Unit- 3

Negotiable instruments
Negotiable instruments

It means a written document which creates a right in favour of

some person and which is freely transferable.
Def of Justice Willis: a negotiable instrument is “one in
which the property is acquired by any one who takes it bonafide
and for value notwithstanding any defects of title in the person
from whom he took it.” Free negotiability is an important
characteristic of a negotiable instrument.
Section 13 of the negotiable act: a negotiable instrument means
“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.”

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Essential characteristics of negotiable instrument
• Negotiability
• Title
• Recovery
• Presumptions
Presumptions of negotiable instrument
• That every negotiable instrument was drawn, accepted and
endorsed, made or transferred for consideration.
• That the date it bears is the date on which it was made.
• That it was accepted with in a reasonable time after being made
and before maturity.
• That every transaction was made before maturity.
• That the endorsements were made in the same order in which they
appear.
• That the lost instrument was duly signed and stamped.

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 Bills of exchange
Def: a bill of exchange is an instrument in writing containing an
unconditional order, signed by the marker, directing a certain person to
pay a certain sum of money only to, or the order of, a certain person or
to the bearer of the instrument.

Essential characteristics
• it must be in writing
• it must be singed by the drawer
• the drawer, drawer and payee must be certain
• the sum payable must also be certain
• it should be properly stamped
• it must contain an express order to pay money and money alone
• the order must be unconditional

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 Specimens of bill of exchange

Mumbai,
Date : 1st march, 2007.
Rs. 5,000.00
Sixty days after date pay to ABC or order the sum of five thousand
rupees only for value received.

To
PQR, Lentin Road, Mumbai.

Signed
XYZ

Here XYZ is the “drawer” PQR is the “drawee” and ABC is the “payee.”

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 Cheque

Def : A bill of exchange drawn on a specified banker and not expressed

to be payable.

Cheques have the three additional qualifications

• It is always drawn on a specified banker
• It is always payable on demand
• It includes the electronic image of a truncated cheque and also a
cheque in the electronic form

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 Specimens of a cheque

Date: 1st march, 2007.

PAY A B

C. ............................................. .........
. . . . . . . . . . .. . . . . . . . . . . .. . . . . . . . . . . .. . .. . . . . OR BEARER
RUPEES Five Thousand Rs. 5000.00
Only
A/C No.
THE BANK OF INDIA
Sd./-
MUMBAI XYZ
“340218” 400013020 11

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 Promissory note
Def: A promissory note is an instrument in writing containing an
unconditional undertaking signed by the marker, 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 characteristics of promissory note

• It is an instrument in writing
• It is a promise to pay
• The undertaking to pay is unconditional
• It should be signed by maker
• The maker must be certain
• The payee must be certain
• The promise should be to pay money and money only
• The amount should be certain
• Other formalities

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 Specimens of promissory note

Rs. 5,000.00

On demand I promise to pay ABC, the sum of Rs.5,000(Rupees five thousand)

only with interest at 9 percent per annum for the value received.

Place: Bombay. XYZ

Date: 1st march, 2007

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Difference between a bill of exchange and promissory note

1. number of parties
2. “promise” and “order”
3. Acceptance
4. Nature of liability
5. Maker’s position
6. Formalities in case of dishonor
I. Notice to prior parties
II. protest
7. Copies

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Difference between bill of exchange and a cheque
A bill of exchange is usually on some person or firm, while a cheque is
always drawn from on bank.
Drawer cannot hold the drawer liable on bill of exchange unless the latte
has accepted it. It is essential that a bill of exchange must be accepted
before its payment can be claimed. A cheque does not require any such
acceptance.
A cheque is always payable on demand. A bill of exchange may be
payable on demand or on the expiry of a fixed period.
A cheque is payable immediately on demand without any days of grace
but in the case of a time bill of exchange, three days of grace are
allowed from the date within which the payment can be made.
A bill of exchange must be property stamped. A cheque does not require
any stamp.
A cheque drawn to the bearer payable on demand shall be valid, but a
bill payable on demand can never be drawn to the bearer.
Unlike bill of exchange, cheques usually are not intended for circulation
but for immediate payment.
Unlike cheques, the payment of bill cannot be countermanded by the
drawer. 10
Bank draft or demand draft
•It is drawn by a banker upon another banker
•It cannot be made payable to bearer
•Its payment cannot ordinarily be stopped or countermanded
•It is always payable on demand

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Payment in due course

These conditions may briefly be explained as follows:

• Payment must be in accordance with the apparent tenor of the
instrument
• Payment in order to be payment in due course must be in all good
faith
• The drawer must not be guilty of any negligence in making the
payment
• Payment in due course must be made to a person who has the actual
position of the instrument
• Payment should not be made under circumstances which afford a
reasonable ground for believing that the person was entitled to
received the amount mentioned in the instrument.

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 Types of Endorsements

There are seven kinds of endorsement

1. Indorsement in blank
2. Indorsement in full
3. Partial Indorsement
4. Conditional or qualified Indorsement
5. Restrictive Indorsement
6. Facultative Indorsement
7. Forged Indorsement

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1. Indorsement in blank
If the indorser signs his name only, the Indorsement is said
to be ‘in bank’. A blank Indorsement is also called ‘general
endorsement’. The name of indorser is left blank.

Specimens of Indorsement in blank

1) Henry Brown.
2) Thomson Robinson.
3) Jonathan George.

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2.Indorsement in full
If the indorser signs his name and adds a direction to pay the
amount mentioned in the instrument to, or to the order of a
specified person, the Indorsement is said to be ‘in full’. The
specified person is called the ‘indorsee’ of the instrument.

Specimens of Indorsement in full

1) Pay to Thomson Robinson or order James Richardson.

