The Negotiable instruments, as the name suggests, connotes those transferable instruments that help in conducting day to day financial and commercial transactions. They are instruments which are freely transferable without any hindrance whatsoever which adds onto their extreme utility in ensuring swift commercial and financial transactions. Law relating to Negotiable Instruments in India is contained in the Negotiable Instruments Act, 1881, which is British era colonial piece of legislation. However, appropriate amendments have been undertaken to tailor the legislation in consonance and accordance with the needs and wants of the contemporary era.
HISTORICAL EVOLUTION OF THE LAW OF NEGOTIABLE INSTRUMENTS IN INDIA
In India, it would not unreasonable to state that the Negotiable Instruments have been in usage from a long time before the advent of the British rule. Although, before the Britishers, the practice was not well codified but was more of a customary mercantile practice. It is pertinent to note that the word “hund” is vernacularly used to describe instruments of exchange or instruments that are freely transferable. The word “hundi” has its roots in Sanskrit language, which means “to collect” and thus sufficiently expresses the purposes for which instruments were used at the time of their origin before the advent of Britishers.
When the Britishers came and they started trading in India, there commercial and financial transactions saw a major surge and such highly level and frequent transactions could not be sufficed by coins, they therefore felt the need for applying the English system of Negotiable Instruments here in India as well through the medium of courts as there was no codified law relating to Negotiable Instruments in India. Therefore, the courts of the day applied the English system of law on the touchstone of the principle of justice, equity and good conscience.
In 1866 the Indian Law Commission drafted the Negotiable Instruments Bill which was introduced before the council. However, there were certain lapses in the Bill and it was thereafter sent to the Standing Committee which proposed certain recommendations. Thereafter, a new Law Commission was setup which adopted majority of the recommendations of the Standing Committee and prepared a new draft of the Bill. The Bill, after being passed by the council, received the assent on 9th December, 1881 and came into force on 1st March, 1882 as the Negotiable Instruments Act, 1881.
DEFINITION AND MEANING OF THE NEGOTIABLE INSTRUMENTS
Upon dissection of the terms “Negotiable” and “Instruments”, it may be observed that the literal meaning of “Negotiable” is “Transferable” and term “Instruments” is used to connote a “written document”.
Justice Willis: “A Negotiable Instrument is one, the property in which is acquired by anyone who takes in bona fide and for value notwithstanding any defect of title in the person from whom he took it”.
Section 13 of the Negotiable Instruments Act, 1881:
‘‘Negotiable instrument”. —
(1) A “negotiable instrument” means a promissory note, bill of exchange or cheque payable either to order or to bearer.
Explanation (i). —A promissory note, bill of exchange or cheque is payable to order which is expressed to be so payable or which is expressed to be payable to a particular person, and does not contain words prohibiting transfer or indicating an intention that it shall not be transferable.
Explanation (ii). —A promissory note, bill of exchange or cheque is payable to bearer which is expressed to be so payable or on which the only or last endorsement is an endorsement in blank.
Explanation (iii). —Where a promissory note, bill of exchange or cheque, either originally or by endorsement, is expressed to be payable to the order of a specified person, and not to him or his order, it is nevertheless payable to him or his order at his option.
(2) A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one of two, or one or some of several payees.
SALIENT FEATURES OR ESSENTIAL CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS
Broadly the Negotiable Instruments can be said to have the following Characteristics:
Writing: As Negotiable Instruments is an Instrument; therefore, it is essential that it should be written. Oral promise would not suffice. Except for Cheque, there is no particular form in which Promissory Notes or Bill of Exchange should be written.
Negotiability: Negotiability connotes “transferability”. It must be noted here that there is a fundamental difference between the transfer of Property and transfer of a Negotiable Instrument. Negotiable Instruments are an exception to the principle of “nemo dat quad non habet” i.e., no one can transfer a better title than he himself has.
