Definition of Negotiable Instrument

Definition of Negotiable Instrument

The Negotiable Instrument Act does not define a negotiable instrument and merely states that a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or bearer. This does not indicate the characteristics of a negotiable instrument  but only states that three instrument – cheque, bill of exchange and promissory note – are negotiable instruments. These three instruments are, therefore negotiable instrument by statue. Section 13 does not prohibit any other instrument which satisfies the essential feature of negotiability, to be treated as negotiable instrument. The essential feature of negotiable instruments is its negotiability as discussed below.
Justice K.C, Willis defines a negotiable instrument as “one the property in which is acquired by anyone who takes it bona fide and for value notwithstanding any defect of title in the person from whom he took it.”
Another useful definition is given by Thomas who states that an instrument is negotiable when it is, by a legally recognized custom of trade or by law, transferable by delivery or by endorsement and delivery, without notice to the party liable, in such a way that (a) the holder of it for the time being may sue upon it in his own name, and (b) the property in it passes to a bona fide transferee for value free from any defect in the title of the person from whom he obtained it.”
These definitions clearly reveal the true nature of negotiable instruments. A negotiable instrument is a transferable document either by the application of the law or by the custom of the trade concerned. The special feature of such an instrument is the privilege it confers on the person who receives it bona fide and for value, to possess good title thereto, even if the transferor had no title or had defective title to the instrument.
Essential Features of Negotiable Instruments
The following are the special features of the negotiable instruments:

  • The negotiable instruments are easily transferable from person to person and the ownership of the property in the instrument may be passed on by mere delivery, in case of a bearer instrument, or by endorsement and delivery, in case of an order instrument. Transferability is an essential feature of a negotiable instrument but all transferable instruments are not negotiable instruments. Herein lays the difference between transferability and negotiability which is explained below.
  • A negotiable instrument confers absolute and good title on the transferee, who takes it in good faith, for value and without notice of the fact that the transferor had defective title thereto. This is the most important characteristics of a negotiable instrument. A person who takes negotiable instrument from another person, who had stolen it from somebody else, will have absolute and undisputable title to the instrument provided he receives the same for value (i.e. after paying its full value) and in good faith without knowing that the transferor was not the true owner of the instrument. Such a person is called the holder in due course and his interest in the instrument is well protected by the law.

Difference between transferability and negotiability. In case of any goods or commodity, which is transferable from person to person the general rule of law is that the transferor cannot transfer title better than what he himself possesses. For example, X purchases an article or a commodity, say a book from Y against payment of its full value. But Y had stolen the book from the house of Z. If the thief, i.e. Y, is caught for this theft or if the stolen article is found in the possession of X the latter shall have to return the same to the true owner of the article because the title of X to the property is not deemed to be better than the title possessed by Y. In fact, Y had no title thereto and hence X will also stand on the same footing.
A negotiable instrument is an exception to this general rule of law. Suppose in the above illustration X takes a cheque, he will have good title thereto and will not be responsible to the true owner Z. The latter will have a right against Y, the thief of the instrument. This privilege of the holder of a negotiable instrument in due course constitutes the main difference between a transferable instrument or article and a negotiable instrument.

  • Such holder of a negotiable instrument, who is legally called the holder in due course, possesses the right to sue upon the instrument in his own name. Thus, he can recover the amount of the instrument from the party liable to pay thereon.

Where a debtor has drawn a negotiable instrument in favor of his creditor and has also executed a mortgage to provide further security, the creditor has right to sue on the basis of negotiable instrument even without exhausting security in the shape of mortgage.
Types of Negotiable Instruments
Though the negotiable instruments possess the above mentioned features, they fall under two categories as follows:

  • Negotiable instruments by statute. As already stated that Negotiable Instruments Act states three instruments –cheque, bill of exchange and promissory notes—as negotiable instruments. They are therefore called negotiable instruments by statute.
  • Negotiable instrument by custom or usage. Some other instruments have acquired the character of negotiability by custom or usages of trade. Section 137 of the Transfer of Property Act 1882 also recognized that an instrument may be negotiable by law or custom. Thus in India Government promissory note, shah jog hundis, delivery orders and railway receipt have been held to be negotiable by usages or custom of the trade.

Exceptional Case of Negotiable Instruments.  Generally the negotiable instruments possess all the essential features discussed above. But sometimes the drawer or the holder may take away the essential characteristic of negotiability and thus the instrument ceases to be a transferable or negotiable instrument. Example: (i) if a cheque is payable to a specified  person only and not to his order or the bearer, it cannot be transferred to any other person and hence it loses its negotiability , (ii) if a cheque is crossed ‘Not negotiable’ it can be transferred but without conferring on the transferee absolute and good title in all cases. The transferee of such a cheque will stand at par with the transferee of any other commodity and shell not possesses title better than that of his transferor.

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