UILS, Panjab University

UNIVERSITY INSTITUTE OF LEGAL STUDIES, PANJAB UNIVERSITY, CHANDIGARH

TOPIC: Meaning and Characteristics of Negotiable Instrument

A project report submitted as a part of internal assessment of the course B.Com. LL.B.
(Hons.) in the subject of BUSINESS LAWS-II for the session 2022-23.

SUBMITTED TO: SUBMITTED BY:

Ms. Atambir Kaur Ravneet Kaur

332/19

B.Com. LL.B. (Hons.)

Section F

8th semester

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ACKNOWLEDGEMENT
The detailed project on “Meaning and characteristics of Negotiable Instruments” would not
have been possible without the kind support and help of many individuals. I would like to
extend my gratitude to all of them.

I am highly indebted to Ms. Atambir Kaur for her guidance and constant help as well as for
providing necessary information regarding the project and also for his support in completing
the project.

I would also like to express my gratitude to my parents and friends for their kind cooperation
and encouragement which helped me in completion of this project.

A sincere thanks to all of them.

-Ravneet Kaur

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CONTENTS

Sr. no. Particulars Page no.

1. Introduction 4
o Meaning of Negotiable Instrument

2. Types of Negotiable Instrument 5-6

3. Purpose 7

4. Characteristics 8-9

5. Conclusion 10

6. References 11

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INTRODUCTION
The Negotiable Instrument Act was promulgated in the year 1881 which was introduced to
ease the growth of banking and commercial transactions. The basic purpose was to legalize the
system of negotiable instruments. The Act was enforced during British rule and to date, most
of the provisions still remain unchanged. The Ministry of Finance is the nodal organization that
regulates the system related to negotiable instruments. The process of transfers from one person
to another in dealings of monetary value in terms of legal documents is the negotiable
instrument. The legal definition of negotiable is that something can be transferable from one
party to another party by delivery so that the title shall pass with or without the endorsement to
the transferee.

MEANING

The word “negotiable” means "transferable from one person to another by mere delivery or by
endorsement and delivery, in return for consideration, and "instrument" means a written
document creating a right in favour of some person, which may be duty for another".

According to section 13 of the Negotiable Instruments Act, 1881, a negotiable instrument

can be defined as a “promissory note, bill of exchange, or cheque, payable either to order or to
bearer” Negotiable Instruments play an important role in financial transactions. A negotiable
instrument is a signed written document. The purpose of this document is to transfer the
specific amount of money to the assigned person.

The instrument bears the promise to pay the sum of money at an assigned future date or on-
demand as the case may be. One of the common examples that we can see in our day-to-day
life is a draft that is the specific amount of money payable by the payer or the personal check.
There are no certain set of fixed conditions to consider a document as the negotiable instrument;
however, for an instrument to be negotiable, it must be signed with a mark or signature, by the
maker of the instrument that is the one who issues drafts. The person who promises the amount
of money is known as the drawer of funds and the person receiving it is known as the drawee
of funds.

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TYPES
Most of the negotiable instruments can be categorized into three parts. However, there are no
explicit statements that it is limited or it must be specified into only three parts. The railway
receipts or the delivery orders are also common examples of negotiable instruments.

Promissory note- Under section 4 of the Negotiable Instrument Act, 1881- a

promissory note is defined as “an instrument in writing (not being a bank note or a
currency note) contains 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”.
This transaction generally takes place between the debtor and the creditor. The debtor
creates the instrument promising the amount of money on a specified date. The promise
to pay shall be unconditional, failing which the note shall not be called a promissory
note. The person making the note is known as the maker, and the person to whom the
such note is being made is called the payee.
Features of Promissory note:
 A promissory note should be in written form, duly signed by its maker or drawer
and duly stamped as per the Indian Stamp Act.
 It must contain an undertaking or promise to pay the amounted mentioned
therein because only acknowledgement of indebtedness is not enough to serve
the purpose.
 It must contain a consideration in monetary terms only.
 The parties involved in a promissory note must be certain.
 A promissory note should be payable either on demand or at a certain date.
 The sum payable mentioned there in the promissory note must be certain or
capable of being made certain. It means that the sum payable may be in figures
or may be such that it can be calculated.

Bills of Exchange- Under section 5 of the Negotiable Instrument Act, 1881- a bill of
exchange is defined as “an instrument in writing contains an unconditional order, signed
by the maker, directs 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”.
This is just the opposite of the promissory notes as this is an order from the creditor to
the debtor. Here, the creditor makes the instrument that instructs the debtor to pay the

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payee a certain amount of money. The person making the instrument is known as a
drawer, and the person on whom the such instrument is drawn is known as the drawee
or the acceptor.
Features of Bills of Exchange:
 It must be in writing.
 It must contain an order to pay and not a promise or request.
 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.
 It must be duly stamped as per the Indian stamp act.

