Notes and Articles for Law students

User Tools

Site Tools


Extent and Scope of the Negotiable Instruments Act

Section 1 of the Negotiable Instruments Act,1881. This Act may be called the Negotiable Instruments Act, 1881.

Local extent. Saving of usages relating to hundis, etc.

It extends to the whole of India but nothing herein contained affects the Indian Paper Currency Act, 1871, (3 of 1871) section 21, or affects any local usage relating to any instrument in an oriental language;

Provided that such usages may be excluded by any words in the body of the instrument which indicate an intention that the legal relations of the parties thereto shall be governed by this Act and it shall come into force on the first day of March, 1882.


From the first day of March 1882 upto the 14th day of August 1947 the Act was applicable To the whole of British India that is, all the territories in India under the British Administration. The Act was also declared to be applicable to Upper Burma except the Shan states, to parts of Hyderabad under the Resident, Berar, Bangalore and to British Baluchistan. Under the Indian Independence Act which was passed by the British Parliament in 1947 and received the royal assent on 18/7/1947 British rule came to an end on and from the 15th day of August, 1947 when the Sub-continent of India attained independence and was split into the Dominion of India and the Dominion of Pakistan.

Under the Independence Act and under Article 4 (2) both of Indian Adaptation Order and Pakistan Adaptation Order dated 15/8/1947 passed there under all Central and Provincial Acts which were in force in British India on 14/8/1947 became applicable in the two Dominions. In this context the expression “British India” wherever it occurs in its application to the Dominion of India would mean “The Provinces of India” and in its application to the Dominion of Pakistan would mean “the Provinces of Pakistan” until altered or modified by competent authority. Since then the constitution of India has been framed and on and from the 26th day of January, 1950, India has been proclaimed a Republic, Sovereign and Independent and has ceased to be a Dominion.

Article 372 of the Constitution provides that all laws in force in the territory of India immediately before the commencement of the Constitution shall continue to remain in force until modified, altered or repealed by competent authority. The same article authorises the President “to make such adaptations and modifications of any law in force in the territory of India, whether by way of repeal or amendment as may be necessary or expedient for the purpose of bringing the provisions of such law into accord with the provisions of the Constitution and to provide that the law shall, as from such date as may be specified in the Order, have effect subject to the adaptations and modifications so made ”.

Accordingly the President made the Adaptation of Laws Order 1950 on the 26th of January under which all existing Central and Provincial laws have effect as from the appointed day i.e, the 26th day of January subject to the adaptations and modifications mentioned therein. The Negotiable instruments Act is a Central Act under the Adaptation Order of 1947 “British India” in its relations to India was substituted by “all the Provinces ot India” which were again replaced by “the whole of India except Part B States” By the Adaptation of Laws Order 1950. Under this Order the Act was not to apply to Indian states and acceding states called Part B states but was to apply to Part A States and Part C states, i.e, the territories under the Governors and the Chief Commissioners respectively.

Since then Act III of 1951 called the Part B States (Laws) Act has been passed by the Indian Parliament and has resumed the assent of the President on the 22nd of February, 1951. By this Act the clause “except Part B States” has been substituted by “expect the State of Jammu and Kashmir” with the result that the Act was made applicable to the whole of India including Part B states except the State of Jammu and Kashmere. In Pakistan the expression “British India” shall be substituted by “the Provinces of Pakistan” until the Constitution was framed and consequential changes are made or until otherwise modified or amended.

Prior to 1956; NI Act was not applicable in state of Jammu and Kashmir but the position was clarified by the 11th Law Commission Report, Para 35 of the report states that-

The Act has already been extended to the State of Jammu and Kashmir by the Jammu and Kashmir Extension of Laws Act, 1956 and the words “except the State of Jammu and Kashmir” in Section 1 have been omitted by that Act.

Presently this Act is applicable in entire India , including Jammu & Kashmir.

Scope of the Act

The present Act seeks to codify the law relating to promissory notes, bills of exchange and cheques. Upon their plain language and also upon authority certain definitions in the Act such as those of ‘Negotiable Instrument’, ‘holder’, ‘holder in due course’ are exhaustive. But the Act, however, is not exhaustive. It is not a compendium of the whole law relating to the transfer of interest in negotiable instruments or the procedure governing actions on them.

