LawPage

Notes and Articles for Law students

User Tools

Site Tools


negotiable-instruments:introduction

Introduction to Negotiable Instruments Act

The Negotiable Instruments are a western concept and the law governing them is necessarily of western origin attributable to (i) the principles applicable to ordinary contracts under the common law, (ii) the principles imported by the Law Merchant founded on the usages of trade, judicially ascertained and recognised. The Law Merchant is nothing but the usages of merchants and traders adjudicated by the law courts and adopted by them as settled law m the general interest of trade and commerce and for the convenience of the public It is a perfect development of the Customary Law of the English Merchants.

The Negotiable Instruments came into being with the progress of civilization and growth of industries and enterprise. The Bill of Exchange, of all such instruments, came into use first among the Mediterranean trading countries in the thirteenth and the fourteenth centuries and from there it gradually came to England. Originally, a bill of exchange was used to transfer trade-debts between persons in different countries , and the system was extended to apply to inland trade debts, and gradually to private debts also. At the back of the whole system were trust and confidence born of the rigid fulfilment of the obligations arising under such instruments in the early stages of their growth When trade flourished and commerce expanded, the supply of currency could not keep pace with their demand and credit instruments had to be invented to function as money which they represented.

Soon after the Bill of Exchange, the promissory notes made their appearance The usage among traders of making promissory notes payable to bearer or to order, began to prevail and was recognised in England by the law courts more than once. But in 1703 Chief Justice Holt denied the promissory notes the attribute of negotiability and persistently refused the merchants the legal sanction of their custom. Therefore, the statute of 3 and 4 Anne C 8, was passed whereby promissory notes were made assignable by indorsement.Cheques are the latest of the devices introduced in England in the seventeenth century when the business of banking was undertaken there by goldsmiths.

The present Act (XXVI of 1881) replaced Statute of William III, C 17 and 3 and Anne C 8 and Indian Acts VI of 1840 and V of 1866 which were in force in this country. Before the passing of this Act there was no enactment in British India exchange and cheques. Previously the courts used to apply the Law Merchant in cases of Europeans and in cases of Hindus and Muslims their personal laws.But where the instrument was in English form, English law was applied even if the parties were Hindus. There is a class of instruments called hundies which have been current in this country from long past. These instruments are bills of exchange written in oriental languages and were governed by customs prevailing amongst the merchants of different communities other than Europeans. The customs were not uniform but varied according to places. Local customs prevailed in connection with these hundies over the technicalities of English law. With the growth of trade and commerce necessitating an extensive use of the promissory notes, bills of exchange and cheques it was felt that there should be one uniform law regarding them in British India on the lines of the Law Merchant, a perfect development of the customary laws of the English merchants and the Negotiable Instruments Act based entirely on the principles of English law was eventually passed in 1881 after long and protracted, consideration as noted hereinafter. The object and purpose of the Act is to legalise a system under which the claims arising upon certain instruments of a mercantile character can be treated like ordinary goods which pass by delivery from hand to hand within the prescribed limits. There was some controversy, however, as to whether the Act should apply in its entirety to hundies as the undernoted extract from the report of the Select Committee shows. But eventually “local usage relating to any instrument m an oriental language” remained unaffected unless “such usages were excluded by any words m the body of the instrument”.

The Select Committee in their report stated as follows — “We have certainly considered the arguments urged on the one side by the learned Chief Justice of Bengal for the immediate application of the measure in its entirety to hundies and on the other side by the Government of the Punjab for the total exclusion of hundies from any part of the measure. We have come to the conclusion that the bill should in this respect be left substantially as it stands.Admitting with the Chief Justice that the one main principle of Indian Codification is to reconcile and assimilate, as far as possible, the native and European law on each subject, we would point out that the principle must be applied as to produce as little friction as possible, and we feel assured that the sudden abolition of the numerous local usages as to hundies, uncertain and undefined as they often are, would cause much and justifiable dissatisfaction among native bankers and merchants in certain parts of the country.But we believe that the effect of the bill, passed with a saving of the local usages in question, will be, not as the Chief Justice fears, to Stereotype and perpetuate these usages, but to induce the native mercantile community gradually to discard them for the corresponding rules in the Bill. The desirable uniformity of mercantile usage will thus be brought about without any risk of causing hardship to native bankers and merchants. How long this change will take is, of course, impossible to prophesy. But the Bank of Bengal has supplied evidence that the native usages as to negotiable paper have of recent years been greatly changing and that the tendency is to assimilate them more and more to the European custom”.

