Negotiable Instruments Act,1881

Negotiable Instruments Act,1881 

Meaning:

According to Section 13 (a) of the Act, “Negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer, whether the word”order ” or” “ bearer” appears on the instrument or not.” In the words of Justice Willis, “A negotiable instrument is one, the property in which is acquired by anyone who takes it bonafide and for value notwithstanding any defects of the title in the person from whom he took it”. 

Thus, the term, negotiable instrument means a written document which creates a right in favor of some person and which is freely transferable. Although the Act mentions only these three instruments (such as a promissory note, a bill of exchange and cheque), it does not exclude the possibility of adding any other instrument which satisfies the following two conditions of negotiability: 

1. the instrument should be freely transferable (by delivery or by endorsement. and delivery) by the custom of the trade;and 

2. the person who obtains it in good faith and for value should get it free from all defects, and be entitled to recover the money of the instrument in his own name. As such, documents like share warrants payable to bearer, debentures payable to bearer and dividend warrants are negotiable instruments. But the money orders and postal orders, deposit receipts, share certificates, bill of lading, dock warrant, etc. are not negotiable instruments. Although they are transferable by delivery and endorsements, yet they are not able to give better title to the bonafide transferee for value than what the transferor has. 

Essentials of Negotiable Instruments:

1. Must be in writing-The writing can be on anything that is readily transferable and that has a degree of permanence. 

2. Must be signed by the maker or drawer- The signature can be anyplace on the instrument.It can be in any form (such as word, mark or rubber stamp) that purports to be a signature and authenticates the writing.It can be signed in a representative capacity. 

3. Must be a definite order or promise to pay-A promise must be more than a mere acknowledgement of a debt. The words “I/We Promise” or “Pay” meet this criterion. 

4. Must be unconditional-Payment cannot be expressly conditional upon the occurrence of an event.Payment cannot be made subject to or governed by another agreement. Payment cannot be paid out of a particular fund (except for a government issued instrument).

 5. Must be an order or promise to pay a sum certain-  An instrument may state a sum certain even if payable in installments, with interest, at a stated discount or at an exchange rate. Inclusion of cost of collection and attorney’s fees does not disqualify the statement of a sum certain.

 6. Must be payable in money. Any medium of exchange recognized as the currency of a government is money. The maker or drawer cannot retain the option to pay the instrument in money or something else.

 7. Must be payable on demand or at a definite time-Any instrument payable on sight, presentation or issue is a demand instrument.An instrument is payable at a definite time even though it is payable on a stated date, or within a fixed period after sight, or the drawer or maker has an option to extend time for a definite period. Acceleration clauses, even if unenforceable, do not affect the negotiability of the instrument.

 8. Must be payable to order or bearer – An order instrument must name the payee with reasonable certainty.An instrument whose terms intend payment to no particular person is payable to bearer.