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Negotiable Instruments Act, 1881,
 Negotiable Instruments Act, 1881,

It came into force on 01/03/1882

Source of NI Act : English common law

Meaning

Negotiable Instrument
(Transferable ) (Written Document)

PROF. K.K.AGRAWAL - NOTES FOR STUDETNS ONLY

Objective
The objective of the act is to define the various negotiable instruments
such a, promissory notes, bills of exchange, cheque etc. Also to prescribe
the liability in case of a failure of the instrument to fulfill its debt due to the
default on the part of the payer or to curb scrupulous practices adopted to
escape liability in respect of negotiable instruments. However, Section 138
in regard to dishonor of cheque attracts criminal liability.

The law relating to negotiable instruments is contained in the Negotiable

Instruments Act, 1881, which deals with promissory notes, bills of
exchange and cheques.The Act extends to the whole of India. The Act
came into force on first day of March. 1882.

The word "negotiable" means "transferable from

one person to another in return for consideration" and "instrument" means
a "written document by which a right is created in favour of some person."
Thus, a negotiable instrument is a document which entitles a person to a
sum of money and which is transferable from one person to another by
mere delivery or by endorsement and delivery.
Some Important Points to Note : -

Criminal liability/Penalty in Negotiable Instruments Act, 1881 is

inserted by amending it with Negotiable Instruments Act, 1988.

Another important amendment in negotiable instrument was when

the parliament enacted the Negotiable Instruments (Amendment
and Miscellaneous Provisions) Act, 2002. By this amendment 5 new
sections were inserted in the NI act. The intention of insertion of
new section is to plug the loopholes of the old act.

Recently in 2015 act is again amended and definition of cheque and

the jurisdiction of court for hearing cases has been amended.

So from above it is clear that though Negotiable Instrument act is an

a century old act but legislature has amended it from time to time as
per the need of the society at large.

PROF. K.K.AGRAWAL - NOTES FOR STUDETNS ONLY

 Definition
Sec 13 of Negotiable Instruments Act
“a negotiable instrument means a promissory note, bill of exchange or
cheque payable either to order or to bearer."

In general, In most of the acts definitions are given under section 2,

but here in case of NI act it is given in section 13

Justice Willis defines

“a negotiable instrument as one the property which is acquired by anyone

who takes it bona fide and for value notwithstanding any defect of title In the
person from whom he took it “
How many times we can negotiate the Negotiable Instrument

We can negotiate the Negotiable Instrument N number of time

till it maturity. It is negotiated by endorsement in case of order
instrument and just by mere delivery in case of bearer
instruments.

What is bearer instrument and what is order instrument?

This we will learn in upcoming sessions, but right now at

this point, first we have to learn, what definition as per act
says about the Negotiable Instrument.

PROF. K.K.AGRAWAL - NOTES FOR STUDETNS ONLY

 Types of Negotiable instruments

Instrument Negotiable by Statute (As per Section 13)

-Promissory notes (Sec 4)
-Bill of Exchange ( Sec 5)
-Cheques (Sec 6)

Instrument Negotiable by Custom or Usage (But not included in Act)

-Demand Drafts
-Hundis
-Postal Orders
-Delivery order
-Railway receipts for goods
-Etc.
Can we include Demand Drafts in Negotiable Instruments?

Yes, But it is not included in definition, as per definition of the NI act

only 3 instruments are treated as NI Act

Can we include Currency Notes in Negotiable Instruments?

No. Never

Why ?

This will be clear when we learn about promissory note and

payable to bearer and payable to demand concepts

PROF. K.K.AGRAWAL - NOTES FOR STUDETNS ONLY

Characteristics of a negotiable instrument

-Freely Transferable

-Title of holder free from all defects

-Recovery

-Presumption
 Characteristics of a negotiable instrument

-Written & Signed Document

All Negotiable instruments must be in writing. A negotiable instrument will be
considered as incomplete instrument or ineffective instrument unless it is
duly signed by the parties.

-Freely Transferable
The possessor of the negotiable instrument is presumed to be the owner of the
property contained therein. A negotiable instrument does not merely give possession
of the instrument but right to property also.
The property in a negotiable instrument passes from one person to another by
delivery if the instrument is payable to bearer, and by endorsement and delivery if it
is payable to order
 Characteristics of a negotiable instrument
-Title of holder free from all defects
-A person taking an instrument bona fide and for value, known as a holder in
due course, gets the instrument free from all defects in the title of the
transferor. He is not in any way affected by any defect in the title of the
transferor or of any prior party
-Example. S sells certain goods to B. B gives a promissory note to S for the
price. He refuses to pay the promissory note claiming that the goods are not
according to order. If S sues B on the note. B's defence is good. But if he
negotiates the note to H a holder in due course , B’s defence will be of no
avail.
-The general principle of law relating to transfer of property is that no one
can pass a better title than he himself has (nemo dat quad non-habet).
The exceptions to this general rule arise by virtue of statute or by a custom.
A negotiable instrument is one such exception which is originally a creation
of mercantile custom.
 Characteristics of a negotiable instrument

Thus a bona fide transferee of negotiable instrument for consideration

without notice of any defect of title, acquires the instrument free of any
defect, i.e., he acquires a better title than that of the transferor.

