What is a Negotiable Instrument? Characteristics of negotiable instrument.

 What is a Negotiable Instrument?

Meaning- "A Negotiable Instrument", as the name suggests is an instrument or a document which is Negotiable or transferable. In simple words any document that entitles a person to a sum of money and which can be transferred from one person to the another is a negotiable instrument. By transfer of document we mean transferring the right to receive the money (of the instrument) and also the right to further transfer the instrument. However, the instrument can be transferred by two modes only (by delivery or by endorsement and delivery).

In other words, a NEGOTIABLE Instrument is : -

(i) any document in writing.

(i) this document legally entitles the holder of the instrument to a sum of money.

(iii) such an instrument can be transferred from person to person.

(iv) the person to whom it is transferred gets two rights :

    -right to receive the money

    -right to further transfer the same instrument.

Definition-

Negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.                                      - U/S 13 (1) of the Negotiable Instruments Act, 1881. 

Characteristics of Negotiable Instrument-

1. Entitles the holder a sum of money- A negotiable instrument is a legal document which entitles a person (i.e., the holder of the instrument) to a sum of money. The sum of money is clearly stated on every negotiable instrument. Every holder of the instrument has a legal right to claim the sum so stated (on the instrument) from the person who gave this instrument to the holder. In other words, every negotiable instrument represents the money payable to the holder of the instrument. 

2. Element of Negotiability /Transferability- An instrument that possesses the quality of negotiability is entitled to be called a negotiable instrument. Negotiability means the right to freely transfer the property or ownership of the instrument from person to person. Every holder of a negotiable instrument can legally transfer the right to ownership to another person i.e. once the instrument is transferred to the another, then the new holder of the instrument gets the right to claim the money stated on the instrument. 

3. Modes of transfer of instrument- A negotiable instrument can be either an order instrument or a bearer instrument. A bearer instrument can be transferred by delivery of the instrument, whereas an order instrument can be transferred by endorsement and then delivery.

    *Bearer Instrument- A bearer instrument is an instrument on which no specific name of the payee (receiver of money) is mentioned. Such an instrument is the property of the person who holds the instrument i.e. who has the physical possession or custody of the instrument.

    *Order Instrument- Order Instrument is an instrument which is payable to a specific payee i.e. the name of the payee is mentioned on the instrument. Only the person whose name is mentioned on an order instrument has the legal right to ownership of that instrument and the right to claim the money of the instrument.

4. In writing- Every negotiable instrument has to be in writing. An oral promise to pay a sum of money to the other person cannot be legally challenged in the Court of Law. Although the writing may better be in ink or even in pencil is acceptable, but very essential element of all negotiable instruments is they should be written. 

5. A certain sum of money- Another essential characteristic of a negotiable instrument is that the sum of money payable to the payee must be certain or definite. However, in cases where the amount to paid is differently stated in figures and in words, the amount stated in words shall be the amount undertaken to be the paid. The amount in words constitutes the body of the instrument, therefore in case of a discrepancy the amount written in words shall prevail.

6. Consideration should be money only- A negotiable instrument has to be for a consideration, because under section 25 of the Indian Contract Act, 1872, "an agreement without consideration is a void agreement."
A negotiable instrument must be to pay money only. If the instrument is not to pay money but to do or pay something else, then it shall not be a valid negotiable instrument.

For Example: An instrument signed by A saying, "I promise to pay B 500 and to deliver to him my black horse on 1st January next" is not a valid promissory note because in this case the promise is not to pay money only but to do something else also apart from that.

7. Unconditional- A negotiable instrument must be unconditional i.e. the payment of the instrument shall be on the fulfillment of some conditions or on the happening of some contingency.

For example: "I promise to pay B 5000/-seven days after my marriage to C.

8. Good title- The transferee who takes the negotiable instrument in good faith and for consideration (technically known as a holder in due course) gets a good title to the same even though the title of the transferor is defective.

Any person who:

(i) acquires a negotiable instrument; 

(ii) for a value i.e. for consideration;

(iii) in good faith i.e. bonafide;

9. Right to sue in own name- In case of dishonour of a negotiable instrument, the owner (holder or holder in due course) can sue the liable parties in his own name to recover the amount due on the instrument.

10. Presumptions (U/S 118 and 119)

(a) Consideration- Every negotiable instrument is presumed to have been made, drawn, accepted, endorsed, negotiated or transferred for consideration. In other words, every negotiable instrument is said to have been made for a value or consideration. 

(b) Presumption as to date- Every instrument is presumed to have been drawn or made on the date that appears on it. 

(c) Time of acceptance- When a bill of exchange has been accepted, it is presumed that it was accepted within reasonable time after its date and before its maturity.  

(d) Time of transfer- Every transfer of a negotiable instrument is presumed to have been made before its maturity.

(e) Order of indorsements- The indorsements on a negotiable instrument are presumed to have been made in the order in which they appear on the instrument.

(f) As to stamp- Where an instrument has been lost, it is presumed that the instrument was duly stamped. 

(g) Holder in due course- Every holder is presumed to be a holder in due course. Thus, a person who has the possession of the instrument is presumed to have obtained it for value and in good faith. The burden lies upon the opposite party to show that he is not a holder in due course. 

(h) Proof of protest [Section 119]- In a suit upon an instrument which has been dishonoured, the Court shall, on proof of the protest, presume the fact of dishonour. unless and until such fact is disproved.

Conclusion-

All above are the characteristics of the negotiable instruments.