The Law Relating to

Negotiable Instrument
Negotiable Instrument : 'Negotiable' means transferable by delivery, and 'Instrument' means a written
document by which a right is created in favor of some person who is holder of it. So, Negotiable Instrument
means document transferable by delivery.
“A Negotiable instrument means a Promissory Note , Bill of Exchange or cheque Payable either to order or
to bearer.”------Sec 13(1) of Negotiable Instrument Act 1881

Essential Features of Negotiable Instrument:

• Must be written & signed by the parties.
• Must be payable by legal tender money and the sum of money must be certain.
• Must have negotiability, but the payee must be certain.
• Must contain in an order to pay.
• Should be unconditional.
• 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.
• It has the popularity in commercial transaction because of their easy negotiability and quick remedies.
• A document, which fails to qualify as a negotiable instrument, may nevertheless be used as evidence of
the fact of indebtedness.
Promissory Note : A promissory note is a negotiable instrument, containing an unconditional undertaking
signed by the maker to pay a certain sum of money only to, or to order of a certain person, or to the bearer of
the Instrument. It is not a bank note or currency. There are two parties in the promissory note; maker and the
payee.
Following essential Requisites of a promissory note:
1. The promissory note must be in writing 6. The payee must be certain
2. Must contain a promise to pay 7. Stamp
3. The promise to pay should be unconditional 8. Legal tender money
4. The promissory note must be signed by the 9. May be payable on demand or after a certain definite
maker period of time
5. The maker must be certain 10. The sum payable must be certain

Specimen:
Bill of Exchange : A Bill of Exchange is an instrument in writing containing an unconditional order, signed by
the maker, directing a 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.
Drawer: The maker of the bill of exchange
Drawee: The person who is directed to pay the bill of exchange.
Payee: The person who will receive the money
Holder: The payee who has the custody of the bill of exchange
Acceptor: When the drawee accepts the bill, the drawee becomes the acceptor.
Sometimes the name of another person is mentioned as the person who will accept the bill if the original drawee
does not accept it. Such person is called a “drawee in case of need”.

Essential elements of a bill of exchange

➢ Written
➢ Signed by the drawer
➢ Unconditional order to pay
➢ The drawer, drawee and payee must be certain and definite individuals
➢ Certain sum of money
➢ Legal tender money
➢ Stamped
➢ Payable on demand or after definite period of time
Cheque : A Cheque is a bill of exchange drawn upon a specified banker and payable to bearer or on
demand.

The essential features of cheque :

➢ Written.
➢ Signed
➢ Payable to bearer, order or on demand
➢ Sufficient funds
➢ No legal bar to cheque being hand written
➢ Tally of signature with specimen signature.
➢ Dated
➢ Time of presentation
➢ Validity (six months)
➢ Unconditional order.
➢ Certain amount of money.
➢ Transferability.
➢ Printed
➢ Types of cheque:
Open cheque: Payable in cash across the counter of the bank
Cross cheque: Two parallel lines marked across its face paid only another banker not across the counter
of the bank. A cheque can be crossed by the drawer, the holder, the bank (for collection).There are
different mode of crossed cheque.
• General crossing: Putting two parallel lines across the face
• Special crossing: Putting two parallel lines across the face along with bank name between the
parallel lines
In addition to general or specific crossing, a cheque may contain various remarks written on it. The
usual remarks are “Account Payee” and “Not Negotiable”.
• “Account Payee Only”: The words “account payee” on a cheque is interpreted as a direction
on the banker to credit the cheque to the account of the payee.
• "Not Negotiable" : A cheque marked with the words "Not Negotiable" can be transferred or
assigned by the payee. This sort of words on cheque refers that transferee of this cheque will get
the same right, as regards payment, as the transferor had. Though there are the words 'not
negotiable' written on the face of the cheque, it can be transferable by authorization of transferor
and the transferee will get same title as the transferor had.

➢ Difference between Bill of Exchange and Cheque

➢ Difference between Promissory Note and Bill of Exchange
➢ Difference between Promissory Note and Cheque
Holder :
The holder of a negotiable instrument means any person entitled in his own name to the possession
thereof and to receive or recover the amount due thereon from the parties thereto.
Holder in due course:
The holder in due course is a particular kind of holder. The holder of a negotiable instrument is Called the
'holder in due course' if he satisfies the following conditions:
1. He obtained the instrument for valuable consideration.
2. He became holder of the instrument before its maturity, i.e. before the mentioned in it became payable.
3. He had no cause to believe that any defect existed in the title of the person from Whom he derived his
title.
Right of a Holder in due course:
• Defects of instruments are eliminated.
• Unauthorized acts of an agent may be valid.
• Good title in an inchoate stamped instrument.
• Liability of prior parties to holder in due course.
• Holder can file suits in his own name.
• Acceptance of bill drawn in fictitious name.
• Unlawful instruments.
• Estoppel against denying original validity of instrument.
• Estoppel against denying capacity of payee to endorse.
• Transferee from a holder in due course.
• Acceptance: A bill of exchange is said to be accepted when the drawee puts his signature on it, thereby
acknowledge his liability under the bill. Acceptance may be either (i) general or (ii) qualified.
• Negotiation: Negotiation of an instrument is the process by which the ownership of the instrument is
transferred from one person to another.
• Indorsement: Indorsement or Endorsement means signature of the holder made with the object of transferring the
document. The person who makes the endorsement is called the Indorser.

Who can be parties to a negotiable instrument

Every person capable of contracting may bind himself and be bound by negotiable instrument. Exceptional cases-
• Minor
• Lunatic, idiot, drunken person
• Insolvent
• Corporation
• Agent
• Legal Representative

Liability of the parties:

• Maker and Acceptor
• Drawer
• Drawee of cheque
• Indorser
➢ Dishonour of a negotiable instrument:
A negotiable instrument may be dishonoured either by non-acceptance or by non-payment.
Dishonoured by Non-acceptance: when any bill of exchange is presented to the drawee for
acceptance and the drawee disagrees to give acceptance, it is known as dishonor of bill of exchange by
non-acceptance
Dishonoured by Non-payment: A negotiable instrument is dishonoured by non-payment when the
maker of the note or the acceptor of bill of exchange or the drawee of the cheque makes default in
payment upon being required to pay the same.

➢ Consequence of dishonour
Steps to be taken by the holder:
1.File suit
2.Give notice
3.Noted the instrument and protested before a notary public.

➢ Notary Public