The Indian Act has codified the English common law relating to promissory notes, bills of exchange and cheques. It differs from the English law on very few points. As has been aptly put, the Act is the fitting of the English boot to an Indian foot, the dressing of an oriental figure in a London made suit As the negotiable instruments are the most cosmopolitan of all contracts, it is right, therefore, on points of uncertainty, and where there is a lack of authority, to look for the solution of difficulties in the codes and laws of other countries.

In England, the law of negotiable instruments was codified by the passing of the Bills of Exchange Act, 18521). The history of the Indian Act is rather a long one. The bill was originally drafted in 1866 by the Indian Law Commission. It was introduced in the Indian Legislative Council in 1867 and was considered by a Select Committee, but objections were taken by the mercantile community to the various departures from the English law which it contained and the bill had to be remodelled in 1877 on a large scale. It was then considered by a Select Committee which made certain alterations both verbal and substantial It was again referred to a Law Commission in 1880 which did not change anything except making certain important additions regarding hundies.The bill was again referred to a Select Committee which made a few formal changes This bill as amended was eventually passed into law in 1881. Since the passing of this Act several amendments have been made to bring this Act in conformity with the provisions of the Bills of Exchange Act and to meet the exigencies of the situation.

The first of these amendments was the Negotiable Instruments Act (II of 1885) by which sections 7, 61, 64, 101, 109, 113 were amended, sections 45A and 104A were inserted and section 108 was repealed in part. The most important of these changes was the relaxation of certain formalities which the acceptor of a bill, had to observe before under the Act. These were omitted in the Bills of Exchange Act In India these conditions stood in the way of some acceptors of certain classes of bills in going before a notary. A further practical difficulty was that unlike the Bills of Exchange Act, section 113 of this Act provided that the Notarial Act required payment by the payer for honour himself and not by his agent. These defects were cured by Act II of 1885 in conformity with the law of England Provision was also made at the same time for better guidance and control of notaries public.

Then followed the Negotiable Instrument Amendment Act (VI of 1897) by which section 72 was amended and section 84 substituted. These changes were for the protection of a drawer of a cheque Thus, where a drawer has a larger amount in the bank than is covered by the cheque drawn on it and tor non-presentation of the cheque within a reasonable time by the holder the drawer suffers actual damage, as by the failure of the bank, the drawer is discharged to the extent of his liability under the cheque.

The changes effected by NI Amendment Act (V of 1914) were in sections 13, 16, 138, 139 With respect to section 13 it was mainly a confirmatory amendment. It had long been the practice to endorse negotiable instruments, particularly G P notes, in such a way as to make them payable to two of more payees jointly or, in the alternative, to one or some of several payees This practice was confirmed by this amendment clearing all the doubts about it. By insertion of sub-section 23 in section 16 rights of the endorsee were protected if his signature was forged.The changes in sections 138 and 139 were consequential as the Decentralisation Act IV of 1914 effected a change in Sec 3 by empowering. Local Governments to appoint the Notary Public This power again has vested in the Central Government

After this was passed Act VITI of 1919 amending sections 9, 13, 48. 121. It validated a prevailing custom by which a cheque was treated as a negotiable instrument even though the word “bearer” printed on it was struck out and the word ‘order' was not substituted The Bombay High Court had doubted the validity of this practice in Dosabhai v Virchand2) and held that these instruments were not legally negotiable This amendment put an end to the confusion which the decision m question brought about in the mercantile community.

By the Amendment Act (XXV of 1920) a new section 75A was inserted It provides that delay in presentment for payment should be excused where the circumstances causing the delay are beyond the control of the holder. This was a post war amendment.

The next Amendment Act (XII of 1921) amended Sections 63, 75A, 83. This excused delay in presentment for acceptance and also extended the time within which bills are to be accepted after presentment By the Amending Act (XVIII of 1922) an explanation has been added to Section 131 by which protection is given to collecting bankers in cases where they credit their customers’ account with the amount of a cheque before receiving payment of it.

The Amendment Act (XXX of 1926) amended sec 80 of the Act. This amendment has settled the rate of interest on negotiable instruments by reconciling the provisions of the C P. Code and Negotiable Instruments Act of 1881 in cases where rate of interest is not specified. By the Amendment of 1930' (XXV of 1930) section 85A, was inserted to limit the liability of bankers on forged and unauthorised indorsements of demand drafts drawn by one branch of a bank upon another branch of the same bank.

