. The instrument must point out with certainty the maker and the payee of the promissory note, e.g., son of. resident of, etc. 6. The sum payable must be certain or capable of being made certain. 7. It cannot be payable to bearer on demand (s.31 of R. B. I. Act). Cont. 8. It cannot be crossed unlike a cheque.
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Law of Negotiable Instruments

Specimen of a Promissory Note

New Delhi 1100 01 Jan. 10, 2006 On demand [or six months after date] I promise to pay X or order the sum of rupees ten thousand with interest at 12 per cent per annum only for value received. To X Sd/-A Address. Stamp Rs 10,000

Parties to a Promissory Note 1. 2. 3. 4. 5.

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The maker The payee The holder The endorser The endorsee
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Law of Negotiable Instruments

Features of a Bill of Exchange

1.
2.

It must be in writing.
It must contain an order to pay and not a promise or request. Words, like Please pay Rs 10,000 to A on demand and oblige, do not constitute the instrument a bill of exchange.

3.
4. 5. 6. 7. 8. 9.

The order must be unconditional.

There must be three parties, viz., drawer, drawee and payee. The parties must be certain. It must be signed by the drawer. The sum payable must be certain or capable of being made certain. The order must be to pay money and money alone. The number, date and place of the bill are not essential. Oral evidence may

be obtained as to date and place of execution.

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Cont.
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Law of Negotiable Instruments

Specimen of a Bill of Exchange

Rs 10, 000
New Delhi 110 016 Jan. 13, 2006 Six months after date pay to A or order/bearer the sum of ten thousand rupees only for value received. To X Sd/-Y Address Stamp ..

Stamp Duty, Attestation and Registration of a Promissory Note and a Bill of Exchange. A promissory note as well as a bill of exchange are liable to stamp duty.

Cont.
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Law of Negotiable Instruments

Distinction between a Promissory Note and a Bill of Exchange

1. Promissory Note There are only two parties the maker (debtor) and the payee (creditor). A note contains an unconditional promise by the maker to pay the payee. No prior acceptance is needed. Bill of Exchange There are three parties the drawer, the drawee and the payee although drawer and payee may be the same person. It contains an unconditional order to the drawee to pay according to the drawers directions. A bill payable after sight must be accepted by the drawee or his agent before it is presented for payment. The liability of the drawer is secondary and conditional upon non-payment by the drawee. Notice of dishonour must be given by the holder to the drawer and the intermediate endorsers to hold them liable thereon. The maker or drawer does not stand in immediate relation with the acceptor or drawee.

2. 3.

4. 5.

The liability of the maker or drawer is primary and absolute. No notice of dishonour need be given.

6.

The maker of the note stands in immediate relation with the payee.

Kinds of Bills. Bills are of different kinds. Some of these are: (1) Inland Bills (2) Foreign Bills (3) Trade and accommodation bills (4) Time Bills (5) Demand Bills (6) Clean Bills (7) Documentary Bills. Copyright 2001, S.S. Gulshan
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Law of Negotiable Instruments

Cheques
Meaning of a Cheque. A cheque is the usual method of withdrawing money from a current account with a banker. Savings bank accounts are also permitted to be operated by cheques provided certain minimum balance is maintained.

Specimen of a Cheque

Cont.

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Law of Negotiable Instruments

Requisites of a Cheque

1.
2. 3.

Written instrument
Unconditional order On a specified banker only

4.
5. 6. 7. 8.

A certain sum of money

Payee to be certain Payable on demand Amount of the cheque Dating of cheques

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Law of Negotiable Instruments

Holder and holder in due course

Meaning. A holder in due course, on the other hand, is a person who for consideration became the possessor of a promissory note, bill of exchange or cheque.
Privileges of a Holder in Due Course

1.
2. 3. 4.

Privilege against inchoate stamped instruments

Fictitious drawer or payee Right of an endorsee from a holder in due course Estoppel against denial of validity

5.
6. 7. 8.
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Estoppel against denial of payees capacity

Presumption Prior defects (s.58) Endorser not permitted to deny the capacity of prior parties
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Law of Negotiable Instruments

Negotiation of a Negotiable Instrument

Meaning of Negotiation. The transfer of an instrument by one party to another so as to constitute the transferee a holder thereof is called negotiation. Negotiation and Assignment. The negotiation of an instrument should be distinguished from assignment. Lets first see what is assignment and what are the common points in negotiation and assignment. When a person transfers his right to receive the payment of a debt that is called assignment of the debt. Payable to bearer. An instrument is payable to bearer (1) where it is made so payable, or (2) where it is originally made payable to order but the only or the last indorsement is in blank, or (3) where the payee is a fictitious person. Endorsement. An endorsement is the mode of negotiating a negotiable

instrument. A negotiable instrument payable otherwise than to bearer can be negotiated only by indorsement and delivery. Cont.
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Law of Negotiable Instruments

Kinds of Endorsements

1.
2. 3. 4. 5. 6. 7.