Cheque- Under section 6 of the Negotiable Instrument Act, 1881- a cheque is defined
as a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand.
This is just one of the forms of bill of exchange. In this case, the drawee is a bank and
such cheques are payable on demand. The bank is instructed by the debtor to pay a
certain amount of money to the assigned payee. The person signing the cheque and
making an instruction to the bank is known as the drawer, the bank becomes the drawee,
and the person to whom payment is to be made is known as the payee.
Features of Cheque:
 In Writing: The cheque must be in writing. It cannot be oral.
 Unconditional: The language used in a cheque should be such as to convey an
unconditional order.
 Signature of the Drawer: It must be signed by the maker.
 Certain Sum of Money: The amount in the cheque must be certain.
 Payees Must be certain: It must be payable to specified person.
 Only Money: The payment should be of money only.
 Payable on Demand: It must be payable on demand.
 Upon a Bank: It is an order of a depositor on a bank

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Let us have a look at the purpose of the Negotiable Instrument Act.

Main purpose of negotiable instruments is to avoid the carriage of higher amount of money and
to reducing the risk of theft; robbery etc.

o The Act defines every subject related to the negotiable instruments for better clarity and
understanding. For example, who is the drawer, drawee, acceptor, etc are mentioned in
the various sections.
o The Act provides the penal provisions for effective implementation of the negotiable
instruments process among the parties. If any party breaches its obligation or there is
nonfulfillment of the said duty then they may be charged with offenses leading to
imprisonment.
o The Act protects the right of the parties when they discharge their obligations diligently.
o The Act mentions different conditions about the transaction systems and laid down its
specific provisions.
o The Act eliminates all kinds of discrepancies or hurdles that may arise between the
parties. In case of any dispute, the parties would have to undergo the established
provisions, and such would legally resolve the matter.
o The Act regulates the different negotiable instruments like promissory notes, Bills of
Exchanges, and cheques.

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CHARACTERISTICS
The characteristics of negotiable instruments may be described as follows:

1) Writing and signed by its maker- A negotiable instrument being an instrument must be
in writing and signed by its maker. Therefore an oral promise to pay certain sum at a
future date without any written document is not enforceable in the eyes of law.
Similarly, if the maker doesn’t sign the instrument, it is not a valid negotiable
instrument.

2) Unconditional- A negotiable instrument contains an unconditional promise or order to

pay some money. Therefore if payment of money is conditional to the completion of
some condition, then, it is not a valid negotiable instrument.

3) Fixed sum of money- A negotiable instrument is a promise to pay a fixed sum of money
only, which may include interest at a fixed rate. Any promise to pay an uncertain sum
will not make a valid negotiable instrument.

4) Transferable- A negotiable instrument is transferable easily from one person to another

any number of times. The instrument is freely transferable, either by delivery when it
is payable to the bearer of the document, or by endorsement and delivery when the
document is payable to order. Transferability is an essential feature of negotiable
instruments, but all transferable instruments are not negotiable instruments.

5) Absolute and Good Title- The transferee of a negotiable instrument who receives it in
good faith and for value gets the instrument free from all defects. He gets an absolute
and good title, irrespective of any defect in the title of the transferor. In simple words,
it means that a person who receives a negotiable instrument has a clear and undisputable
title to the concerned instrument.

6) Right to recovery- The transferee has a right to recovery, i.e., he can sue on the
instrument in his own name to enforce his rights. Moreover he need not give any notice
of transfer to the party liable on the instrument.

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7) Essence of Delivery- It is essential that the instrument must be delivered. Any

negotiable instrument, such as, a cheque or a promissory note is incomplete till it is
delivered to its payee.

8) Exchange- The negotiable instruments are concerned with the payment of certain
money in legal tender, and hence they are regarded as substitutes for money and are
accepted in exchange of goods because these are easily converted into cash by
discounting and re- discounting.

9) Stamping- The stamping of Bills of Exchange and Promissory Notes is mandatory by

law. The respective instrument must be duly stamped as per the Indian Stamp Act, 1899.
Moreover, the value of stamp will depend upon the value of the promissory note or bill
and the time of their payment.

10) Rule of evidence- The negotiable instruments are in written form and duly signed by
the parties, and therefore, they can be used as evidence of the fact of indebtness in the
court of law because they have special rules of evidence.

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CONCLUSION
Negotiable instruments are vital to the economy and as recognized globally as a medium of
payment. They can be freely transferred from one person to another, which makes them more
useful, and parties can use them to meet their payment obligations. However, due care shall be
taken when writing a negotiable instrument, especially when the same is made payable to a
bearer as a person acquiring the same by unfair means can try to misuse the instrument, and
legal actions can take some time thereafter.

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REFERENCES
 https://www.educba.com/negotiable-instruments/
 https://edurev.in/t/113850/Meaning--Characteristics-of-Negotiable-Instrument-
 https://blog.ipleaders.in
 www.legalservices.com

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