Negotiable Instrument Act

Topics: Negotiable instrument, Cheque, Promissory note Pages: 46 (15663 words) Published: August 27, 2013
Definition of a Negotiable Instrument.
The law relating to negotiable instruments is contained in the Negotiable Instruments Act, 1881. It is an Act to define and amend the law relating to promissory notes, bills of exchange and cheques. The Act does not affect the custom or local usage relating to an instrument in oriental language i.e., a Hundi. The term "negotiable instrument" means a document transferable from one person to another. However the Act has not defined the term. It merely says that "A .negotiable instrument" means a promissory note, bill of exchange or cheque payab1e either to order or to bearer. [Section 13(1)] A negotiable instrument may be defined as "an instrument, the. property in which is acquired by anyone who takes it bona fide, and for value, notwithstan~ing any defect of title in the person from whom he took it, from which it follo~s that an instrument cannot be negotiable unless it is such and in such a state that the true owner could transfer the contract or engagement contained therein by simple delivery of instrument" (Willis- The Law of Negotiable Securities, Page 6). According to this definition the following are the conditions of negotiability: (i) The instrument should be freely transferable. An instrument cannot be negotiable unless it is such and in such state that the true owner could transfer by simple delivery or endorsement and delivery. (ii) The person who takes it for value and in good faith is not affected by the

defect in the title of the transferor.
(iii) Such a person can sue upon the instrument in his own name.

Negotiability involves two elements namely, transferability free from equities and transferability by delivery or endorsement (Mookerjee J. In Tailors Priya v. Gulab Chand, AIR 1965 Cal). But the Act recognises only three types of instruments viz., ci Promissory Note, a Bill of. Exchange and a Cheque as negotiable instruments. Howe~er, it does not mean that other instruments are not negotiable instruments provided that they satisfy the following conditions of negotiability:

1. The instrument should be freely transferable by the custom of trade.
Transferability may be by (i) delivery or (ii) endorsement and delivery. 2. The person who obtains it in good faith and for consideration gets it free from
all defects and can sue upon it in his own name.
3. The holder has the right to transfer. The negotiability continues till the
Effect of Negotiability
The general principle of law relating to transfer of property is that no one can pass a better title than he himself has (nemodat 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. Thus a bona fide transferee of negotiable instrument for consideration without notice of any defect of title, acquires the instrument free on any defect, i.e., he acquires a better title than that of the transferor. Important Characteristics of Negotiable Instruments

Following are the important characteristics of negotiable instruments: (1) The holder of the instrument is presumed to be the owner of the property contained in it.
(2) They are freely transferable.
(3) A holder in due course gets the instrument free from all defects of title of any previous holder. 4) The holder in due course is entitled to sue on the instrument in his own name. (5) The instrument is transferable till maturity and in case of cheques till it becomes stale (on the expiry of 6 months from the date of issue). (6) Certain equal presumptions are applicable to all negotiable instruments unless the contrary is proved.

Classification of Negotiable Instruments
The negotiable instruments may be classified as under:
1) Bearer Instruments

A promissory note, bill of exchange or cheque is...
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