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‡ The law relating to negotiable instruments
is contained in the Negotiable Instruments
Act. 1881 which applies and extends to the
whole of India.

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The word negotiable¶ means ³transferable by
delivery´ and instrument means ³a written
document by which a right is created in favour
of some person or persons.
Thus, the term negotiable instrument literally
means a written document which creates a
right in favour of somebody and is freely
transferable.


‡ A negotiable instrument is a piece of paper
which entitles a person to a certain sum of
money and which is transferable from one to
another person by a delivery or by
endorsement and delivery.
Eg - Promissory note, Cheque and a Bill of
exchange, documents such as Railway or ST
Receipts; Dividend, warrants; Railway Bonds
payable etc.
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‡ Ä

 

 

 

Negotiable instrument is freely transferable.
‡  



 

 



 A
person who takes negotiable instrument bona-
fide and for value gets the instrument free
from all defects in the title. The holder in due
course is not affected by defective title of the
transferor or of any other party

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‡ 4 
  : that every negotiable
instrument, was made or drawn for
consideration.
‡ 
: that every negotiable instrument
bearing a date was made or drawn on such
date.

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‡  


: that every
accepted bill of exchange was accepted within
a reasonable time after its date and before its
maturity.
‡  

 

 : that the
endorsements appearing upto negotiable
instrument were made in the order in which
they appear thereupon.

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‡  : that a last promissory-note,
bill of exchange or cheque was duly stamped.
‡ 

 
 
: that every
holder of a negotiable instrument is holder in
due course.
‡  
 
: that every transfer of
a negotiable instrument was made before its
maturity.

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 Negotiable instruments are of two types which
areas follows:
‡ —
 

 

  

e.g. Bills of exchange, cheque and promissory
notes.
‡ —
 

  

  


  

e.g. Bank notes, exchequer bills, share warrants,
bearer debentures, dividend warrants, share
certificate.
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‡ A bill of exchange is an instrument in writing
containing an unconditional order, signed by the
maker, directing 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.
Eg - Mr. X purchases goods from Mr. Y for Rs.
1000/-
Mr. Y buys goods from Mr. S for Rs. 1000/-
Then Mr. Y may order Mr. X to pay Rs. 1000/- Mr.
S which will be nothing but a bill of exchange.
`
 A ³promissory ±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 the order of
a certain person or the bearer of the
instrument.

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‡ Promissory note is a negotiable instrument
‡ It must be in writing
‡ It is a promise to pay money only.
‡ It must be definite. The promise to pay must
be definite.
‡ It must be unconditional. Undertaking to pay
must be unconditional.
‡ It must be signed by the maker.

`
‡ Maker of the promissory note must be a certain
person and the payee must also be certain.
‡ Amount of the promissory note must be certain.
‡ Other formalities like number, date,
consideration, place etc. are generally found in
the promissory notes but they are not essential
in law.
‡ Promissory note must be properly stamped
according to the provisions of the Indian Stamp
Act, 1899.
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³A cheque is a bill of exchange drawn on a
specified banker and expressed to be payable
otherwise than on demand.´

The maker of a bill of exchange or Cheque is

called the ³Drawer"; the person thereby
directed to pay is called the "Drawee".

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‡ A cheque is a negotiable instrument.
‡ It is a bill of exchange.
‡ It is always drawn on a specified banker.
‡ It is always payable on demand.
‡ A cheque can be bearer, order or crossed

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‡ A cheque requires no acceptance in the
ordinary course of business as it is intended for
immediate payment.
‡ In case of a cheque, a drawee is always a
specified bank, a drawer is a person who draws
a cheque and who has an account in the bank
ad payee is a person to whom the amount of
cheque is made payable.

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³It is a process of transferring the ownership,
right, title, interest of a person in a negotiable
instrument to another person so as to give a
good title to the transferee and make a
transferee a holder of such instrument.´

`!
Negotiation does not mean a simple transfer.
Simple transfer may not necessarily involve the
transfer of property in the negotiable instrument
but negotiation implies the transfer of property
or ownership.
Eg -X hands over a cheque to Mr. Y here Mr. X
has negotiates the instrument.
But if he hands over a cheque to Mr. Y asking
him to keep the same in his safe, the cheque is
not negotiated to Mr. Y, Mr. Y does not become
its holder but only a bailee.
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‡ There must be transfer of a negotiable
instrument to another person.
‡ As a result of such transfer, the transferee
must become the holder of the instrument.

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‡ Negotiation by delivery ± The negotiable
Instrument is transferred by delivery, actual or
constructive.´ It is physical act of delivering
the instrument or handing over the delivery,
actual possession of the instrument is not
passed.
‡ Negotiation by endorsement and delivery ±
The negotiable Instrument payable to order is
negotiable by the holder by endorsement and
delivery thereof.
?`
³Literal meaning of the term endorsement is
writing on an instrument.´
Endorser - The person who signs on the back
or on the face of the instrument or on the
slip is an endorser.
Endorsee - The person to whom the
instrument is endorsed is called the
endorsee.

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‡ General or blank endorsement - Endorser
signs his name either on the back or face of
the instrument.
‡ Full or special endorsement - It specifies the
name of the person to whom or to whose
order the payment must be made.

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‡ Partial endorsement ± Endorsement is made
for remaining balance of payment.
‡ Conditional endorsement ± The liability of the
endorser is limited or negative.

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