Negociable Instrument

Topics: Negotiable instrument, Promissory note, Cheque Pages: 15 (4092 words) Published: April 16, 2013
Negotiable Instruments
A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, without conditions in addition to payment imposed on the payer. Cheques or promissory notes are common examples. Negotiable instruments are often defined in legislation.Although often discussed as foundational in commercial law, their modern relevance is sometimes questioned. More precisely, it is a document contemplated by a contract, which warrants the payment of money, the promise of or order for conveyance of which is unconditional; specifies or describes the payee, who is designated on and memorialized by the instrument; and is capable of change through transfer by valid negotiation (sale) of the instrument. When the instrument is transferred in accordance with certain conditions, the holder may become a holder in due course and be free from defenses which would apply to the original payee, such as defective goods or fraud. Law relating to promissory notes, bills of exchange, cheques and other negotiable instruments is codified in India under the Negotiable Instruments Act, 1881. It defines promissory note, bill of exchange, cheque, foreign instrument and negotiable instrument.

Examples of negotiable instruments

(a) Negotiable instruments recognized by statute :
i) Bills of exchange
ii) Promissory notes.
iii) Cheques.
(b) Negotiable instruments recognized by usage or custom :
i) Hundis.
ii) Share warrants.
iii) Dividend warrants.
iv) Banker’s drafts.
v) Circular notes.
vi) Bearer debentures.
vii) Debentures of Bombay port trust.
viii) Railway receipts.
ix) Delivery orders.

1)Freely Transferable:
A negotiable instrument is freely transferable which means that it can be transferred from one person to another easily and no legal formalities are necessary to be complied with a transfer. Usually, when we transfer any property to somebody, we are required to make a transfer deed, get it registered, pay stamp duty, etc. But, such formalities are not required while transferring a negotiable instrument. The ownership is changed by mere delivery (when payable to the bearer) or by valid endorsement and delivery (when payable to order). Further, while transferring it is also not required to give a notice to the previous holder. Example:S draws a bill on T as, "Pay to T Rs.80000." It is a valid negotiable instrument which is freely transferable from A to B. 2)Rights Of The Holder:

The holder of a negotiable instrument has the right to file a suit in his name for payment from all or any of the concerned parties. Holder in due course can sue in his own name without giving notice to the debtor (drawer) of his becoming holder. All prior parties are liable to him. A holder in due course can recover the full amount of the instrument. Example:C signs a negotiable instrument "I promise to B or order Rs. 100,000." It is a valid negotiable instrument where B has the right to recover Rs.100,000 from C. 3)Better Title:

This means that the title of holder is free from all defects and a person who receives a negotiable instrument has a clear and undisputable title to the instrument. However, the title of the receiver will be absolute, only if he has got the instrument in good faith and for a consideration. Also the receiver should have no knowledge of the previous holder having any defect in his title. Such a person is known as holder in due course. Example:Mr. X sold goods to Mr. Y worth Rs. 100,000 and received a promissory note in return from him. Afterwards B refused to honour promissory note claiming that the goods were not of agreed quality. i. If Mr. X sues Mr. Y on the pro-note, Mr. Y's defence is good. ii. If Mr. X negotiates pro-note to Mr. Z (who is holder in due course), Mr. Y's defence will be of no avail. 4)Promise Or Order:

Promise or Order to pay must be unconditional which means that it contains an...
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