Basics of Negotiable Instruments Act, 1881

“A negotiable bill or note is a courier without luggage.”[1] – John B Gibson

The transaction is an important part in everyday life. For a transaction to be complete it is important to have the required documents to verify the process and authenticity of the amount. This is where we introduce you to the term ‘Negotiable Instrument’. A negotiable instrument is a signed document that promises a sum of payment to a specified person or an assignee.[2] The nature of Negotiable instruments is transferable. This is the reason behind the usage of the word negotiable is for fact the note in question can be transferred or assigned to any other party as against non-negotiable which means firmly established and cannot be adjusted or amended.[3] Section 13[4] of the Negotiable instrument does not define a negotiable instrument but classifies into 3 types-bills, notes and cheques.

History of Negotiable Instrument

The act was originally drafted in 1886 by the 3rd Indian law commission and introduced in December 1867 in the council and it was referred to a select committee.[5]Then there were objections across the country due to numerous discrepancies by the interference of English laws. The bill was redrafted in 1870 after heavy criticism from local governments, the high courts and the chamber of commerce it was redrafted by the select committee. In spite of this, the bill could not reach the final stage.[6] In 1880 it was referred to the new law commission and under their guidance, it was referred to the new law commission. Finally- the fourth draft prepared in 1881 was introduced in the council and was passed as the Negotiable instruments act of 1881.[7]

Types of Negotiable Instruments

Negotiable instruments are of various types. It has been explained in detail in the Negotiable instruments act 1881. Some of the important negotiable instruments are-

1. Promissory note

Section 4[8] of the Negotiable instruments act defines a promissory note. The most important fact about a promissory note is it is not related to the bank. It is an unconditional undertaking which is signed by the person who has drafted to pay a certain amount of money.[9] The person who makes the promise is called the maker and the person who receives the amount is called the payee.[10] Essential features are[11]

  1. It should be in writing
  2. It should be for commercial purpose
  3. Documents should be signed
  4. Amount should be definite
  5. It has to be legally valid.

In Chandrarao bhaskar’s case, the honourable high court of Andhra Pradesh held that since a promissory note is not a compulsory attestable document even if the signatures are taken after its execution it does not amount to material alteration.[12] Haribhavandas Parasaram and co V A.D Thakur[13] it was held that it is mandatory that presumption under section118(a)  shall be made should be made until the contrary is proved.

2. Cheque

A cheque is a “Bill of exchange drawn on a specified banker and not expressed to payable otherwise than on demand and it includes the electronic image of truncated cheque and cheque in the electric form.”[14]

If you have a savings account or current account in a bank, you can issue a cheque in your own name or in name of others, thus asking the bank to pay the specified amount to the particular name mentioned in the cheque.[15]There are basically four types of cheque-

  1. Open cheque
  2. Close cheque
  3. Bearer cheque
  4. Order cheque

3. Bill of exchange

A bill of exchange is a written order once used primarily in international trade that binds one party to pay a fixed sum of money to another party on demand or at a predetermined date. Bills of exchange are similar to checks and promissory notes they can be drawn by individuals or banks and are generally transferable by endorsements.[16] A bill of exchange transactions can involve up to three parties.[17] The drawee is the party that pays the sum specified by the bill of exchange. The payee is the one who receives that sum. The drawer is the party that obliges the drawee to pay the payee. The drawer and the payee are the same entity unless the drawer transfers the bill of exchange to a third-party payee. This is how it works. Bill of exchange is not much necessary these days as they are being replaced by paper currency, bank wires and debit/credit cards.[18]

The Importance of Negotiable Instruments

Negotiable instruments are very important to boost and continue our economy. It gives assurance for people with regard to their money and assets. Without the predictable laws in place that protect both the payor and payee of a negotiable instrument, our economy would not be able to function the way that it currently does.[19]


After explaining the definition, types and importance of a negotiable instrument it is important to conclude this essay with an explanation of how a negotiable instrument can be enforced. Negotiable instruments act in 1881 explains the legality and methods of enforcing a negotiable instrument.[20] Generally, anyone can enforce it when the payment is due. Parties who do not honour the terms may be considered as breaching the contract. Thus negotiable instruments play an important role in various day-to-day matters and are important to understand the basics. This will help us in becoming aware of the financial other monetary processes.

[1] Overton vs Taylor, 1846

[2] Adam Haynes, Negotiable Instrument. (16th June 2020) (Here after Haynes)

[3] Haynes (16th June 2020)

[4] Negotiable Instrument act 1881

[5] Chapter 4- Negotiable Instruments act,1881 (16th June 2020)

[6] Historical developments. (16th June 2020)

[7] Negotiable instruments (16th June 2020),the%20bearer%20of%20this%20demand.

[8] An instrument (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 to the bearer of the instrument

[9] Negotiable instruments: Meaning, types and differences. (17th June 2020)

[10] Negotiable instruments: Meaning, types and differences. (17th June 2020)

[11] What is a promissory note (17th June 2020),neither%20be%20added%20or%20subtracted.

[12] [12] Negotiable instruments: Meaning, types and differences. (17th June 2020)

[13] A.I.R 1963. MYS 107

[14] Negotiable instrument act 1881

[15] Features of a cheque. (17th June 2020)

[16] Marshall Hargrave. Bill of exchange. (17TH June 2020),drawee%20to%20pay%20the%20payee. (Here after Hargrave)

[17] Hargrave. (17th June 2020)

[18] Hargrave(17th June 2020)

[19] What is negotiable instruments? (17th June 2020) instruments.html#:~:text=The%20Importance%20of%20Negotiable%20Instruments&text=They%20allow%20people%20to%20do,delivering%20large%20amounts%20of%20cash.

[20] Negotiable instrument. (17th June 2020)

This Article is Authored by Nilesh Beliraya K, 1st Year BB.A LL.B (Hons) Student at Chnakya National Law University.

Also Read – What Are The Types Of Negotiable Instruments?

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