The Act does not expressly exclude the doctrine of representative action. It only regulates the issue and negotiation of the promissory notes, bills of exchange and cheques but does not interfere with the assignment or devolution of rights under the ordinary law. It is a statute dealing with a particular form of contract and will always overrule the provisions of a general character embodied in the Indian Contract Act. The Act will not apply where Sec 25 of the Indian Paper Currency Act of 1882 ammended by Act 1) and at present embodied in section 31 of the Reserve Bank Act (II of 1934) applies or where there is any local usage relating to any instrument in an oriental language, but in the absence of local usage it will apply to hundies in an oriental language. The usage may, however, be excluded specifically by words to that effect in the body of the instrument with the result that this Act shall prevail over the current usage. If there is no such intention specifically expressed, the usage, wherever proved, shall prevail and this Act shall not be applicable.

There is a conflict of opinion as to the applicability of the Act to non-negotiable instruments. According to the Calcutta High Court the Act applies to all negotiable instruments and does not apply to non-negotiable ones. But according to the High Court of Madras, the Act applies to non-negotiable instruments as well.

Negotiable Instruments

The negotiable instrument is an instrument that can be passed from hand to hand like cash or goods, by endorsement or delivery. Negotiability cannot be given to an instrument by agreement of the parties or otherwise than by an established custom of merchants or by statute. These instruments derive their authority primarily from the Law Merchant which is the accumulated product of mercantile usages and customs sanctioned from time to time by the decision of law courts. This Act specifically deals with promissory notes, Bills of exchange and cheques which are defined in sections 4 to 6. It, however, makes no provision as regards hundies, yet it has never been held any where that a hundi is not a negotiable instrument.

Paper Currency Act III of 1871

Section 25 of the Paper Currency Act prohibits the making, accepting or issue of promissory note or bill of exchange or hundi or engagement for payment of money 'payable to bearer on demand' or borrowing, owing or taking up any sum of money on any such bills etc. The object of this prohibition is to ensure Government monopoly of the issue of Notes in India. This monopoly is now vested in the Reserve Bank and the Governor General in Council.

In some cases Negotiable instruments contain promise to pay a certain sum to a specified person or to his order or bearer. To make such instruments payable to bearer on demand will be to attract the operation of section 25 and the penal section 26 of the Paper Currency Act , the addition of a specified payee does not make it legal and no claim can be founded on it although a suit may be on the original consideration. But a contrary view has been held in Bombay and Sindh.It is only the making of such instruments that is prohibited. It is important to note here that section 25 of the Paper Currency Act imposes no restrictions on the issue of cheques made payable to bearer on demand.

A person can, however, draw bills or notes payable to a certain person or to order or to a man of worth and make them payable on demand. The note may become a bearer note by endorsement in blank as it is only the making of such notes that is prohibited. Again a pronote with interest at 9pc per annum with half yearly rest indicating that the loan is at least for more than a half year and hence not payable on demand or a note drawn payable to the person who brings it or to the order of the aforesaid person on demand implying that there must be an endorsement by the payee does not offend against section 25 of the Paper Currency Act.

It is to be noted that the Indian Paper Currency Act has been repealed by the Reserve Bank of India Act 11 of 1934. Sections 31 and 32 of this Act correspond to sections 25 and 26 of the repealed Act. The proviso to section 25 beginning with “their customers” has been omitted from the corresponding section 31 of the Reserve Bank Act. This has made it clear that the Act does not prohibit cheques even for an overdrawn amount on a bank.

Local usage

As already stated, unless specially excluded by words to that effect in the body of the document, a local custom or usage, when proved, must prevail over the provisions of this Act. But such custom or usage will not override the provision of any other Act except this. The usage or custom in respect of the instrument must be certain, invariable, reasonable and acquiesced in universally, so that any trader may enter into the contract with that usage as an implied part of it. The usage may be of recent origin or may be in course of growth. As an instance of custom, contrary to the provisions of the Act, may be mentioned the Shahjog hundi which is payable to a Shah, i.e , a respectable and responsible person and not to any bearer presenting it. When presented it must stand endorsed by a respectable person. In one case it has, however, been stated that a Shahjog hundi is saved from the operation of the Act, not by reason of the provisions of section 1 of the Act, which saves local usages relating to instruments in an oriental language, but because a Shahjog hundi does not fall within the definition of a 'negotiable instrument’ as mentioned in the Act and is totally outside the scope of the Act.

XXXIII of 1923