There are several modes of financial transactions. The previous methods mainly focussed on cash transactions. Cash was mainly used as the preferred mode in exchange for goods or services. However, in recent times, there has been the introduction of several negotiable instruments (NI), which has eased out the transaction process. Several countries have devised their own negotiable instrument laws. Let us know the definition of negotiable instruments or the meaning and kinds of negotiable instruments in detail.
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What is a Negotiable Instrument Meaning?
Talking about negotiable instrument meaning, the first things that come to our mind are bills and cheques. The best way to define negotiable instruments is to consider them as anything that possesses monetary values. Additionally, such instruments must also be transferable between individuals. Therefore, the two main characteristics of negotiable instruments are financial value and ease of transfer. Like many other countries, India also had the Negotiable Instruments Act being validated in 1881. It is mainly devised to govern the use of such documents in transactions. The Indian negotiable instrument act identifies each of such documents individually and has separate rules for each of them. The act defines the list of negotiable instruments in India consisting of promissory notes, bills of exchange, and cheques. Although another form of payment method called hundis is prevalent in India, it is not considered in the Indian negotiable instrument act.
What is the Negotiable Instrument Act?
To know what is negotiable instrument act, we need to understand them based on our country. According to the Indian negotiable instrument act 1881, negotiable instruments can be anything that has a monetary value and are transferable. It enlists cheques, exchange bills, and promissory notes, but excludes hundis, a common means of monetary transfer prevalent in some parts of India. The law considers each of these negotiable instruments separately and has defined rules for each of them. Any other instrument can be considered to be negotiable if it qualifies to some basic criteria. For example, the mode of the transaction will be considered under the NI act if they can be transferred by endorsement or delivery. It must also give the right to sue to the holder if there are some means of discrepancies in the transaction.
Similarly, there are negotiable instruments laws in other countries. Singapore has devised laws for Singapore instruments with meaning related to the economy of the country.
What is the Meaning and Kinds of Negotiable Instruments?
As discussed earlier, any instrument that has a financial worth and can be transferred is called a negotiable instrument. However, if we define what is NI act, then these attributes are not taken into consideration. Rather these constants are considered to be in relation to the act. Therefore, the act did not provide a clear, defined description for negotiable instruments, but has followed an inclusive approach in describing them.
According to Section 13 (1) of the NI Act, the list of negotiable instruments in India includes bills of exchange, promissory notes, and cheques that are deemed payable to the bearer or to order. Therefore, the negotiable instruments act notes consider only these three types of NI.
Just like other properties have financial values, negotiable instruments also have monetary worth. One only has to pay monetary support to the owner in order to purchase it.
Therefore the main properties of a negotiable instrument are:
The negotiable instrument has to be freely transferable by a simple delivery process or by endorsement followed by delivery.
If the name of the sellers of the instruments is defective, it should not affect the person who buys these instruments by trusting them.
The holders can sue the instruments upon themselves.
Effect of the Negotiable Instrument Law
The ‘Nemo dat quad non-habet’ is considered as one of the essential principles related to transferring property. Such a maxim indicates that the person can pass the best title related to property transfer. Therefore, the owner of the property has the sole power to transfer it, and any transaction being made not by the owner is considered to be void.
However, the negotiable instrument meaning provides an exception to this law of transferring property. Here, any person can acquire a NI from a seller who does not possess them. The only rule pertaining to NIs is that it must be transferred due to bonafide reasons.
FAQs on Negotiable Instruments Act: Definitions and Examples
1. What is a negotiable instrument according to the Negotiable Instruments Act, 1881?
As per Section 13 of the Negotiable Instruments Act, 1881, a negotiable instrument is a signed, written document that promises or orders a specific sum of money to be paid on demand or at a future date. The key feature is its transferability, meaning ownership can be easily passed from one person to another, entitling the new holder to receive the money and sue on the instrument in their own name.
2. What are the three main types of negotiable instruments defined in the NI Act?
The Negotiable Instruments Act, 1881, primarily defines three specific types of instruments:
- Promissory Note: A written promise made by one person (the maker) to pay a certain sum of money to another person (the payee).
- Bill of Exchange: A written order from one person (the drawer) to another (the drawee) to pay a specified sum of money to a third person (the payee).
- Cheque: A specific type of bill of exchange drawn on a specified banker and payable on demand.
3. Can you provide a real-world example of how a bill of exchange works?
Certainly. Imagine Seller A sells goods worth ₹50,000 to Buyer B on credit for 3 months. Seller A can draw a bill of exchange on Buyer B for this amount. Buyer B accepts the bill by signing it, which makes it a legally binding promise to pay. Now, if Seller A needs immediate cash, they can either get the bill discounted from a bank or endorse it to another person, C, to settle their own debt. After 3 months, the holder of the bill (the bank or C) can present it to Buyer B for payment.
4. What is the key difference between a promissory note and a bill of exchange?
The key difference lies in who creates the instrument and the nature of the instruction. In a promissory note, the debtor (the person who owes money) creates the instrument and makes an unconditional promise to pay. In a bill of exchange, the creditor (the person who is owed money) creates the instrument and issues an unconditional order to the debtor to pay. Essentially, a note is a promise, while a bill is an order.
5. Why is 'free transferability' a crucial characteristic of a negotiable instrument?
Free transferability is crucial because it allows the instrument to function like money, facilitating trade and commerce. This feature means that the ownership of the instrument can be transferred from one person to another without complex legal formalities—often by simple delivery (for bearer instruments) or by endorsement and delivery (for order instruments). This ease of transfer ensures liquidity and allows businesses to settle debts and finance transactions efficiently.
6. How does the Negotiable Instruments Act provide an exception to the legal rule 'nemo dat quod non habet'?
The Latin maxim 'nemo dat quod non habet' means 'no one can give what they do not have,' implying you cannot transfer a better title to property than you yourself possess. However, negotiable instruments are a major exception. A person who receives a negotiable instrument in good faith and for valuable consideration (known as a 'holder in due course') acquires a good and defect-free title, even if the title of the person who transferred it was defective. This unique protection encourages public confidence in using these instruments for transactions.
7. Who are the primary parties involved in a cheque?
A cheque involves three primary parties:
- The Drawer: The person who holds the bank account and signs the cheque to issue an order for payment.
- The Drawee: The bank on which the cheque is drawn, which is ordered to pay the specified amount.
- The Payee: The person or entity named in the cheque to whom the money is to be paid.
8. Are there other instruments, like Hundis, considered negotiable even if not specified in the NI Act, 1881?
Yes, while the NI Act of 1881 explicitly mentions only promissory notes, bills of exchange, and cheques, it is not an exhaustive list. An instrument can be recognised as negotiable by trade custom or usage if it possesses the essential characteristics of negotiability, such as being freely transferable. Hundis are a traditional Indian financial instrument that function as negotiable instruments based on custom, and their usage is governed by local traditions rather than the Act itself.