Recovery (Sue)
The holder In due course can sue upon a negotiable "Instrument in his own name )
for the recovery of the amount further he need not give notice of transfer to the party
liable on the instrument to pay.
 Characteristics of a negotiable instrument
-Title of holder free from all defects
-A person taking an instrument bona fide and for value, known as a holder in
due course, gets the instrument free from all defects in the title of the
transferor. He is not in any way affected by any defect in the title of the
transferor or of any prior party
-Example. S sells certain goods to B. B gives a promissory note to S for the
price. He refuses to pay the promissory note claiming that the goods are not
according to order. If S sues B on the note. B's defence is good. But if he
negotiates the note to H a holder in due course , B’s defence will be of no
avail.

Recovery (Sue)
The holder In due course can sue upon a negotiable "Instrument in his own name )
for the recovery of the amount further he need not give notice of transfer to the party
liable on the instrument to pay.
Recap

The objective of the act is to define the various negotiable instruments

such a, promissory notes, bills of exchange, cheque etc. Also to prescribe
the liability in case of a failure of the instrument to fulfill its debt due to the
default on the part of the payer or to curb scrupulous practices adopted to
escape liability in respect of negotiable instruments. However, Section 138
in regard to dishonor of cheque attracts criminal liability.
The law relating to negotiable instruments is contained in the Negotiable
Instruments Act, 1881, which deals with promissory notes, bills of
exchange and cheques and also with hundis (a bill of exchange in a
vernacular language) The Act extends to the whole of India. The Act came
into force on first day of March. 1882.

The word "negotiable" means "transferable from

one person to another in return for consideration" and "instrument" means
a "written document by which a right is created in favour of some person."
Thus, a negotiable instrument is a document which entitles a person to a
sum of money and which is transferable from one person to another by
mere delivery or by endorsement and delivery.
 Characteristics of a negotiable instrument

-Presumptions
Certain presumptions apply to all negotiable instruments unless contrary is proved
these are as under

Consideration - Every negotlable instrument is presumed to have been made,

dawn , accepted, endorsed, negotiated or transferred for consideration. This would
help a holder to get a decree from a court without any difficulty.

Date- Every negotiable instrument bearing a date is presumed to have been made
or drawn on such date.

Time of acceptance - When a bill of exchange has been accepted, it is

presumed that it was accepted within a reasonable time of its date and before its
maturity.

Time of transfer - Every transfer of a negotiable instrument is presumed to have

been made before its maturity.
 Characteristics of a negotiable instrument

Presumptions Cont…..

Order of endorsements- The endorsements appearing upon a negotiable

instrument are presumed to have been made in the order in which they appear
thereon.

Stamp- When an instrument has been lost it is presumed that it was duly
stamped.

Holder presumed to be a holder in due course.- Every holder of a negotiable

instrument is presumed to be a holder in due course (Sec. 118).

Proof of protest - In a suit upon an instrument which has been dishonored the
Court on proof of the protest presumes the fact of dishonour, untill such fact is
disproved.
Classification of Negotiable instrument

-Bearer or Order Instrument

-Inland or foreign instrument
-Instrument Payable on demand
-Time instrument
-Accommodation bill
-Fictitious Bill
-Escrow ( Conditional instrument whose payment depends on some condition)
-Ambiguous instrument ( interpretation is not clear whether it is bill pronote or..)
-Inchoate instrument (incomplete instrument)
- undated bill or Notes

Note:- Please check last 15 slides of last numbered file shared with you in class
for detail explanation of all the classification
 Promissory notes
A '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 order of, a certain
person, or to the bearer of the instrument (Sec. 4),

The person who makes the promissory note and promises to pay is called
the maker.

The person to whom the payment is to be made is called the payee.

Examples. A signs an instrument in the following terms:

(1) "I promise to pay B or order Rs. 1000."

(2) "I acknowledge myself to be indebted to B in Rs. 1,000 to be paid on

demand, for value received."

(3) "Mr. B. I.O.U. Rs. 1000."

(4) "I promise to pay B Rs. 1000 and all other sums which shall be due to
him."

(5) "I promise to pay B Rs. 1000 first deducting there out any money which
he may owe me."

6) "1 promise to pay B " Rs. 1000 seven days after my marriage with C."

(7) "I promise to pay B Rs. 1000 on D's death provided D leaves me
enough to pay that sum."

(8) "I promise to pay B Rs. 500 and to deliver to him my black horse on 1st
January next."

Of these only (1) and (2) are promissory notes.

 Payee
Specimen of promissory note

10,000/- Rs. Rajkot Dec 15, 2021

Six month after the date I promise to pay Mr. X or order

the sum of Ten thousand rupee, for value received.