2) Pay to George French James Phillips.
3) Pay to Jonathan George George French

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3.Partial Indorsement

No writing on a negotiable instrument is valid for the purpose

of negotiation if such writing purports to transfer only a part of
the amount to be due on the instrument.

4.Conditional or qualified Indorsement

The indorser of a negotiable instrument may, by express

words in the Indorsement, exclude his own liability thereon, or
make such liability or the right of indorsee to receive the amount
due thereon dependent upon the happening of a specified event,
although such event may never happen.

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5.Restrictive Indorsement

Restrictive Indorsement prohibits or restricts further

negotiation of an instrument.
The effects of restrictive Indorsement can be summarized as
under :
I. It prohibits further negotiation,
II. It may constitute indorse agent to:
a) Receive its contents for the indorser;
b) Receive its contents for some other specified person.

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6.Facultative Indorsement
When the indorser abandons some right or increase his
liability under an instrument, the indorser is called
“facultative”. For example the indorser may by an
Indorsement waive notice of dishonor as given in the
illustration below:
illustration: pay A or order. Notice of dishonor waived.

7.Forged Indorsement

Forgery is nullity. Where an instrument is negotiable by a

forged Indorsement, no person can acquire the rights of a
holder in due course, even if he has obtained instrument for
value and in good faith.

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 Holder – Holder in due course

Holder in due course

Holder in due course means any person who for
consideration became the possessor of a promissory note, bill
of exchange, or cheque, if payable, to bearer, or the payee or
indorsee thereof, if payable to order, before the amount
mentioned In it became payable, and without having sufficient
cause to believe that any defect existed in the of the person
from whom he derived his title.
A person is a holder in due course when he proves that
i. Consideration
ii. Before maturity
iii. Good faith

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Rights or privileges of a holder in due course
Holder in due course acquiring the instrument for consideration
and in good faith gets the following rights under the Act:
1. Holder in due course can file a suit in his own name against the
parties liable to pay. He is deemed prima facie to be a holder in
due course.
2. Every prior party to the instrument is liable to a holder in due
course until the instrument is duly satisfied.
3. The other parties liable to pay cannot plead that the delivery of
the instrument was conditional or for a specific purpose only.
4. Even if the negotiable instrument is made without
consideration, if it gets into the hands of the holder in due
course, he can recover the means of a forged Indorsement.
5. The person liable cannot plead against the holder in due course
that the instrument had been lost or was obtained by means of
an offence or fraud or for an unlawful considerations.

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Holder driving title from holder in due course

A holder of a negotiable instrument who derives title from a

holder in due course has the rights thereon of that holder in due
course. The law presumes that every holder in due course until
the contrary is provided.

Liability of prior parties to holder in due course

Every priority party to a negotiable instrument is liable

thereon to holder in due course until the instrument is duly
satisfied.

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 Discharge of parties

Discharge of instrument and discharge of parties from liability is

not same. Parties may be discharged from liability on a negotiable
instrument in any of the following ways:
1. By payment
2. By cancellation
3. By release
4. By default of the holder
5. By material alteration
6. By holder destroying indorser remedy
7. Draft indorsed by payee
8. Discharge of drawee of cheque
9. By operation of law

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1.By payment
When the maker, acceptor or indorser makes payment on
an instrument in due course to the person entitled to receive
payment in advance with the apparent tenor of instrument in
good faith and without negligence, discharges the parties to
the instrument.

2.By cancellation
When the holder or his agent cancels or strikes out the
name of the acceptor or indorser with intention to discharge
him, such party is discharged from liability to the holder and
to all subsequent parties. Cancellation by mistake does not
discharge the party. It must be intentional. Cancellation must
be legible and apparent on the face of the instrument.

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3.By release
Where the holder discharges or releases the maker,
acceptor or indorser, such party receiving notice of discharged
to the holder and to all subsequent parties. Holder may, there
fore discharge any one of the parties by agreement,
renunciation or by accord and satisfaction.

4.By default of the holder

The parties to the instrument are discharged when the
following defaults are committed by the holder.
a) Allowing drawee more than 48 hours
b) Parties not consenting to qualified or limited
acceptance
c) Delay in presentment of cheque and drawer
damaged thereby
d) Delay in presentment for payment
e) Failure to give notice of dishonor
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5.By material alteration
Material alteration without consent of the other parties
thereto renders the alteration void and discharges the parties to
the instrument because by alternation the identity of the
instrument is destroyed. Accidental alteration does not render a
document invalid.
Instances of material alteration
The following alterations are material are material alterations
which will make the instrument void:
1. Altering the date of the instrument
2. Altering the amount payable on the instrument
3. Altering the time or place of payment
4. Addition of place of payment without acceptors assent.

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6.By holder destroying indorser remedy:
Where the holder of a negotiable instrument, without
consent of the indorser, destroys or impairs the endorser's
remedy against a prior party, the indorser is discharged from
liability to the holder, to the same extent as if the instrument
had been paid at maturity.

7.Draft indorsed by payee

Drafts are drawn by one branch of a bank upon its
another branch. The account of the customer is debited and
the amount is transferred to another branch of bank on which
the draft is drawn. When payment is made by the branch
office of the bank upon which it is drawn, to the person
endorsed by the payee, the bank is discharged.

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8.Discharge of drawee of a cheque
Where a cheque is a payable to order, the drawee is
discharged by payment in due course. Where cheque is
originally expressed to be payable to bearer, the drawee is
discharged by payment in due course to the bearer thereof.

9.By operation of law

Parties to the instrument are also discharged by operation

of law under the following circumstances:
i. By an order of the insolvency court discharging the
insolvent.
ii. When debt under the bill is merged into the judgment debt.
iii. By remedy becoming time-barred.

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