The next amendment in 1934 (XVII of 1934) added sub-section (2) to section 85 which absolves a banker from all liability in case a cheque is originally a “bearer” cheque and the bank pays the amount to the bearer who presents it for payment in due course notwithstanding any endorsement restricting or excluding further negotiation. In 1947 section 75B was inserted as a temporary provision by section 2 of NI Act and Indian Limitation Act (Temporary Amendment) Ordinance No 31 of 1947 promulgated under section 42 of the Government of India Act 1935. This section dispensed with the necessity of presentment for acceptance and payment of a negotiable instrument if it was not possible for the bank as holder to present it on account of not or other disturbances ill the area where presentment was to be made. This temporary provision has since lapsed The next amendment was the insertion of section 131A by section 2 of the N I Amendment Act (33 of 1947). This section set at rest the doubt as to the applicability of Chapter XIV of the Act to a draft issued by one branch of a bank on another. But by the Repealing and Amending Act (35 of 1950), Act 33 of 1947 itself has been repealed subject to certain savings under section 4 of the Act.

Apart from the changes noted above a fundamental change having taken place in the Constitution of the Indian Subcontinent there have been some consequential formal changes in some sections of the Act.On and from the 15th day of August 1947 British India ceased to exist. In its place two self-governing Dominions—India and Pakistan - were brought into existence by the Indian Independence Act of 1947 passed by the British Parliament.The laws in force in British India immediately before the 15th of August became the laws of the two Dominions ‘British India’ wherever the expression occurred in this Act was substituted by the word ‘provinces’ in its application both to India and Pakistan under the Adaptation Orders passed. Thereafter the constitution of India has been framed by the “Constituent Assembly and India has been proclaimed a Sovereign Republic on and from the 26th day of January 1950 and has ceased to be a Dominion. By the consequential Adaptation of laws. Order passed on the same date the expression ‘provinces’ which was a substitute for ‘British India’ has been replaced by the word ‘States’ in India At the commencement of the Indian Constitution the word States in this Act meant Part A and Part B States to the exclusion of Part B States But after the passing of Part B States (Laivs) Act III of 1951 the word means the territory of India excluding the State of Jammu and Kashmir. In its application to Pakistan it means the provinces of Pakistan. The constitutional change affects the application of section 11 of the Act long a bill drawn at Dacca and made payable in Calcutta was an inland bill. Such a bill will now be a foreign bill under the section necessitating observance of all formalities relating to it.

The Act enumerates only three kinds of negotiable instruments promissory notes, bills of exchange and cheques. It also appears from the preamble that the scope of the Act is limited to defining and amending the law relating to these three kinds of instruments alone. The Act is applicable to hundis subject to local usage But this local usage must be established by the party who relies on it. Subject to local usage the Act applies to hundis as much as to other negotiable instruments. The following are the broad features of the Act.

Promissory Notes, Bills and Cheques

In the Act we are furnished with the definitions of promissory note, bill of exchange and cheque in sections 4, 5, and 6 from a perusal of which, it will appear that a cheque is treated as a particular form of a bill of exchange. There are, therefore, practically two classes of instruments, namely,

  1. Promissory notes, and
  2. Bills of Exchange

The broad distinction between these two may be shortly stated to be this, that in a promissory note, the executant promises to make the payment himself, in a bill of exchange he directs some other person to pay. It follows that there are two parties in a promissory note and three in a bill of exchange. A promissory note when endorsed in favour of a third person is like a bill of exchange as it is an order by the endorser upon the maker to pay the endorsee To be a valid bill of exchange or a promissory note, it must be in writing, must contain an unconditional order or promise to pay, must be signed by the drawer or maker who must be a certain person and the amount payable must be certain.In the case of a promissory note the payment is to be made to the person in whose favour it is executed or to the order of such person or to the bearer of the instrument. In the case of a bill of exchange, the drawee and the payee must be certain and the order must be to pay money and money only.

A cheque is a bill of exchange drawn on a specified banker and payable on demand While all cheques are bills of exchange, all bills of exchange are not cheques. A banker's cheque is a peculiar sort of instrument, in some respect resembling a bill of exchange, but in some, entirely different. A cheque does not require acceptance and, ordinarily is never accepted. It is not intended for circulation but is given for immediate payments. It is not entitled to days of grace

Marking and certification of Cheques

Acceptance of a cheque is not necessary to create any liability to pay as between the drawer and the drawee bank. The liability is a matter of contract between them. The practice of certifying cheques is not judicially or legislatively established in India. Marking or certification of a cheque is not an acceptance. It is essentially different in its nature and effect in the absence of a customer treating certification as an acceptance.

