KINDS OF NEGOTIABLE INSTRUMENTS

This article is written by Ayni Saad, A student of 2nd Year, Faculty of Law, University of Delhi, an intern under Legal Vidhiya

“Nemo dat quod non habet”

“Nemo dat quod non habet” is a Latin phrase that means “no one can give what they do not have.” This principle is a fundamental concept in property law and is often applied to transactions involving the sale or transfer of property, including negotiable instruments. Under this principle, a person who sells or transfers property, including negotiable instruments, to another person cannot transfer a better title than they themselves possess.

The principle of “nemo dat quod non habet” is a key component of the legal framework for negotiable instruments, as it establishes the requirements for the transfer of valid title and ownership interests in these instruments. It is also relevant in other areas of law, including real estate, intellectual property, and personal property transactions.

INTRODUCTION TO NEGOTIABLE INSTRUMENTS

Negotiable instruments are legal documents that represent a promise to pay a specific amount of money to a person or entity named on the document. They are often used in commercial transactions as a means of payment or to secure a loan.

Negotiable instruments are transferable, meaning they can be assigned or transferred to another person or entity. The person or entity in possession of the instrument has the right to collect payment from the issuer of the instrument. They can also be used as collateral for a loan or other financial transaction.

In most countries, negotiable instruments are regulated by specific laws and regulations that govern their use and transfer. These laws define the rights and obligations of the parties involved in a negotiable instrument transaction, as well as the consequences of non-payment or non-performance.

Purpose of negotiable instruments:

The purpose of negotiable instruments is to facilitate commercial transactions by providing a secure and convenient way to transfer and exchange value. Negotiable instruments are used in a variety of transactions, including buying and selling goods, services, and property, as well as borrowing and lending money.

Negotiable instruments are also subject to specific laws and regulations that govern their use and transfer. These laws establish the requirements for the creation, transfer, and enforcement of negotiable instruments, as well as the rights and obligations of the parties involved in these transactions. The laws governing negotiable instruments vary from country to country, but they generally aim to provide a consistent and reliable framework for the use and exchange of these instruments in commercial transactions.

NEGOTIABLE INTRUMENTS IN INDIAN CONTEXT

DEFINITION AND KEY FEATURES:

In India Negotiable Instruments are defines under The Negotiable Instruments Act 1881, The act provides a legal framework for the creation, transfer, and enforcement of negotiable instruments such as promissory notes, bills of exchange, and cheques.

The key provisions of the Negotiable Instruments Act, 1881 include:

1. Definition of negotiable instruments: The act defines negotiable instruments and sets out the requirements for a document to be considered a negotiable instrument, such as being in writing and containing an unconditional order or promise to pay a specific amount of money.

• Parties to negotiable instruments: The act establishes the legal rights and obligations of the parties involved in a negotiable instrument, including the drawer, payee, and endorser.

• Transfer of negotiable instruments: The act provides for the transfer of negotiable instruments by endorsement or delivery, and sets out the rules for determining the rights of subsequent holders.

• Payment and dishonour of negotiable instruments: The act sets out the rules for payment and dishonour of negotiable instruments, including the consequences of non-payment or dishonour.

• Liability of parties: The act provides for the liability of parties to negotiable instruments, including the liability of endorsers and guarantors.

• Dispute resolution: The act sets out the procedures for resolving disputes related to negotiable instruments, including the jurisdiction of courts and the limitation period for filing claims.

CHARASTERISTICS OF THE ACT:

Section 13 of the Negotiable Instruments Act, 1881[1] sets out the requirements for a negotiable instrument to be valid and enforceable. According to this section, a negotiable instrument must meet the following requirements:

• It must be in writing.
• It must contain an unconditional promise or order to pay.
• It must be signed by the maker or drawer.
• It must be payable on demand or at a fixed or determinable future time.
• It must be payable to a specific person or to the bearer.

If a negotiable instrument does not meet these requirements, it may be considered invalid or unenforceable. However, the courts may consider other factors, such as the intent of the parties and the circumstances of the transaction, in determining whether a document is a negotiable instrument.

