BUSINESS LAW

NEGOTIABLE INSTRUMENTS ACT 1881
 
INTRODUCTION OF NEGOTIABLE INSTRUMENTS

Individuals, businessmen and firms use various instruments to facilitate transfer of money and settlement of transactions. Perhaps you have heard the word ‘cheque’ and if you have an account in a bank, probably you know the uses of a cheque. A cheque is used to transfer money from one person to another. There are some other documents which are used in business transactions to facilitate the transfer of money. These documents are called negotiable instruments. In this unit, we will discuss the meaning and different types of negotiable instruments. We will also discuss the parties involved in these negotiable instruments

MEANING OF NEGOTIABLE INSTRUMENTS

You know that a business firm can purchase and sale goods in cash or on credit. In case of cash transactions, they are immediately settled by paying cash (cash purchases) or by receiving cash (cash sales) and generally the parties have no further obligations in respect of payments. But it is not so in case of credit transactions. The purchaser who purchases goods on credit have to make payment at some later date though not immediately. The seller, in that case, writes an order (a written document) to the purchaser that he has to make payment after a specified period of time. That order has to be signed by the purchaser indicating that he has accepted the order and will make payment on the specified date. The seller retains the order with him till the specified date when the purchaser makes the payment.

But the seller instead of waiting to collect the amount on the specified date can transfer the document to some other person to meet his own business obligation. The seller can transfer the document by writing the name of the person on the back of the document and thereby instructing the purchaser to pay the amount to that person on due date. The seller must sign on the back of the document to transfer the document. At the end of the specified period, the person can collect the amount from the purchaser.

From the above discussion, it can be said that there are certain documents which facilitates the payments in business and thereby reduce the physical handling of cash. These documents are called negotiable instruments.

Hence, negotiable instruments may be defined as written documents which can be transferred from one person to another to make payments until the final payment is made. In India, the Negotiable Instruments Act, 1881 contains the rules relating to negotiable instruments. According to Section, 13 of this Act, a negotiable instrument means “a promissory note, bill of exchange or cheque, payable either to order or to bearer whether the words “order” or “bearer” appear on the instrument or not.”

According to this definition, there are only three types of negotiable instruments i.e. promissory note, bill of exchange and cheque. But some other documents like, dividend warrants, railway receipts, hundies etc. are also considered as negotiable instruments if they satisfy the conditions of a valid negotiable instrument.
Now, let us know something more about these negotiable instruments

1.      What is negotiable?

·         Negotiable means transferable.

·         The negotiation that goes on refers to the transfer of the instrument between two people, or from one bank to another, or even from one country to another.

2.      What is an instrument?

·         In the broadest sense, almost any agreed-upon medium of exchange could be considered a negotiable instrument.

·         In day-to-day banking, a negotiable instrument usually refers to checks, drafts, bills of exchange, and some types of promissory notes.

3.      Forms of Negotiable Instruments

·         A negotiable instrument is a written order promising to pay a sum of money.

·         A document becomes negotiable when it contains an unconditional promise to pay money and is payable to a bearer or payable on demand.

4.      Nature of the negotiable instrument are:

·         Be in writing

·         Be signed by the maker or drawer

·         Be an unconditional promise or order to pay

·         State a fixed amount of money

·         Be freely transferable from one to another person

·         Be payable on demand or at a definite time

·         Be payable to order or to bearer

5.       Nature of negotiable instrument

·         Always drawn on specified bank,

·         Always payable on demand

·         Unconditional order

·         Certain sum of money

·         Sing

·         Banker name

·         Codes

·         Writing etc

6.      Types of negotiable instrument

·         Cheque

·         Bill of exchange

·         Promissory note

What is a Cheque? Meaning

Cheque is an important negotiable instrument which can be transferred by mere hand delivery. Cheque is used to make safe and convenient payment. It is less risky and the danger of loss is minimized.

Definition of a Cheque

1.      “A" cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand

2.       

3.      "Cheque is an instrument in writing containing an unconditional order, addressed to a banker, sign by the person who has deposited money with the banker, requiring him to pay on demand a certain sum of money only to or to the order of certain person or to the bearer of instrument."

Different Kinds / Types of Cheques

1. Bearer Cheque

When the words "or bearer" appearing on the face of the cheque are not cancelled, the cheque iscalled a bearer cheque. The bearer cheque is payable to the person specified therein or to any other else who presents it to the bank for payment. However, such cheques are risky, this is because if such cheques are lost, the finder of the cheque can collect payment from the bank.

