BBA 1st Semester Business Low Notes

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Negotiable instruments are the most common credit devices utilized in business society. Negotiable instruments importance lies in the fact that these are more readily transferred than ordinary claims or contract rights that the transferee of a negotiable instrument may acquire greater rights than would an ordinary assignee.

Though basically, negotiable instruments are written promises or orders to pay money, such as promissory notes, bills of exchange and cheques which when in proper form, may be transferred from person to person as a substituted  of money.

The law relating to negotiable instruments in India is incorporated in Negotiable Instrument Act, 1881. The Act is not comprehensive. It does not affect the local usage or customs. If any local usage or custom is contrary to the provisions of this act, the local usage overrides the Act.

The act includes only three instruments in its ambit, viz. Bill of exchange, promissory note and cheque. But the act will also be extended to other instruments possessing the characteristics of    a negotiable instrument, by local customs, for example Hundi. The act also does not prohibit the transfer of instruments by other methods, e.g. by assignment.

Meaning of Negotiable Instruments

According to section 13 (a), Negotiable Instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer, whether the ‘words’ order or ‘bearer’ appear on the instrument or not. Any other instrument can be added to these three if it satisfies two conditions of negotiability.

One is that it is by customs of trade transferable by delivery or by endorsement and delivery; second is that it is capable of being sued upon by the person holding out in his own name.

The nature of negotiable instrument is such that property in it is acquired by every person who takes it bonafide and for value, notwithstanding any defect of title in the person from whom he took it.

On this basis a negotiable instrument may be defined as a contractual obligation in writing and signed by the party executing it, containing an unconditional promise or order to pay a sum certain in-money on demand, or at a fixed or determinable future time, payable to bearer  or to the order of a specified person.

Essential Elements of Negotiable Instrument :

To be negotiable an instrument must have the following elements :

  1. A negotiable instrument must be in writing, which includes typing, printing and engraving.
  2. The instrument must be signed by the maker or
  3. There must be a promise if it is a promissory note or order to pay if it is a bill of exchange.
  4. The promise or order must he unconditional. If it is conditional the instrument is not
  5. A negotiable instrument must call for payment in money If the promise or order is for anything else, the instrument is not
  6. The instrument must not only call for payment in money but also for a certain
  7. A negotiable instrument must be payable at a time which is certain to arrive which may be payable either on demand or at a particular time or at a determinable future time. If it is payable when convenient, the instrument is not negotiable because the day of payment may not arrive. The requirement that there must be a time certain to arrive does not mean that the instrument must specify a fixed date for
  8. A negotiable instrument must be payable to order or hearer: Without the words order or bearer, the instrument would not be negotiable because, if they were not there, no one but the payee could present them for payment. If it is merely payable to Ram, it  is not negotiable. It is not necessary that the instrument actually use the words ‘order’ or ‘bearer’. And other words indicating the same intention are sufficient. Pay to holder could be used in place of ‘order’ or ‘bearer’.
  9. In the case of a bill of exchange or cheque, the drawee must be named or described with reasonable certainty. The purpose of this requirement is to enable the holder of the instrument to know to whom he must go for

Presumptions as to Negotiable Instruments

Since the philosophy underlying the law of Negotiable instruments is that business transactions should be facilitated by making available evidence of right to money that will pass freely from hand to hand.

In order to facilitate the free transfer of negotiable instruments from one party to another, Section 118 of the Act provides that until the contrary is proved, the following presumptions shall be made :

  1. That every negotiable instrument was made or drawn, accepted, endorsed and negotiated or transferred for
  2. That it bears the date on which it was made or
  3. That every accepted bill was accepted within a reasoble time after its date and before its
  4. That every transfer of a negotiable instrument was made before
  5. That the endorsements appearing on it were made in the order in which they appear thereon.
  6. Where an instrument has been lost or destroyed, that it was duly stamped and the stamp was duly
  7. That the holder of the instrument is a holder in due

The object of these presumptions is to declare the instrument as valid and in good order     it a suit is filed in respect of a negotiable instrument, the Court will presume that the instrument was in good order and valid.

If any party challenges its validity, he shall have to prove to the contrary. These presumptions are necessary in the case of negotiable instruments, as they are credit instruments and intended to be created as money which can pass freely from hand to hand.

Negotiable instruments act includes only thr£e types of instruments :

  1. Promissory
  2. Bill of



Promissory note is defined by Section 4 of the Negotiable Instruments Act. A promissory note is an instrument in writing 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.

An instrument to be a promissory note must possess the following elements :

  • It must be in writing: Mere verbal promise to pay will not do. The method of writing is important, but it must be in a media that can not be altered
  • It must contain an express promise or clear undertaking to pay: A promise to pay cannot be inferred; it must be express. A mere acknowledgement is not enough. The following are not promissory notes, as there is no promise to pay:

(a) “Mr. A.I.O.U. Rs. 500”.

  • “I am liable to pay you 1,000”.
  • “I have taken from you Rs. 150; whenever you ask for it; I have to ” But the following is a promise to pay:
  • “I promise to pay Ram or order 1,500.”
  • “Ram, I owe you 1,500 and promise to pay the same for value received.”
  • “I promise to pay Ram 1,500 at ”

Although the promise to pay may be opposed to public policy and unenforceable, once a promissory note is executed the promise to pay is performed because a promissory note amounts in law to payment and what vitiates a promise does not vitiate a payment.

  • The promise to pay must be unconditional: We have seen before that an instrument,  to be negotiable, must contain an unconditional promise or So a promise to pay contained in a note must be unconditional. A conditional undertaking destroys the negotiable character of an otherwise negotiable instrument. But a promise to pay at a particular place or after a specified time or on the happening of an event which must happen is not conditional.

For example, I promise to pay B Rs.50 seven days after C’s  death is not conditional, for    C is certain to die some time or the other.

  • The maker must Sign the promissory note: The person who draws the instrument and signs it is known as the maker and the person to whom the promise is made is called the payee. The instrument will be complete only when it is signed by the maker even when it is written by him and his name appears in the body of Signature may be in any part of the instrument, and may be expressed by a thumb mark or any other mark, if the executant is illiterate.
  • The maker must be a certain person: The note itself must show clearly who is the person engaging himself to pay, Where the promisors are more than one they may bind themselves jointly or jointly and severally but not in the
  • The payee must be certain: A promissory note must contain a promise to pay to some person or persons ascertained by name or designation or to their A promissory note made payable to the maker himself it nullity but if such a note is endorsed by him, it becomes payable to bearer and is valid.
  • The sum payable must be certain and the amount must not be capable of contingent additions or substractions. Thus, if A promises to pay Rs.500 and all other sums which shall become due to him or to pay 180 and all fines according to rules, the instrument is not a promissory
  • Payment must be in legal money of the country. Thus an agreement to pay money or grain or to deliver 100 tons of iron is not a promissory
  • A bank note or a currency note is not a promissory note within the meaning of this section. They are expressly excluded from the definition, as they are treated as money and not merely securities for A promissory note or a draft cannot be made payable to bearer, no’matter whether it is payable on demand or after a certain period.
  • Other matters of form like number, place, date etc., are usually found given in notes, but they are not essential in

A promissory note must bear the stamp duty as required under the Indian Stamp Act. It is better if the stamps affixed al-e cancelled by the maker’s signature. Suit can not be maintained on an unsufficient stamped promissory note.

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