Money is the Subject Matter: Negotiable Instruments tend to involve a certain of sum of money to which the holder of the Instrument is entitled to receive from the other party who is liable to pay. Promissory Note contains a “promise to pay” whereas the Bill Exchange and Cheque contains an “order to pay”.
Title Acquisition: In case the holder of Instrument has acquired it for consideration in good faith and without notice of any defect in the title earlier, he acquires a better title than the person who has no title or whose title is defective.
Ownership: The holder of Instrument becomes the legal owner of the Instrument and has certain rights over it, such as the right to possession of the Instrument, the right to negotiate it, the right to enforce the claim provided under the Instrument.
Presumption of Consideration: As Negotiable Instruments involve a certain sum of money that is to be paid therefore there is a Presumption as existence of a Consideration under the Negotiable Instrument. This Presumption has been statutorily recognized under Section 118(a) of the Negotiable Instrument Act, 1881.
KINDS OF NEGOTIABLE INSTRUMENTS
Section 13 of the Negotiable Instruments Act, 1881 provides for definition of Negotiable Instruments and states that it includes the following:
- Promissory Note
- Bill of Exchange
V.1. PROMISSORY NOTE
It has been defined under Section 4 of the Negotiable Instruments Act, 1881 as:
“an instrument in writing (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.”
Essentials of a Promissory Note
Writing: As is essential for any Negotiable Instrument, Promissory Note must be in writing. An oral promise to pay would not be considered to be an Instrument for the purposes of the Act. However, it must be noted that there is no prescribed or fixed format of a Promissory Note, but it requires a Promise to pay that must flow from the words written on the Instrument as well as the Intention of the maker.
Undertaking to Pay: There must be an express undertaking to pay a certain sum of money. A mere acknowledgement of the debt would not constitute a Promissory Note.
Promise to Pay must be Unconditional: The promise to pay by the maker of the Instrument must be an Unconditional one. It should not be subject to any condition.
Sum to be certain: Sum mentioned over the Instrument must be certain and not subject to contingency.
Discharged with Money Only: Sum under the Instrument ought to be discharged with money only and not in any other way to be a Promissory Note.
Stamped: It must be stamped in accordance with Section 49 of the Indian Stamp Act, 1899. Stamp duty is subject to value of the Instrument.
V.2. BILL OF EXCHANGE
It has been defined under Section 5 of the Negotiable Instruments Act, 1881 as:
“an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.”
Essential of a Bill of Exchange
Writing: As it is an Instrument, it must be written down.
An Order of Payment: Bill of Exchange contains an Order of Payment by the Maker/Drawer of the Instrument to a certain person to pay a sum of money certain another person. It may be in the form of request, but should be an imperative one.
Unconditional Order & Money Only: The order to pay must be an Unconditional one and to be paid in Money only.
Stamped & Signed: Stamp Duty according to value mentioned. It must be signed by Maker/Drawer.
It has been defined under Section 6 of the Negotiable Instruments Act, 1881 as:
“a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.”
It can be said that “All Cheques are Bills but all Bills are not Cheques.”
Writing: An indispensable requirement of any Instrument.
Order to Pay: The Drawer/Maker of Cheque makes an Order to the Drawee Bank for payment of certain sum of money to Payee.
Unconditional Order & Money Only: Order to pay must not be subject to any Contingency and is to be paid or discharged by money only.
Signed and Payable on Demand: Cheque must be signed by the Maker/Drawer and is always Payable on Demand.
It may be observed that Negotiable Instruments have revolutionized the way financial or commercial transactions are undertaken. However, nowadays we also have electronic transactions that have further eased the manner of undertaking transactions but the prominence of Negotiable Instruments can never be ignored as they came at a junction when the demand from the mercantile sector for a safer and sounder medium for larger and bulkier transactions surged and this demand was then fulfilled by the Negotiable Instruments only.
Author(s) Name: Rahil Setia (Army Institute of Law)