2. Order Cheque

When the word "bearer" appearing on the face of a cheque is cancelled and when in its place the word "or order" is written on the face of the cheque, the cheque is called an order cheque. Such a cheque is payable to the person specified therein as the payee, or to any one else to whom it is endorsed (transferred).

3. Uncrossed / Open Cheque

When a cheque is not crossed, it is known as an "Open Cheque" or an "UncrossedCheque". The payment of such a cheque can be obtained at the counter of the bank. An open cheque may be a bearer cheque or an order one.

4. Crossed Cheque

Crossing of cheque means drawing two parallel lines on the face of the cheque with or without additional words like "& CO." or "Account Payee" or "Not Negotiable". A crossed cheque cannot be encashed at the cash counter of a bank but it can only be credited to the payee's account.

5. Anti-Dated Cheque

If a cheque bears a date earlier than the date on which it is presented to the bank, it is called as "anti-dated cheque". Such a cheque is valid upto three months from the date of the cheque.

6. Post-Dated Cheque

If a cheque bears a date which is yet to come (future date) then it is known as post-dated cheque. A postdated cheque cannot be honoured earlier than the date on the cheque.

7. Stale Cheque

If a cheque is presented for payment after three months from the date of the cheque it is called stale cheque. A stale cheque is not honoured by the bank

What are Features of Cheques ? Characteristics of Checks

1. Cheque is an instrument in writing

A cheque must be in writing. It can be written in ink pen, ball point pen, typed or even printed. Oral orders are not considered as cheques.

2. Cheque contains an unconditional order

Every cheque contains an unconditional order issued by the customer to his bank. It does not contains a request for payment. A cheque containing conditional orders is dishonoured by the bank.

3. Cheque is drawn by a customer on his bank

A cheque is always drawn on a specific bank mentioned therein. Cheque drawn by stranger are of no meaning. Cheque book facility is made available only to account holder who are supposed to maintain certain minimum balance in the account.

4. Cheque must be signed by customer

A cheque must be signed by customer (Account holder) . Unsigned cheques or signed by persons other than customers are not regarded as cheque.

5. Cheque must be payable on demand

A cheque when presented for payment must be paid on demand. If cheque is made payable after the expiry of certain period of time then it will not be a cheque.

6. Cheque must mention exact amount to be paid

Cheque must be for money only. The amount to be paid by the banker must be certain. It must be written in words and figures.

7. Payee must be certain to whom payment is made

The payee of the cheque should be certain whom the payment of a cheque is to be made i.e. either real person or artificial person like Joint Stock Company. The name of the payee must be written on the cheque or it can be made payable to bearer.

8. Cheque must be duly dated by customer of bank

A Cheque must be duly dated by the customer of bank. The cheque must indicate clearly the date, month and the year. A Cheque is valid for a period of three months from the date of issue.

9. Cheque has 3 parties: Drawer, Drawee & Payee

1. Drawer: A drawer is a person, who draws a Cheque.
2. Drawee: A drawee is a bank on whom a Cheque is drawn.
3. Payee: A payee is a person in whose favour a Cheque is drawn.

MEANING OF A BILL OF EXCHANGE

Let us discuss another negotiable instrument i.e. bill of exchange. Section 5 of Negotiable Instruments Act, 1881 defines a bill of exchange as “an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument.”

A bill of exchange contains an unconditional order as opposed to unconditional promise in a promissory note. The bill must be signed by the maker, usually a creditor, who directs the debtor, to make the payment at a specified future date.

Let us take another example. Suppose, Amar has purchased goods from Hari for Rs. 5, 000 on credit. Amar is the debtor and he have to pay Rs. 5,000 to Hari (creditor). Now, Hari can write a bill of exchange on Amar stating that Amar will pay him a sum of Rs. 5, 000 at a fixed future date. The bill must be accepted by Amar recognizing the fact that he will pay the money at the specified time. Suppose, Hari is indebted to Rakesh for Rs. 5, 000. Now, Hari can transfer the document to Rakesh, who will collect the amount from Amar on due date.
In a bill of exchange, the main parties involved are-

1.Drawer: The person, who draws or writes the bill, is called the drawer.
2. Drawee or Acceptor: The person, on whom the bill is drawn, is called the drawee.
3. Payee: The person, to whom the bill will be paid, is called the payee. The drawer may himself be the payee.

