Legal Aspect of

Business
Tejpal sheth

The Negotiable Instrument

Act 1881
Negotiable Instrument Act 1881

• "I promise to pay Blawan Rs. 1200 after

deducting there from any money which
he owes me." Is it valid promissory note?
Why?
Case analysis
• It is not valid promissory note.
• Promissory note is drawn with specified sum and
without any condition. Here it is conditional.
Negotiable Instrument Act 1881

• “I promise to pay Balwant Rs. 100 ten

days after my marriage with C." Is it valid
promissory note ? Why ?
Case analysis
• In the given case person promise to pay Rs.100. It is
possible that ‘person’ may never marry ‘C’ and the sum
may never become payable. Hence, the promise to pay
is conditional as it depends upon an event, which may
not happen. Hence, it is not a promissory note.
Negotiable Instrument Act 1881

• "I promise to pay B Rs. 2000 on D's

death, provided D leaves me enough to
pay that sum." Is it valid promissory
note ? Why ?
Case analysis
• It is not valid promissory note.
• Promissory note is drawn with specified sum and
without any condition. Here it is conditional.
Negotiable Instrument Act 1881

• "I acknowledge myself to be indebted to

B in Rs. 5,000, to be paid on demand, for
value received". Is it valid promissory
note ? Why ?
Case analysis
• It is valid promissory note as it is fulfilling all
elements of promissory note.
Negotiable Instrument Act 1881

• State, giving reasons, whether the following

instruments are valid Promissory notes:
• (i) X promises to pay Y, by a Promissory
note, a sum of Rs. 5,000, fifteen days after
the death of B.
• (ii) X promises to pay Y, by a Promissory
note, Rs. 5000 and all other sums, which
shall be due.
Case analysis
• Refer the provisions for Essential elements of
promissory note para 14.5 on page no. 342 of book.
(i) The payment to be made is fifteen days after the death of
B. Though the date of death is uncertain, it is certain that B
shall die. Therefore the instrument is valid.
(ii) The sum payable is not certain within the meaning of
Section 4 of the Negotiable Instruments Act, 1881- Hence
the Promissory Note is not a valid one.
Negotiable Instrument Act 1881

• Referring to the provisions of the Negotiable

Instruments Act, 1881, examine the validity
of the following Promissory Notes:
• (i) I owe you a sum of Rs.1,000. ‘A’ tells ‘B’.
• (ii) ‘X’ promises to pay ‘Y’ a sum of
Rs.10,000, six months after ‘Y’s marriage
with ‘Z’
Case analysis
(i) It is not valid promissory note.
– Since A has not made any promise to pay Rs. 1000 to B
(mere acknowledgement of indebtness does not result in a
valid promissory note). Further A has not made any
instrument in writing.
(ii) It is not valid promissory note.
– Since the promise is conditional (as Y’s marriage with Z is
not certain to happen)
Negotiable Instrument Act 1881

• An acceptor accepts a “Bill of Exchange”

but write on it “Accepted but payment will
be made when goods delivered to me is
sold.” Decide the validity.
Case analysis
• The acceptance is valid and the acceptor is liable
but it amounts to qualified acceptance. Other
party is not liable on the bill, unless it has given
its consent to t he qualified acceptance.
• However, the holder is entitled to object to
qualified acceptance, and treat the bill as
dishonored by non-acceptance, and in such a
case, all the prior parties shall be liable towards
the holder.
Negotiable Instrument Act 1881

• X, a major, and M, a minor, executed a

promissory note in favour of P. Examine
with reference to the provisions of the
Negotiable Instruments Act, the validity of
the promissory note and whether it is
binding on X and M.
Case analysis
• The promissory note is not valid.
– Negotiable instrument does not become invalid only
because of the reason that any party to the negotiable
instrument is a minor. M, minor is not liable on negotiable
instrument.
• X is liable.
– All the parties, except the minor are liable on a negotiable
instrument drawn, accepted, endorsed, or negotiated by a
minor.
Negotiable Instrument Act 1881

• Ascertain the date of maturity of a bill

payable hundred days after sight and
which is presented for sight on 4th May,
2000.
Case analysis
• In this case the day of presentment for sight is to be
excluded i.e. 4th May, 2000. The period of 100 days ends
on 12th August, 2000 (May 27 days + June 30 days +
July 31 days + August 12 days). Three days of grace are
to be added. It falls due on 15th August, 2000 which
happens to be a public holiday. As such it will fall due on
14th August, 2000 i.e. the preceding business day.
Negotiable Instrument Act 1881

• Promissory note dated 1st February,

2001 payable two months after dale was
presented to the maker for payment 10
days after maturity. What is the date of
Maturity?
Case analysis
• If a promissory role is made payable a stated number of
months after date, it becomes payable three days after the
corresponding date of months after the stated number of
months (Section 23 read with Section 22 Negotiable
Instruments Act 1881). Therefore- in this case the date of
maturity of the promissory note is 4th April, 2001.
• In this case the promissory note was presented for payment
10 days after maturity. According to Section 64 of Negotiable
Instruments Act read with Section 66, a promissory note must
be presented for payment at maturity by on behalf of the
holder. In default of such presentment, the other parties the
instrument (that is, parties other than the parties primarily
liable) are not liable to such holder. The indorser is
discharged by the delayed presentment for payment. But the
maker being the primary party liable on the instrument
continues to be liable.
Negotiable Instrument Act 1881

• A bill of exchange is drawn payable to X

or order. X indorses it to Y, Y to Z, Z to A.
A to B and B to X. State with reasons
whether X can recover the amount of the
bill from Y. Z, A and B, if he has originally
indorsed the bill to Y by adding the words
‘Sans Recours.
Case analysis
• In the problem X, the endorser becomes the holder after
it is negotiated to several parties. Normally, in such a
case, none of the intermediate parties is liable to X. Tills
is to prevent ‘circuitry of action’. But in this case X’s
original endorsement is ‘without recourse’ and therefore,
he is not liable co Y, Z, A and B. But the bill is negotiated
back to X, all of them are liable to him and he can
recover the amount from all or any of them
Negotiable Instrument Act 1881

• The drawer, ‘D’ is induced by ‘A’ to draw

a cheque in favour of P, who is an
existing person. ‘A’ instead of sending
the cheque to ‘P’, forgoes his name and
pays the cheque into his own bank.
Whether ‘D’ can recover the amount of
the cheque from ‘A’s banker. Decide.
Case analysis
• D’s banker is not liable
– Paying banker is not liable even if it is subsequently found
that any endorsement on the cheque has been forged
provided the paying banker made the payment in due
course.
• A’s banker is not liable
– Collecting banker is not liable for any loss caused to the
true owner due to defective title of the holder provided
the colleting acted in good faith and without negligence
while collecting the amount of the crossed cheque as an
agent.
Negotiable Instrument Act 1881

• A found a negotiable instrument lying on

the road, and transferred it to B who
received it in good faith, and for
consideration. Can B recover the amount
due on the instrument?
Case analysis
• Yes B can recover amount.
• Any holder who receives the instrument from a
holder in due course gets the same free from
defects even if he had knowledge of some prior
defects.