There is a practice amongst the bankers for marking cheques as good for payment for the purpose of clearance by which they become bound to each other. This is entirely different from acceptance the effect of which is to create a negotiable liability.

Parties to negotiable instruments

The maker of a promissory note is one who executes it. The person who draws a bill is called a drawer. Where a person after drawing a bill delivers it to the payee the former incurs ar liability to the latter. Therefore, ordinarily, a person who is competent to enter into a contract draws a bill. But there is nothing to prevent a person incompetent to contract from drawing a bill, only in such cases the drawer incurs no legal responsibility as no obligation can be enforced against him legally. Drawee is generally a person who is under some obligation to the drawer, either by having in his possession funds of the drawer or for some other reason, to make the payment as directed by the drawer And the moment he formally accepts the bill or the cheque i.e, he signifies his assent to the order of the drawer, he is called the acceptor, and makes himself liable for the payment. It follows, therefore, that he should be a person competent to contract free from all legal disabilities. The person who is the real beneficiary under the bill i.e, to whom the payment is to be made is called the payee. Where the payee signs his name and makes it payable to some other person, that other person does not become the payee. A corporation, a community or a minor may be a payee.

A holder of an instrument means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. The term ‘holder' as defined in this section appreciably differs from that of the English law under the provision of the English Bills of Exchange Act the holder of a bill is a person who is actually in possession of it. But the present Act goes much further and lays down that one who is entitled to but may not actually be in possession of a note is the holder thereof.

A holder in due course means a bona fide holder of an instrument for value before it has became due without notice of any defect. The definition lays down three conditions

  1. The transfer must be for consideration
  2. it must be before it is due,
  3. it must be without notice of any defect

The holder in due course holds the instrument free from all defects of title and conveys a similar title to others. This special privilege has been conferred on the holder in due course to make his position certain against all possible claims. Uncertainty is opposed to the fundamental principle of the Law Merchant whose function is to give currency to these instruments for facility of trade and commerce by protecting the interest of bona fide dealers for value.

When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the put pose of negotiation, on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to indorse the same, and is called the 'Endorser'. If the indorser signs his name only, the indorsement is said to be in 'blank' and if he adds a direction to pay the amount mentioned in the instrument to or to the order of, a specified person, the indorsement is said to be “in full”, and the person so specified is called the “indorsee” of the instrument.

Consideration

Every negotiable instrument shall be presumed to be for valuable consideration until the grant or failure of consideration is proved by the person alleging it. In an action on a negotiable instrument, the defendant, unlike other contracts where the plaintiff must prove consideration, must prove want or failure of consideration. The presumption is in favour of the plaintiff.

Negotiation

When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated. When a negotiable instrument payable to order or bearer is transferred to a person by endorsement or delivery or by both as laid down in this Act the instrument is said to be negotiated as distinct from transfer by a document under the T.P Act.

Under the Transfer of Property Act a person cannot transfer a better title than he possesses but under the present Act one having a defective title to the property in the instrument can pass an absolutely unimpeachable title to the transferee.3)

Presentment

Presentment for acceptance means that the bill should be exhibited to the drawee so that he may judge for himself whether he will accept or pay it or not, mere notice of the existence of the bill is not sufficient to constitute presentment.

In the case of compulsory presentment it must be made within a reasonable time i.e, without undue delay. There can be no hard and fast rule as to what period will constitute reasonable time in all cases. It will depend on the circumstances of each particular case. Delay in presentment for acceptance or payment is excused if it is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct or negligence.

The bill is to be presented to the drawee usually at his place of residence or business unless a specified place is mentioned in the bill for presentment. Where the presentment of a bill is compulsory presentment should be definitely proved in order to enable a party to base his claim on it. It is the holder of the bill who can demand acceptance and, therefore, the holder or his authorised agent is competent to present. One unconnected with the bill in either of the capacities cannot, therefore, present it. Presentation is necessary only for making liable persons other than the makers.