 KINDS OF NEGOTIABLE INSTRUMENTS

As per Section 13 of the Negotiable Instruments Act[2], “A negotiable instrument means a promissory note, bill of exchange or check payable either to the order or to the bearer.”

SECTION 4: PROMISSORY NOTE

Section 4 of the Negotiable Instruments Act, 1881[3] defines “Promissory Note” as a Negotiable Instrument. A “Promissory Note” is a written document in which one party, called the maker, makes an unconditional promise to pay a certain sum of money to another party, called the payee, on demand or on a specified date.

Promissory notes are used as a means of borrowing money, and they are often used in business and commercial transactions. They are also used in personal loans, such as loans between family members or friends.

Promissory notes are negotiable instruments, which means that they can be transferred from one party to another. The holder of a promissory note has the right to receive payment from the maker, and can transfer that right to another party through endorsement.

The essential features of a Promissory Note include:

• The name of the maker who promises to pay
• The name of the payee who will receive the payment
• The amount of money to be paid
• The date or event when the payment will be made
• The signature of the maker

If the maker fails to pay the amount due on the promissory note, the payee can take legal action to recover the amount owed. The promissory note can be used as evidence in court to prove the existence of the debt and the terms of repayment.

PARTIES TO PROMISSORY NOTE

The parties to a promissory note are:

• Maker: The maker is the person who creates the promissory note and promises to pay the amount specified in the note. The maker is also known as the borrower or debtor.

• Payee: The payee is the person or entity to whom the maker promises to pay the amount specified in the promissory note. The payee is also known as the lender or creditor.

• Endorser: An endorser is a third party who endorses or signs the promissory note to guarantee the payment of the note in case the maker defaults. The endorser becomes liable for the payment of the note if the maker fails to pay.

• Holder: The holder is the person or entity who is in possession of the promissory note and has the right to receive payment from the maker.

FORMS OF ROMISSORY NOTES

There are different forms of promissory notes, including:

• Simple promissory note: This is the most basic form of promissory note, in which the maker promises to pay a certain sum of money to the payee at a specified time or on demand.

• Installment promissory note: This type of promissory note specifies that the payment will be made in installments over a certain period of time.

• Secured promissory note: This type of promissory note is backed by collateral, such as property or other assets, which the lender can seize if the borrower defaults on the payment.

• Unsecured promissory note: This type of promissory note is not backed by any collateral, and the lender relies solely on the borrower’s promise to repay the debt.

• Demand promissory note: This type of promissory note is payable on demand by the payee, rather than at a specified time.

• Joint and several promissory note: This type of promissory note is signed by two or more makers, who are jointly and severally liable for the payment of the debt.

• Callable promissory note: This type of promissory note gives the lender the option to call in the loan before the specified maturity date.

These are some of the common forms of promissory notes used in financial transactions.

SECTION 5: BILL OF EXCHANGE

Section 5 of the Negotiable Instruments Act,1881[4] defines “Bills of Exchange” as Negotiable Instrument. A “Bill of Exchange” is a written document in which one party, called the drawer, orders another party, called the drawee, to pay a certain sum of money to a third party, called the payee, on demand or on a specified date. It is used as a means of payment in commercial transactions, especially in international trade.

A bill of exchange is also a negotiable instrument, which means that it can be transferred from one party to another. The holder of a bill of exchange has the right to receive payment from the drawee, and can transfer that right to another party through endorsement.

The essential features of a Bill of Exchange include:

• The name of the drawer who orders payment
• The name of the drawee who is ordered to make payment
• The name of the payee who will receive payment
• The amount of money to be paid
• The date or event when the payment will be made
• The signature of the drawer

If the drawee fails to pay the amount due on the bill of exchange, the payee can take legal action to recover the amount owed. The bill of exchange can be used as evidence in court to prove the existence of the debt and the terms of repayment.

PARTIES TO BILL OF EXCHANGE

There are three parties involved in a bill of exchange:

• Drawer: The drawer is the person who creates the bill of exchange and orders the payment. The drawer can be an individual or a company.