FEATURES OF A BILL OF EXCHANGE
1.The bill of exchange must be in writing.
2. The bill of exchange must contain an unconditional order to pay.
3. The drawer, drawee and the payee of a bill of exchange must be certain.
4. The amount of money which is payable through the bill must be certain. Money means the legal tender money.
5. The drawer must sign the bill. It must be properly dated and stamped as per the Indian Stamp Act.
6. The drawee must accept the bill by putting his signature on the bill.
7. A bill may be payable on demand or after the expiry of a fixed period of time.

The specimen of a bill of exchange is given below

               

MEANING OF A PROMISSORY NOTE

A promissory note is a negotiable instrument which contains an unconditional promise to pay a certain sum of money to a certain person or to the bearer of the instrument. Let us take an example. Suppose Shri Ram has taken a loan of Rs. 10, 000 from Shri Amal. Now, Shri Ram can write a promissory note stating “I promise to pay Shri Amal or order a sum of Rs. 10, 000, value received.” Shri Ram must put his signature and it must be properly stamped to make it a valid promissory note.

Section 4, of the Negotiable Instrument Act, 1881 define a promissory note as “an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to or to the order of, certain person, or to the bearer of the instrument.”

Thus, a promissory note contains an unconditional promise to pay a certain sum of money only to a certain person or to his order, on a specified future date. This instrument must bear the signature of the person who promises to make payment.

Parties to a promissory note:
The main parties involved in a promissory note are-
i. Maker or Drawer: The person, who draws or makes the instrument, is called the maker of the promissory note. The maker promises to pay the amount specified in the promissory note. He must sign the note.
ii. Payee: The person to whom the amount will be paid is called the payee.

The payee may transfer the instrument before the due date to meet his business obligations. In that case, the parties will be-
1.Endorser: The person, (the payee) who transfers the document to some other person to meet his financial obligation, is called the endorser.
2. Endorsee: The person in whose favour the instrument is transferred is called the endorsee.

FEATURES OF A PROMISSORY NOTE

1. A written document: To be a valid promissory note, it must be in writing. A verbal promise to pay is not a promissory note.

2. Unconditional promise to pay: The promissory note must contain an unconditional promise to pay. A conditional promise to pay is not a promissory note. For example, if it is written as “I promise to pay Rs. 5, 000 to Hari, if he comes to my home”, is not a promissory note.

3. The parties must be certain: The maker and the payee of a promissory note must be certain.

4. The amount payable must be certain: The amount of money which is payable as promised by the maker of the promissory note, must be certain. Money means the legal tender money. If any other things other than money are promised by the maker, it is not a promissory note.

5. It must be signed by the maker: The maker of the promissory note must put his signature on the instrument. The note may be signed by the agent of the maker but the agent must clearly state as to on whose behalf he is signing the note. The promissory note must be properly dated and stamped as per Indian Stamp Act.

6. Time of payment: A promissory note may be payable on demand or after a fixed period of time. The promissory note which is payable on demand is called demand promissory note and those payable after a fixed period of time is called time promissory note.

Characteristics of a Promissory Note:

1.      It should be in writing.

2.      It is a promise by a debtor to pay.

3.      The promise is always for payment of money.

4.      It is always unconditional.

5.      Acceptance is not essential.

6.      It can be endorsed

Endorsement
The writing on the back of a negotiable or other instrument.  The endorsement of a check, bill of exchange, or note consists of words, qualifying nor not, followed by the signature of the endorser, who may be the payee, drawee, accommodation endorser, or holder, or simply the signature alone thereof.  Endorsement is the means, plus delivery, by which order instruments are negotiated to another person.  Negotiation consists of the transfer of title to and rights in an instrument from one person to another so that the transferee becomes the legal holder.  If the instrument is payable to bearer, it is negotiable by delivery alone; if payable to order, it is negotiated by the endorsement of the holder completed by delivery.
An endorsement must be written on the instrument itself or upon a paper attafched thereto, called an ALLONGE.  An endorsement must be an endorsement for the full amount of the instrument, but where the instrument has been paid in part, it may be endorsed as to the remainder.  There is no limit to the number of endorsements that may be made on a negotiable instrument, except where negotiability has been destroyed.
Important kinds of endorsements are given below:
1. Blank or general endorsement:
If the endorser signs his name only and does not specify the name of the endorsee, the endorsement is said to be in blank Sec. 16(1). The effect of a blank endorsement is to convert the order instrument into bearer instrument (Sec. 54), which may be transferred merely by delivery.
2. Endorsement in full or special endorsement:
If the endorser, in addition to his signature, also adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified person the endorsement is said to be in full [Sec. 16(1)].
If, for example, A, the holder of a bill of exchange, wants to make an endorsement in full to B, he would write thus: “Pay to B or order, SdA4.” After such an endorsement it is only the endorsee, i.e., B, who is entitled to receive the payment of the instrument and to further negotiate the instrument by his endorsement.
A blank endorsement can easily be converted into an endorsement in full, According to Section 49, the holder of a negotiable instrument endorsed in blank may, without signing his own name, by writing above the endorser’s signature a direction to pay to any other person as endorsee, convert the endorsement in blank into an endorsement in full; and since such holder does not sign himself on the instrument he does not thereby incur the responsibility of an endorser.
3. Partial Endorsement:
Section 56 provides that a negotiable instrument cannot be endorsed for a part of the amount appearing to be due on the instrument. In other words, a partial endorsement which transfers the rights to receive only a part payment of the amount due on the instrument is invalid.
Such an endorsement has been declared invalid because it would subject the prior parties to plurality of actions (one action by holder for part value and another action by endorsee for part value) “and will thus cause inconvenience to them.
Moreover, it would also interfere with the free circulation of negotiable instruments. It may be noted that an endorsement which purports to transfer the instrument to two or more endorses separately, and not jointly is also treated as partial endorsement and hence would be invalid.
Thus, where A holds a bill for Rs 2,000 and endorses it in favour of B for Rs 1,000 and in favour of C for the remaining Rs 1,000, the endorsement is partial and invalid.
Section 56, however, further provides that where an instrument has been paid in part, a note to that effect ma; be endorsed on the instrument and it may then be negotiated for the balance.
Thus, if in the above illustration the acceptor has already paid Rs 1,000 to A, the holder of the bill, A can then make an endorsement saying “Pay B or order” Rs 1,000 being the unpaid residue of the bill.” Such an endorsement would be valid.
4. Restrictive endorsement:
Stating the effect of endorsement, Section 50 provides that “the endorsement of negotiable instrument followed by delivery transfers to the endorsee the property herein with the right of further negotiation.” However, Section 50 permits restrictive endorsement.
An endorsement which, by express words, prohibits the endorsee from further negotiating the instrument or restricts the endorsee to deal with his instrument as directed by the endorser is called ‘restrictive’ endorsement.
The endorsee under a restrictive endorsement gets all the rights of an endorser except the right of further negotiation. In other words, such an endorsement entitles the endorsee to receive the payment on due date and sue the parties for it but he cannot further negotiate the instrument.
Illustrations:
(a) B, the holder of the bill, makes an endorsement on the bill saying “Pay C only.” It is a restrictive endorsement as C cannot negotiate the bill further.²
(b) B, the holder of the bill, makes an indorsement on the bill, saying “Pay C for my use or “Pay C or order for the account of B.” In either case there is a restrictive endorsement as the right of further negotiation by C has been excluded thereby.
The person liable on the hill must pay by drawing a cheque in the name of the holder (or the endorser) B. If he makes the payment to C on C’s own account, he will still be liable to B, the endorser; Hence C cannot endorse the bill further in his own name.
5. Conditional endorsement:
If the endorser of a negotiable instrument, by express words in the endorsement, makes his liability, dependent on the happening of a specified event, although such event may never happen, such endorsement is called a ‘conditional’ endorsement (Sec. 52).
The law permits a conditional endorsement and therefore it does not in any way affect the negotiability of the instrument. Thus, endorsements can validly be made in the following terms:
(i) “Pay B or order on his marriage;”
(ii) “Pay B on the arrival of Pearless ship at Bombay.”
In the case of a conditional endorsement the liability of the endorser would arise only upon the happening of the event specified. But the endorsee can sue other prior parties, e.g., the maker, acceptor, etc., if the instrument is not duly met at maturity, even though the specified event did not happen.
6. Sans recourse endorsement (Sec. 52):
When the endorser expressly excludes his own liability on the negotiable instrument to the endorsee or any subsequent holder in case of dishonour of the instrument, the endorsement is known as ‘sans recourse’ endorsement.
Such an endorsement is generally made by adding the words ‘sans recourse’ or ‘without recourse.’ Thus, “Pay X or order sans recourse” or “Pay X without recourse to me” or “Pay X or order at his own risk” is examples of this type of endorsement.
7. Facultative endorsement:
When the endorser expressly gives up some of his rights under the negotiable instrument, the endorsement is called a ‘facultative’ endorsement. Thus, “Pay X or order, notice of dishonour waived” is a facultative endorsement.
As a result of such an endorsement the endorsee is relieved of his duty to give notice of dishonour to the endorser and the latter remains liable to the endorsee for the non-payment of the instrument, even though no notice of dishonour has been given to him