To, Stamp
Mr. X of Rajkot
R/o Kalawad Road S/d Mr. Y

Maker/Drawer
Essential elements of a Promissory Note

-Written
-Promise to Pay
-Definite and unconditional
-Signed by the maker
-Parties must be certain
-Certain sum of money
-Promise to pay money only
-Date, time , place , consideration must be there
-It may be payable on demand or after definite period
of time
-It cannot be made payable to bearer on demand.
1. Written

The instrument must be in writing. Mere verbal commitment to pay

is not enough. Writing includes print and typewriting and may also
include written by pencil or ink.

2. Promise to pay.

The instrument must contain an express promise to pay. A mere

acknowledgment of indebtedness or implied undertaking by the use
of the word 'debt' or 'pronote' is not sufficient and it does not
constitute 'a promissory note.

For example following are not promissory note

(1) "Mr. B. I.O.U. Rs. 1000" or "Mr. B. I owe you Rs. 1000".
(2) "I am liable to B, in a sum of Rs. 1000 to be paid by instalments."
(3) "I am bound to pay the sum of Rs. 1000 which I received from you."
A receipt for money. if it does not contain express promise to pay. is
not a 'promissory note.

Example.

“ I had received Rs 1000 from Mr X on interest at the rate of 60 paise

per cent per mensem . I have. therefore. executed these few presents
by way of a promissory note so that it may serve as evidence and be
of use when needed.”
Signed by A

Held the instrument is not a promissory note as it does not contain an

express undertaking to pay the amount mentioned in it

But if the receipt is coupled with a promise to pay. it is a

promissory note.
Definite and unconditional.

The promise to pay must be definite and unconditional. If it is uncertain or

conditional the instrument is invalid.

Thus the following instruments signed by A are NOT promissory notes:

(a) "I promise to pay B a sum of Rs. 1000. when convenient or able".

(b) "I promise to pay B Rs. 1000 by installments with a proviso that no
payment shall be made after my death."

(c) "I promise to pay B Rs. 1000 when he delivers the goods."

(d) "I promise to pay B Rs. 1000 on D's death provided D leaves me
enough to pay that sum."
Signed by the maker

The instrument must be signed by the maker otherwise it is incomplete and of

no effect. Even if it is written by the maker himself and his name appears in the
body of the instrument his signature must be there. Signature means the
writing of a person's name in order to authenticate and give effect to the
contract contained in the instrument. It is at the same time essential that the
mind of the signer must accompany the signature

Certain parties

The instrument must point out with certainty as to who the maker is and who the
payee is. Where the maker and the payee cannot be identified with certainty from
the instrument itself the instrument, even if it contains an unconditional promise to
pay , is not a promissory note. The payee may sometimes be misnamed or
designated by description only, In such a case the note is valid if the payee can
be ascertained by evidence
Certain sum of money

The sum payable must be certain and must not be capable of contingent additions or
subtractions.

The following instruments signed by A are not promissory notes (as the sum payable
is not certain)

1) "I promise to pay B Rs. 1,000 and all the other sums due to him."
2) "I promise to pay B Rs. 1,000 and the fine according to the rules."
3) "I promise to pay B Rs. 1000, first deducting there out any money which he may
owe me.".
In case of amount payable with interest , if rate of interest is not certain then
instrument is valid promissory note, but if rate of interest is mentioned but total
amount of interest is not mention then it cannot invalidate the promissory note.

In Case of amount payable in installments with a provision that on default

being made in payment , the balance unpaid shall become due it is a valid
instrument.
Promise to pay money only

The payment to be made under the instrument must be in the legal tender
money of India. If the instrument contains a promise to pay something other than
money or something in addition to money it cannot be a promissory note.

Thus the following instruments signed by A are not promissory notes:

1) "I promise to pay B Rs. 1000 and deliver one quintal of Wheat"
2) "I promise to pay B in 50 shares and 25 bonds of XYZ Ltd."
(c) "I promise to deliver to B 500 bags of wheat."

Bank note or currency note is not a promissory note

This is because a bank note or a currency note is money itself. Only Reserve
Bank of India has a right to issue bank note or currency notes.

PROF. K.K.AGRAWAL - NOTES FOR STUDETNS ONLY

Formalities like number, date, place, consideration, etc

These are usually found in an instrument although they are not essential in
law. The omission of the words for value received, the place where the
Instrument is made or where it is payable or date if the date of execution of
the Instrument can be independently proved do not invalidate the
Instrument. The date of a promissory note is also not necessary unless the
amount is payable at a certain time after date. But it must bear the
necessary stamp under the Indian Stamp Act. 1899.

It may be payable on demand or, after a definite period of time

The expression 'on demand' means payable immediately or forthwith.

It cannot be made payable to bearer on demand

The Reserve Bark of India Act 1934 prohibits issue of such promissory
notes except by the Reserve Bank of India itself or the Central
Government.