• Drawee: The drawee is the person or entity upon whom the bill of exchange is drawn, and who is responsible for making the payment. The drawee can be an individual or a company, and is usually the debtor of the drawer.

• Payee: The payee is the person who is entitled to receive the payment. The payee can be the drawer or any other person to whom the drawer wants to make the payment.

In addition to these three parties, there may also be an endorser or an endorsee in some cases. An endorser is a person who transfers the ownership of the bill of exchange to another person, while an endorsee is the person to whom the bill of exchange is endorsed. The endorser is liable to the endorsee for the payment of the bill, and the endorsee can demand payment from the drawee.

It is important to note that all parties involved in a bill of exchange must be clearly identified and specified in the document. The roles and responsibilities of each party must also be clearly defined to avoid any confusion or disputes.

FORMS OF BILL OF EXCHANGE

There are different forms of bills of exchange, including:

• Sight bill: This type of bill of exchange is payable immediately upon presentation to the drawee (the person or entity required to make the payment).

• Time bill: This type of bill of exchange is payable at a fixed or determinable future date.

• Demand bill: This type of bill of exchange is payable on demand by the payee.

• Clean bill: This type of bill of exchange does not have any accompanying documents or goods.

• Documentary bill: This type of bill of exchange is accompanied by documents such as bills of lading or invoices, which prove the existence of the underlying goods being traded.

• Inland bill: This type of bill of exchange is drawn and payable within the same country.

• Foreign bill: This type of bill of exchange is drawn in one country and payable in another country.

These are some of the common forms of bills of exchange used in international trade transactions.

SECTION 6: CHEQUE

Section 6 of the Negotiable Instruments Act 1881,[5] also defines “Cheque” as Negotiable Instrument. A “Cheque” is a written document that directs a bank or financial institution to pay a certain sum of money to a person or entity named on the cheque. It is a type of negotiable instrument that is widely used for making payments in business and personal transactions.

Cheques can be either bearer cheques or order cheques. Bearer cheques can be encashed by anyone who presents the cheque to the bank, while order cheques can only be encashed by the payee named on the cheque or by someone who has been authorized by the payee

Cheques can also be post-dated, which means that they are dated for a future date when payment is to be made. They can also be crossed, which means that they can only be paid into a bank account and cannot be encashed over the counter.

The essential features of a Cheque include:

• The name of the account holder who is authorizing payment
• The name of the payee who will receive payment
• The amount of money to be paid
• The date on which the cheque was issued
• The signature of the account holder

If there are insufficient funds in the account to cover the amount of the cheque, the cheque will bounce, and the bank will not honour it. The person or entity that presented the cheque may be charged a fee for the bounced cheque, and the account holder may be liable for any damages or legal action resulting from the bounced cheque.

PARTIES TO CHEQUE

The parties involved in a cheque transaction are:

Drawer: The drawer is the person or entity that writes the cheque and orders the payment of a specific amount to the payee.

Payee: The payee is the person or entity that is named in the cheque as the recipient of the payment.

Drawee: The drawee is the bank or financial institution on which the cheque is drawn, and which is responsible for making the payment to the payee.

Endorser: An endorser is a third party who endorses or signs the back of the cheque to transfer the right to receive payment to another party.

Holder: The holder is the person or entity who is in possession of the cheque and has the right to receive payment from the drawee.

These are the main parties involved in a cheque transaction. However, in some cases, there may be additional parties involved, such as a co-drawer or a guarantor, who assume liability for the payment of the cheque.

FORMS OF CHEQUES

There are different forms of cheques, including:

Bearer cheque: This type of cheque can be encashed by anyone who presents it to the drawee bank, as long as the cheque is not crossed or marked “account payee only.”

Order cheque: This type of cheque can only be encashed by the payee named in the cheque or by someone authorized by the payee.

Crossed cheque: This type of cheque is marked with two parallel lines across the face of the cheque, indicating that the cheque can only be deposited into a bank account and cannot be encashed over the counter.

