Negotiable Instrument, in law, a written contract or other instrument whose benefit can be passed on from the original holder to new holders. The original holder (the transferor) must countersign the instrument (as in the case of a cheque) or merely deliver it (as in the case of a bank note) to the new holder; the new holder is then entitled to the benefit of the instrument (in the case of a cheque, to the money from the bank; in the case of the bank note, to the sum promised on the note).
According to section 13 of the Negotiable Instruments Act, 1881, a negotiable instrument means “Promissory note, bill of exchange, or cheque, payable either to order or to bearer”.
Major features of negotiable instruments are;
- Easy Transferability- A negotiable instrument is freely transferable. Usually, when we transfer any property to somebody, we are required to make a transfer deed, get it registered, pay stamp duty, etc. But, such formalities are not required while transferring a negotiable instrument. The ownership is changed by mere delivery (when payable to the bearer) or by valid endorsement and delivery (when payable to order). Further, while transferring it is also not required to give a notice to the previous holder.
- Title- Negotiability confers absolute and good title on the transferee. It means that a person who receives a negotiable instrument has a clear and undisputable title to the instrument. However, the title of the receiver will be absolute, only if he has got the instrument in good faith and for a consideration. Also the receiver should have no knowledge of the previous holder having any defect in his title. Such a person is known as holder in due course.
- Must be in writing- A negotiable instrument must be in writing. This includes handwriting, typing, computer print out and engraving, etc.
- Unconditional Order- In every negotiable instrument there must be an unconditional order or promise for payment.
- Payment- The instrument must involve payment of a certain sum of money only and nothing else. For example, one cannot make a promissory note on assets, securities, or goods.
- The time of payment must be certain- It means that the instrument must be payable at a time which is certain to arrive. If the time is mentioned as ‘when convenient’ it is not a negotiable instrument. However, if the time of payment is linked to the death of a person, it is nevertheless a negotiable instrument as death is certain, though the time thereof is not.
- The payee must be a certain person- It means that the person in whose favor the instrument is made must be named or described with reasonable certainty. The term ‘person’ includes individual, body corporate, trade unions, even secretary, director or chairman of an institution. The payee can also be more than one person.
- Signature- A negotiable instrument must bear the signature of its maker. Without the signature of the drawer or the maker, the instrument shall not be a valid one.
- Delivery- Delivery of the instrument is essential. Any negotiable instrument like a cheque or a promissory note is not complete till it is delivered to its payee. For example, you may issue a cheque in your brother’s name but it is not a negotiable instrument till it is given to your brother.
- Stamping- Stamping of Bills of Exchange and Promissory Notes is mandatory. This is required as per the Indian Stamp Act, 1899. The value of stamp depends upon the value of the pronote or bill and the time of their payment.
- Right ot file suit- The transferee of a negotiable instrument is entitled to file a suit in his own name for enforcing any right or claim on the basis of the instrument.
- Notice of transfer- It is not necessary to give notice of transfer of a negotiable instrument to the party liable to pay.
- Presumptions- Certain presumptions apply to all negotiable instruments, for example consideration is presumed to have passed between the transferor and the transferee.
- Procedure for suits- In India a special procedure is provided for suits on promissory notes and bills of exchange.
- Number of transfer- These instruments can be transferred indefinitely till they are at maturity.
- Rule of evidence- These instruments are in writing and signed by the parties, they are used as evidence of the fact of indebtness because they have special rules of evidence.
- Exchange- These instruments relate to payment of certain money in legal tender, they are considered as substitutes for money and are accepted in exchange off goods because cash can be obtained at any moment by paying a small commission.