Introduction
The Negotiable Instruments Act was enacted, in the year 1881 and came into force on 1st March 1882, in India. The main objective of the act was to give legal protection to mercantile instruments and the main source of this act was English common law. It applies to the whole of India except the State of J & K.
Meaning of Negotiable Instruments
The word ‘negotiable’ means transferable i.e., that can be transferred from one person to another and the term ‘instrument’ means ‘any written document’ by which a right is created in favor of some person. Thus, the negotiable instrument is freely transferable written documents. This instruments are used for commercial transactions and monetary dealings.
Definition:
The definition of negotiable instruments is given under section 13 of the Negotiable Instruments Act, 1881 which states that:-
A ‘negotiable instrument’ means a promissory note, bill of exchange or cheque payable either to order or to bearer.
Promissory Note [Section 4]
A promissory note is a written instrument that includes promise signed by a person to pay a certain sum of money to a certain person or to the bearer of that instrument. The one who makes the promissory note and promises to pay a certain sum of money is called the maker. And the person to whom the payment is to be paid is called the payee.
For example
Raj Kumar promises to pay Rs.30,000 to Inderpal Singh. Here Raj Kumar is the drawer or maker and Inderpal Singh is the drawee or payee to whom payment is to make.
Bill of exchange [Section 5]
A form was written by one person and accepted by another person on which a certain amount of money is ordered. It is called the bill of exchange.
For example
Jatin sold goods to Rahul on credit for Rs. 20,000 for 2 months. To ensure payment on due date Jatin draws a bill of exchange upon Rahul for
Rs. 20,000 payable after 2 months. After Rahul writes the word “accepted” on it and append his signature thereto communicate his acceptance, it becomes a bill of exchange.
Here Jatin is the drawer of the bill and Rahul is the drawee of the bill.
Cheque [Section 6]
It is an exchange bill that is drawn on a specified bank and which is not declared payable in any manner other than due on demand. It is also called a money order. There are different types of checks such as Bearer Cheque, Order Cheque, Crossed Cheque, Account payee Cheque, Stale Cheque, Post-dated Cheque, Ane dated Cheque.
For example
Priya has a savings account in the State Bank of India. She wanted to make payment of Rs.200,000 to Kajal. Priya gave a cheque to Kajal, writing her name on the cheque. Kajal will present the cheque to HDFC bank and she will get the cash.
Essential features of Negotiable Instruments
- They are easily and freely transferable. Just by a mere process of delivery, the property in negotiable instruments gets delivered.
- All negotiable instruments must be written.
- Payment must be at a specified time and should be certain.
- The person to whom the payment is going is paid that is payee must also be certain.
Four types of Negotiable Instruments
1. Inland Instruments:
Section 11 of The Negotiable Instruments Act, deals with inland instruments. It says that promissory note, a bill of exchange or a cheque is called inland instrument if any of the following two conditions are satisfied
a) That they are drawn and made payable in India, or
If a bill is drawn in India and payable in India it is an Inland bill even if it has been endorsed in a foreign country.
b) That they are drawn on any person resident in India.
If a bill is drawn in India and drawn upon a person who is resident in India, it an inland bill and it is immaterial whether the place of payment is in India or outside India.
For example:
A bill is drawn in Delhi upon a merchant resident in New York and payable in Calcutta is an Inland instrument.
2. Foreign Instrument
Section 12 of The Negotiable Instruments Act, deals with inland instruments. It says that any instrument which is not an inland instrument is a foreign instrument. Thus a bill drawn outside India or on any person who is not a resident of India and resident of outside India is a foreign bill. Thus we can say that if the conditions of inland instruments are not fulfilled, we call it foreign instruments
These bills are usually drawn in sets to avoid the danger of loss.
Following are the examples of foreign bills:
a) A bill is drawn in India and made payable in Tehran.
b) A bill made in London and made payable in Tehran.
3. Ambiguous Instruments
Section 17 of The Negotiable Instruments Act, deals with inland instruments. It states that those negotiable instruments which possess the characteristics of promissory note under section 4 and bill of exchange under section 5, such instruments are called ambiguous instruments.
In other words, an instrument is in the form of a promissory note, but which in addition is addressed to a third person who accepts it, may be treated by the person who receives it either in a bill or a promissory note.
For example:
If in a bill the drawer and the drawee are the same person or the drawee is a fictitious person or a person having no capacity to contract, the instrument is ambiguous and the holder may treat it either as a bill or a note.
Section 18 deals with one kind of ambiguity where the amount is undertaken or ordered to be paid are stated differently in words and figures, it creates ambiguity. Thus, the amount stated in words shall be the amount undertaken or ordered to be paid.
4. Inchoate Stamped Instruments
Section 20 of The Negotiable Instruments Act, deals with inland instruments. It states that an” Inchoate stamped instrument ” is one which is an incomplete instrument. Though an instrument is signed and stamped by the drawer it is an incomplete instrument either wholly or partly.
For example
If a person does not mention the amount payable or leaves the name of payee blank or one without date, it is an incomplete instrument and thus Inchoate stamped instruments.
When a person gives to another person a blank signed and stamped paper, the latter may convert it into a negotiable instrument by filling the blanks. The liability of a person who signs and delivers a blank stamp paper arises only when the blanks are filled and the instrument is completed. However, the blanks must be filled up within a reasonable time. A signer does not incur any liability until he has delivered an instrument to another person. The liability of the signer is restricted to the amount specified therein but not exceeding the amount covered by the stamp. But no person other then holder in due course shall recover from the person delivering the instrument anything in excess of the amount intended by him to be paid thereunder.
This article is authored by Rukshana Badar, Second-Year, B.A. LL.B student at Maharishi Dayanand University
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