Endorsement in blank
Endorsement in full Restrictive endorsement Conditional endorsement Endorsement sans recourse Facultative endorsement Partial endorsement (s.56)

Effect of Endorsement. An unconditional endorsement of a negotiable instrument followed by its unconditional delivery has the effect of transferring the property therein to the endorsee. The endorsee acquires a right to negotiate the instrument to anyone he likes and to sue all parties whose names appear on it.
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Law of Negotiable Instruments

Presentment
Presentment of a negotiable instrument is made for two purposes: (i) for
acceptance and (ii) for payment. Maturity (Ss.21-25). Cheques are always payable on demand but other instruments like bills, notes, etc., may be made payable on a specified date or after the specified period of time. The date on which payment of an instrument falls due is called maturity (s.22). Presentment for Payment. A negotiable instrument must be presented for payment to the maker, acceptor or drawee thereof, as the case may be, by the holder or his agent.

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Law of Negotiable Instruments

Dishonour
Dishonour of a Bill. A bill of exchange may be dishonoured either by nonacceptance or by non-payment. A negotiable instrument is said be dishonoured by non-payment when the maker, acceptor or drawee, as the case may be, makes default in payment upon being duly required to pay the same (s.92). Noting. Noting is a convenient method of authenticating the fact of dishonour. Where an instrument is dishonoured, the holder, besides giving the notice as referred to above, should get the bill or promissory note noted by the notary public. Protesting (s.100). The protest is the formal notarial certificate attesting the dishonour of the bill and based upon the noting. After the noting has been made, the formal protest may be drawn up by the notary at his leisure. When the protest is drawn up it relates back to the date of noting.
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Law of Negotiable Instruments

Crossing of Cheques
Meaning of Crossing. Crossing is a unique feature associated with a cheque affecting to a certain extent the obligation of the paying banker and also its negotiable character. Crossing on cheque is a direction to the paying banker by the drawer that payment should not be made across the counter.
Significance of Crossing. As payment cannot be claimed across the counter on a crossed cheque, crossing of cheques serves as a measure of safety against theft or loss of cheques in transit. Types of Crossing Specimen of general crossing

Cont.
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Law of Negotiable Instruments

Not Negotiable Crossing. We have mentioned above that crossing whether general or special may be accompanied by words not negotiable. Account Payee Crossing (A/c Payee Crossing). An A/c payee crossing signifies that the drawer intends the payment to be credited only to the payees account and in none else. The addition of A/c payee to a crossing has no legal sanctity and the paying banker may ignore such a direction without being liable for any damages. Not Negotiable, A/c Payee Crossing. The combination of not negotiable and A/c payee, crossing is the safest form of crossing. It has double advantage. The instrument is rendered not negotiable (making the paying banker responsible to see that payment is made to the person who is entitled to receive it) plus A/c payee crossing directs the collecting banker to collect it for the payee only and warns that if the amount is collected for someone else, he may be held liable for damages.
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Law of Negotiable Instruments

The Paying Banker

Payment in Due Course
1. 2. Payment must be in accordance with the apparent tenor of the instrument. Payment must be made in good faith and without negligence.

3.
4.

Payment must be made to the person in possession of the instrument.]

Payment must be made under circumstances which do not afford a reasonable ground for believing that a person is not entitled to receive payment of the amount mentioned therein.

5.

Payment must be made in money only.

Collection of Bills. Unlike cheques, a banker is not charged with the legal responsibility of collection of his customers bills. But, in fact, no commercial bank can afford to exist without providing this facility to his customers.
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Law of Negotiable Instruments

International law concerning Negotiable instruments

Liability on Foreign Instruments (s.134). In the absence of a contract to the contrary, the liability of the maker or drawer of a foreign bill, note or cheque is governed in all essential respects by the law of the place where he made the instrument. Law in Respect of Dishonour (s.135). Where an instrument is made payable in a different country from that in which it is made or endorsed, the law of the country where it is made payable determines what constitutes dishonour and what notice of dishonour is sufficient. Foreign Instruments made in Accordance with Indian Law (s.136). If a negotiable instrument is made, drawn, accepted or endorsed out of India, but in accordance with the law of India, the circumstance that any agreement evidenced by such instrument is invalid according to the law of the country wherein it was entered into does not invalidate any subsequent acceptance or endorsement made thereon in India. Presumption as to Foreign Law (s.137). The law of any foreign country regarding negotiable instruments shall be presumed to be the same as that of India unless and until the contrary is proved. Copyright 2001, S.S. Gulshan
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