Negotiable Instruments

A negotiable instrument is a signed document that promises a sum of payment to a specified person or the assignee. In other words, it is a formalized type of IOU: A transferable, signed document that promises to pay the bearer a sum of money at a future date or on-demand.

A negotiable instrument is a piece of paper which entitles a person to a sum of money and which is transferable from person to person by mere delivery or by endorsement and delivery. The person to whom it is so transferred becomes entitled to the money also to the right to further transfer it. Thus, negotiable instruments play a major role in the trade world.

The maxim of law nemo dat quod non-habet (no one can transfer a better title than he himself has). This is the general principle relating to transfer of property is that no one can become the owner of any property unless he purchases it from the true owner or with his authority.

According to professor Goode, instrument is described as a document of title of money Therefore an instrument is a document which physically expresses the payment obligation. An instrument will be in deliverable state only if it is signed by the possessor or it should be with the authority of that person. The instrument clearly states the contractual right to payment and the right will be transferred only after the complete delivery. The person who has that entitlement and posses the instrument is consider as the true owner.

Main purpose of negotiable instruments is to avoid the carriage of higher amount of money and to reducing the risk of theft; robbery etc. To give legal effect to negotiable instruments there is legislation and the name of that legislation is The Negotiable Instruments Act, 1881.

The Negotiable Instruments Act was enacted, in India, in 1881.Prior to its enactment, the provision of the English Negotiable Instrument Act were applicable in India, and the present Act is also based on the English Act with certain modifications. It extends to the whole of India except the State of J&K.

What are Negotiable Instruments?

Documents of a certain type, used in commercial transactions and monetary dealings, are called Negotiable instruments. The word 'negotiable' means transferable from one person to another and the term 'instrument' means 'any written doc. by which a right is created in favor of some person.' Thus, the negotiable instrument is a doc. by which rights vested in a person can be transferred to another person in accordance with the provisions of the Negotiable Instruments Act, 1881.

According to section 13 of Negotiable Instruments Act, 1881- A 'negotiable instrument' means a promissory note, bill of exchange or cheque payable either to order or to bearer.

Features of A Negotiable Instrument

An instrument may be negotiable either by

• Statute - Promissory notes, bills of exchange and cheques are negotiable instruments under the Negotiable Instruments Act, 1881; or
• By usage - Bank notes, bank drafts, share warrants, bearer debentures, dividend warrants, scripts and treasury bills.

An instrument is to be called 'negotiable' if it possesses the following characteristic features:

Freely transferable - Transferability may be by

• delivery, or
• By endorsement and delivery.

Most Common Types of Negotiable Instruments are;

• Promissory notes.
• Bill of exchange.
• Cheques
• Government promissory notes.
• Delivery orders.
• Customs Receipts.