Open cheque: This type of cheque does not have any crossing, and the payee can either deposit the cheque into their bank account or encash it over the counter.

Post-dated cheque: This type of cheque has a future date written on it, and it cannot be encashed until that date.

Traveller’s cheque: This type of cheque is used for travel purposes and is pre-printed with the name of the payee. It can be used as a form of payment in foreign countries and can be replaced if lost or stolen.

Self cheque: This type of cheque is written by the account holder and is payable to themselves. It can be used to withdraw cash or transfer funds between accounts.

These are some of the common forms of cheques used in financial transactions.

RELEVANT CASE LAWS:

There have been several cases on the Negotiable Instruments Act in India. Here are some important ones:

Dilip Hariramani vs. Bank of Baroda: The Dilip Hariramani vs. Bank of Baroda case is an important case that deals with the legal responsibility of banks in cases of cheque bouncing under the Negotiable Instruments Act.

The bank then filed a complaint against him under Section 138 of the Negotiable Instruments Act,[6] which deals with the dishonor of cheques.

The Bombay High Court held that the bank had indeed failed to give notice to Dilip Hariramani, and therefore, the complaint filed by the bank was not maintainable. The court also observed that banks have a duty to notify their customers about dishonuored cheques, and that failure to do so can lead to legal consequences.

The court also clarified that the notice period of 15 days is mandatory, and banks cannot waive this requirement by incorporating a clause in the loan agreement. The court held that the provisions of the Negotiable Instruments Act are meant to protect the interests of all parties involved in cheque transactions, and that banks must comply with these provisions.

This case has important implications for banks and their customers, as it clarifies the legal responsibilities of banks in cases of cheque bouncing. It also highlights the importance of complying with the provisions of the Negotiable Instruments Act, and the consequences of failing to do so.

Brij Mohan Lal vs. M/s. Union of India & Anr. (2012): This case dealt with the issue of whether a dishonored cheque can be used as evidence in a criminal proceeding. The Supreme Court held that a dishonored cheque can be used as evidence in a criminal case, and that the accused can be prosecuted under the provisions of the Negotiable Instruments Act.

S. Sundaram Pillai vs. V.R. Pattabiraman (1985): In this case, the Supreme Court held that a cheque is not a legal debt, but a means to discharge a debt. The court also clarified the difference between a bill of exchange and a promissory note.

National Small Industries Corp. Ltd. vs. Harmeet Singh Paintal & Anr. (2010): This case dealt with the issue of whether a cheque issued by a company can be dishonored if the company is not registered. The Supreme Court held that a company can issue cheques even if it is not registered, and that the dishonor of a cheque is not affected by the company’s registration status.

Dashrath Rupsingh Rathod vs. State of Maharashtra (2014): This case dealt with the issue of whether a person can be held liable for an offence under the Negotiable Instruments Act if the cheque was given as a security deposit. The Supreme Court held that if the cheque was given as a security deposit, and not as payment for any debt or liability, the person cannot be held liable under the Act.

These are just a few examples of the cases that have dealt with the provisions of the Negotiable Instruments Act. The Act is regularly enforced by the courts in India, and there have been many more cases over the years that have helped to clarify and interpret its provisions.

CONCLUSION:

Negotiable Instruments play a pivotal role in the in the business transactions and in the trade world. It is very clear from the above mentioned facts that Negotiable Instruments can make world trade, easier and transparent. These instruments can either be Negotiable or Non-Negotiable in nature but they must come under one of the two categories. These Instruments can be used by one or another person any number of times  broadly and freely for International trade making the transactions easily transferrable respectively.[7]

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[1] S. 13, Negotiable Instruments Act, 1881

[2] S. 13, Negotiable Instruments Act, 1881.

[3] S. 4, Negotiable Instruments Act, 1881.

[4] S. 5, Negotiable Instruments Act, 1881.

[5] S. 6, Negotiable Instruments Act, 1881.

[6] S. 138, Negotiable Instruments Act, 1881.

[7]