Termination or Discharge of Contract:-
When we say that contract has been discharged or terminated, it means that rights and and liabilities created by law under contract has been finished.



METHODS TO DISCHARGE THE CONTRACT

1. Discharge by Performance:-
When all the duties required in the contract are performed by all the parties, the contract comes to an end. It is called discharge by performance.

Example: - Mr. Nick agree to sell a piece of land to Mr. Ram for Rs. One lac. Mr. Nick delivers the plot and Mr. Ram makes the payment.


2. Discharge By Breach of Contract :-
When one party violates the conditions of lawful contract it is called breach of contract. When there is a breach by one party the other party gets a right not to perform his obligations it may also take action against the other party who has failed to perform.

Example :- "A" agrees to deliver one cycle to "B" on Sunday. He does not deliver the cycle on Sunday. There is breach of contract.


3. Contract Declared Void :-
If any contract is declared void by law then the parties involved to such contract are discharged from the liabilities.


4. Discharge By Lapse of Time :-
Contract also discharges by lapse of time. Sometimes contract is not performed within prescribed period. In that case injured party should bring suit within three years as mentioned in the limitation act for the recovery of debt.


5. Discharge Due to Impossibility :-
If the performance of contract is not possible then contract is void and contracting parties are discharged from their obligations.

Example :- Suppose Mr. Carry and Miss. Niky contract to marry each other, on 10th March, 2011. Miss Niky dies before the 10th March. The contract becomes void because now marriage is impossible.


6. Discharge By Insolvency :-
If court declares insolvent to any person, he gets free from debts payable to others.

Example :- Mr. Heris promises to sell his factory to Mr. Frank for Rs. 70 lac. Before the performance of the contract Mr. Heris is declared insolvent by court. The contract is discharged.


7. Discharge By Alteration :-
When the alteration is made in the written contract without mutual consent it becomes unauthorized. Such type of alteration discharges the contract by law.


8. Discharge By Merger :-
When you merge the smaller contract in the larger contract it is called merger. The smaller contract is discharged by law automatically.

Example :- When ad-hock doctor is made permanent doctor the contract of ad-hock doctor-ship is discharged by merger.


9. Discharge By Consent :-
A contract may be terminated with the mutual consent of the contracting parties.


10. Discharge By Remission :-
Remission means pardoning of offense or cancelling of the whole or any part of some obligation.

Example :- In the case of life sentence remission is provided to prisoner for his good behavior in prisoner.


11. Discharge By Waiver :-
It means to relinquish the claim or right. Sometimes promisee himself surrenders his rights to the contract and releases the promisor from his obligations.

Example :- Mr. Maddy promises to make a shirt for Mr. Salu and Mr. Salu afterward forbids him to do so. Mr. Maddy agrees. The contract is discharged by waiver.


12. Discharge By Novation :-
If the parties substitute a new contract it is called novation. In this case contract may be discharged by such as an alteration in its condition as substitutes a new contract, for the old one.


13. Discharge By Recession :-
It means remedy for inducing a contract which is rejected one or all the terms of the contract are cancelled. It discharges to parties from obligations of the original contract.

Example :- Mr. Richard promises to deliver a house to Mr. Singh on Friday. Before the Friday both agree that the contract will not be performed. The parties have cancelled the contract

8. "Holder"

The "holder" of a promissory note, bill of exchange or cheque 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.

Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction.

9. "Holder in due course"

"Holder in due course" means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or endorsee thereof, if 9[payable to order], before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.