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Negotiable Instruments –
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Law & Procedure
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DR. PRASHANT S. DESAI,

ASSISTANT PROFESSOR OF LAW,
HAL DPSU CHAIR IN BUSINESS LAWS,
NLSIU, BENGALURU.
Module contents
• Justification for study of ‘negotiable instruments’
• Understanding negotiable instruments
• Parties to negotiable instruments

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• Presentment
• Special provisions relating to cheques

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• Discharge from liability
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• Noting and protest
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• Presumptions and estoppels
• Offences under the act
• Foreign instruments
Justification for study

• Negotiable instruments form the backbone of

today’s complex commercial world
• Tradesmen prefer to use cheques, drafts,

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promissory notes etc., in their day to day
transactions, rather than ready cash

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• These instruments are used as mode of
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payment for almost all human activities
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(payment of salary, application cost, payment
of fees etc.,)
• Necessity of such instruments – make the
wheels of economy turn and transact-ability
increases

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Negotiable instruments – an introduction
• Might have originated from ‘negoce’ (French
word) meaning business, trade or
management of affairs

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• “negotiable is something which is legally
capable of being transferred by endorsement
or delivery, and negotiability is the legal

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character of being negotiable” – Black’s Law
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Dictionary
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• “A ‘negotiable instrument’ means a
promissory note, bill of exchange or cheque
payable either to order or to bearer” – S. 13
of NIAct, 1882
Special indicators
• It gives certain rights to the person in lawful
possession of such an instrument – which no
other instruments can ever give

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• It represents money to a great extent; and
– Does not get tainted by any defect in title at the
source so long as its acquisition is lawful – Ex: if

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the maker of the instrument commits fraud or
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forgery – the bona fide payee of the instrument is
not affected
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– It passes by delivery like cash
– Person in lawful possession of it can sue in his
own name
Kinds of negotiable instruments

• The Act deals in three kinds of instruments

1. Promissory Note;
2. Bill of Exchange; and

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3. Cheque.
• Application

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– Indian Paper Currency Act, 1871;
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– Any local usage relating any instrument in an
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oriental language
• Hundis;
• Rukka
Hundi
• The saving clause does not render the act
altogether inapplicable to hundis
• local custom overrides the statute – provided

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– It is established by the party relying on it; and
– Such local usage is not specifically nullified by the

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instrument specifically (indicating the intent of
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the parties)
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“By excluding the applicability of the Act to
instruments in oriental languages, necessary
confusion in the state of law has been

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established. The law of negotiable
instruments being closely related to the

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commercial world should be, by and large,
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uniform in its application” – Khergamvala on
Negotiable Instruments Act
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• Eleventh Report of the Law Commission of

India (1958)
• Punjab National Bank v Britannia India Ltd.,
[(2001) 106 Comp Cas 293 DB]
– “the Negotiable Instruments Act, 1881 has been

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framed in order to assimilate and record the
mercantile trade practices, prevailing as the law

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merchant in England and therefore any usage
contrary to the provisions of the said Act may not
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be upheld by a court. It is presumed that the Act
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has taken into account, all the prevailing
mercantile usages and any usage, contrary to the
provisions of the Act cannot be given effect to”
Promissory notes

“an instrument in writing containing an

unconditional undertaking, signed by the
maker, to pay a certain sum of money only to,

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or to the order of a certain person or to the
bearer of the instrument” – Sec. 4

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‘two parties’

DRAWER DRAWEE

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THE PERSON TO WHOSE
PERSON WHO DRAWS THE
FAVOUR THE PROMISSORY

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PROMISSORY NOTE
NOTE IS DRAWN
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Pro Note for a loan

Bangalore , March 24, 2007

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In consideration of loan of Rupees Five Thousands
(Rs.5,000) advanced by Mr. Avtar Singh to me, I
promise to repay the said loan of Rupees Five Thousand
with interest at 6.5% per annum to Mr. Avtar Singh or
order

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.L Pratap Singh
s/o Biswas Singh,
Resident of 222, 72 cross, 4th Main,
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Rajajinagar, 6th Block,
Bangalore-560 012
Pro Note payable on fixed date

Dharwad, March 24, 2008

I, Anand Ramappa Patil, S/o Ramappa Chendrashekhar Patil, promise to pay,

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Shri. Chandrakant P Bellad, or order the sum of Rs.50,000(Rupees Fifty Thousand
only) on the Seventh day of November two thousand eight.