Payment

Payment of the amount due on an instrument may be either before or at maturity.Payment by a party to the instrument before maturity does not discharge the instrument and its negotiability does not cease. It is merely a purchase of the instrument with all the rights of negotiation. In order to discharge the instrument the payment must be made at maturity. Otherwise the acceptor will be liable to pay it again on the instrument the hands of a bona fide transferee for value. In the case of premature payment by the maker or acceptor he must get the instrument delivered to him so that he can make himself and all the subsequent parties liable. Ordinarily, the holder who is entitled to recover the amount due on the instrument is entitled to ask for payment in cash or other currency which is recognised as a legal tender. A cheque is not a legal tender. But this does not prevent the holder from entering satisfaction of the debt by acceptance in any form whether that is recognised as a legal tender or not, so that, if the holder chooses, he can give discharge of the debt by means other than cash or any other legal tender, as for instance, by setting off one debt against another, by taking a fresh bill in lieu of the old one or by accepting satisfaction in some other way.

Interest

Under the terms of section 79 of the Act, the Court has no option to disallow interest at the rate, however exorbitant, specified in the instrument and made expressly payable. The interest specified in the note on demand should be calculated from the date of the instrument and not the date of demand, until tender or date of realisation by suit. A stipulation to pay compound interest must be clear and unequivocal. When in spite of agreement to pay interest in title document the rate of such interest is not mentioned, eighteen per cent per annum will be allowed under section 80.

The imperative provision in this Act as to the payment of interest at the specified rate has to be read subject to the provisions of the Indian Contract Act, the Usurious Loans Act, the Provincial Money Lender's Acts and other Acts of kindred nature regulating the rate of interest if made applicable to negotiable instruments, that is to say, the court can grant relief when the rate is exorbitant and unconscionable or in excess of the statutory rates laid down therein in spite of the provisions of this Act.

Discharge from liability

The discharge of the instrument itself extinguishes all rights of action under it and puts an end to its negotiability. So that, if, after such discharge, the instrument reaches a holder in due course he acquires no right under it. But the discharge of a particular party or parties does not discharge the instrument itself nor does it affect its negotiability. It only releases the party or parties from liability to one party or another and the liability of the parties, not discharged, continues as before.

There are three modes of discharge, namely

  1. by cancellation,
  2. by release and
  3. by operation of law.

A party whose name is cancelled with the intention of discharging him is discharged from liability to the holder who has cancelled his name and to all other persons who have derived their title from such holder. A party to the instrument may be expressly released from, liability by the holder or the holder may accept a smaller amount in satisfaction of the entire claim, but in order to discharge the party he must do so absolutely and without any condition. The principles of general law are applicable to negotiable instruments as well , and therefore, besides the modes of discharge specified in this section, there are various other modes of discharge by operation of law as when, a debtor is adjudicated an insolvent, or the remedy of the holder is barred by the law of limitation on account of the lapse of time or when one debt merges into another.

Dishonour

A bill may be dishonoured by non-acceptance and by non-payment. The drawee is to accept the bill within forty-eight hours of presentation. If he does not signify his acceptance or refuses to accept the bill within the aforesaid period it will be taken as dishonoured. When the maker of a negotiable instrument fails to make payment on the due date it is dishonoured and the holder can at once proceed against the drawer and parties, if any, on the instrument. Notice of dishonour is a condition precedent to make the parties liable On dishonour the holder of the instrument, or some party thereto who remains liable thereon must give notice of dishonour to all the other parties except the maker, acceptor or the drawee of a note, bill or cheque respectively whom the holder seeks to make liable.

Crossed cheque

Ordinary cheques are liable to risks of loss or of being stolen in course of circulation. In order to safeguard the interest of all persons concerned against such loss and theft the system of crossing of cheques has been introduced. The object of crossing a cheque is to give a direction to the banker not to make the payment over the counter but to pay it to a banker only. The obvious advantage of this system of payment through a banker is that it may be easily found out to whose use the amount goes. Crossing does not bar negotiability unless the right of transfer is expressly taken away by the addition of the words “not negotiable” to the crossing.

Summary

We have briefly indicated above the history of the negotiable instruments and some of the salient features of the law relating to them as obtains in India and Pakistan. On account of the development of industries and the growing expansion of trade and commerce the importance and usefulness of the negotiable instruments cannot be over-estimated. The law relating to these instruments must keep pace with the exigencies of the situation and should be uniform and with that end in view it has been retained as a central subject both in India and Pakistan.

1)
45 and 46 Vic C 61
2)
49 I C 388
3)
vide section 58