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.L Anand R. Patil,
s/o Ramappa Chendrashekhar Patil,
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Resident of No. 227 “Pratap Chendra Nilaya”
College Road,
Dharwad-580 001.
Pro Note payable on instalments

Dharwad, March 24, 2008

I, Anand Ramappa Patil, S/o Ramappa Chendrashekhar Patil, promise to pay,

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Shri. Chandrakant P Bellad, or order in ten equal instalments of Rs.30,000
(Rupees Thirty Thousand) each payable on the first day of every month
commencing from the first day of every month of May 2008.

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.L Anand R. Patil,
s/o Ramappa Chendrashekhar Patil,
Resident of No. 227 “Pratap Chendra Nilaya”
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College Road,
Dharwad-580 001.
Essentials
• it must be in writing and signed by the maker;
• it must contain an unconditional and definite
promise to pay a certain sum, and nothing more;

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• it must be payable either on demand or after the
efflux of a fixed or determinable time in future;

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• It must be payable to, or to the order of a specified
person named in the note or to the bearer of the
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note;
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• most importantly, an instrument to be regarded as
promissory note must show a prima facie intention
to make such a note and it must be delivered.
Writing

• No particular form of writing

– Pen, pencil, typed, etc.,
– May be on paper or cloth etc.,

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• No need to use specifically the word ‘promise’
• Must be signed by the maker

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Undertaking to pay

• Essential is express promise to pay

• No Promissory notes

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– Mr. X, I owe you Rs.100
– I have received Rs.100 which I borrowed of you,
and I have to be accountable to you for the same

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with interest
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– Deposited with me Rs.100 to be returned on
demand
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• Good examples
– Rs.1000 balance due to you I am still indebted
and do promise to pay

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– Received from X Rs.1000 which I promise to pay
on demand with interest

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– I do acknowledge myself to be indebted to X in
Rs.1000 to be paid on demand for value received
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unconditional

• ‘Unconditionality’ is essential to achieve the

objective of ‘certainty’ of promissory note
• It is indispensable statutory requisite [Black v

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Pilcher (1909)25 TLR 497]
• Notes that are payable on contingency are not

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negotiable
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“it would perplex the commercial transactions
of mankind if paper securities of this kind
were issued out in to the world, encumbered

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with conditions and contingencies and if
persons to whom they were offered in

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negotiation were obliged to inquire when
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these uncertain events would probably be
reduced to certainty..”
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-- Lord Kenyon in Carlos v FAncourt, (1794)

5 TR 484
Examples
• I promise to pay X, Rs.5000 in installments
with a proviso that no payment shall be made
after my death

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• I promise to pay X, Rs.500 on A’s death,
provided he leaves me sufficient money to pay
the said sum

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• I promise to pay AB, Rs.500 out of money
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due to me from XY as soon as XY pays
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• I promise to pay on demand at my
convenience
Certainty regarding the sum

• Bad promissory notes

– I promise to pay A, Rs.100 and all other sums
which may be due to him

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– I promise to pay A, Rs.100 after deducting any
interest or money which he may owe me

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– I promise to pay A the proceeds of a shipment of
goods value of Rs.2000
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– I promise to pay A Rs.1000 and all fines
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according to rule
Payee must be certain

• The payee’s name may be set out in any part

of the instrument; and so long as it appears
on a reading of the whole instrument that the

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payee is specified with certainty the
instrument is a promissory note, assuming

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other requirements of the definition are
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satisfied
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Other formalities

• Must be stamped
• Although not obligatory –

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– Generally dated
– And the place of delivery is mentioned

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• There are in general two parties to a pro-note
– the maker and the payee.
• There can also be ‘Joint makers’ and ‘Joint

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Payees’

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Bill of Exchange

• “an instrument in writing containing an

unconditional order, signed by the maker,
directing a certain person to pay a certain sum

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of money only to, or to the order of a certain
person or to the bearer of the instrument”

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- Sec. 5 of NI Act
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Essentials

• Must be in writing
• Must contain an order to pay

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• Order contained in the bill shall be
unconditional
• Must be signed by the drawer

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• Drawee must be certain
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• Sum payable must be certain
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• Order to pay ‘money and money only’

• The payee must be certain
‘Three parties’

DRAWER DRAWEE/
ACCEPTOR

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ONE WHO IS DIRECTED TO
PERSON WHO MAKES AND
PAY – AFTER SIGNING

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GIVES THE ORDER TO PAY
BECOMES ‘ACCEPTOR’
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PAYEE

WHO OR TO WHOSE ORDER

THE AMOUNT OF THE
INSTRUMENT IS PAYABLE
Typical BoE (payable on demand)

RUPEES FIFTY THOUSAND

Dharwad, March 24, 2008

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Pay to Chandrakant R Bellad, or order on demand the sum of Rs.50,000 (Rupees
Fifty Thousand only).

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Anand R. Patil,

To
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Bhavesh Solanki,
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College Road,
Dharwad-580 001.
BOE shall contain an order

• Essence of BOE is an order by the drawer to

the drawee to pay the money to payee
• Polite assertion may also do

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– ‘Please pay affixed to the order’ will not be invalid
– ‘Mr. AB will much oblige Mr. CD by paying to

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the order of P’ was held to be good bill
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BoE and Pro Note compared

• The liability of the maker

– In Pro Note it is primary
– In BOE it is secondary and conditional

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• Parties
– Pro Note – two

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– BOE – three
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• BOE require specially
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– Acceptance by the drawee; and
– presentment
cheque

• “Cheque is a bill of exchange drawn on a

specified banker and not expressed to be
payable otherwise on demand and it includes

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the electronic image of the truncated cheque
and a cheque in the electronic form”

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- Sec. 6 of NI Act
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• There are two explanations
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– Explaining – ‘a cheque in the electronic form’
and ‘a truncated cheque’; and
– Clearing house for the purpose of this section
Broadening the definition of ‘cheque’
in 2002
• The definition broadened to include
– electronic image of a truncated cheque; and
– cheque in the electronic form

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• The Information Technology Act, 2002
recognizes

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– electronic transfers; and
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– digital signatures
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• The present amendment was intended to
tune the NI Act with Information Technology
law
‘Three parties’

DRAWER BANKER

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PERSON WHO MAKES AND ORDER IS TO A ‘BANKER’

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GIVES THE ORDER TO PAY NO NEED OF ACCEPTANCE

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PAYEE

WHO OR TO WHOSE ORDER

THE AMOUNT OF THE
INSTRUMENT IS PAYABLE
Some other considerations

• No condition attached
– Bevins v London & South Western Bank Ltd.,
(1900) 1 KB 270

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– A company issued a cheque to its bankers along
with a receipt appended thereto and with a note

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– ‘provided the receipt form at foot hereof is duly signed,
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stamped and dated’
– The cheque was held to be invalid because its
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payment was made conditional
• Cheque must be drawn upon the ‘banker’
– R. Pillai v S. Ayyar, (1920) 43 Mad. 816
– A dist. Board had its funds in a Government

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Treasury and used to withdraw money by issuing
orders in the form of a cheque;
– Ayyar J, held that “Treasury is not a bank” and

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therefore, the order was not a cheque under Sec.
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6 but a BOE u/s 5.
– The learned Judge cited the definition by Hart
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that, “a banker is one who in the ordinary course of his
business honours cheques drawn upon him by persons
from and for whom he receives money on current
accounts”
• Cheque must be payable on ‘demand’
– Therefore, a post-dated cheque is only a Bill of
Exchange and no cheque

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– But does become cheque on the date from which
it becomes payable on demand

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– A cheque may bear date of Sunday or a holiday
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• Cheque is ‘peculiar’ BoE
– “Cheque is a peculiar sort of instrument, in many
respects resembling a BOE, but in some entirely

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different. A cheque does not require acceptance,
in ordinary course it is never accepted; it is not
intended for circulation, it is given for immediate

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payment; it is not entitled to days of grace…”
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- Parke B in Ramchurn Mullick v
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Luchmeechund Radhakissen