Negotiable Instruments

The Negotiable Instruments Act, 1881 is based on the provisions of the English Negotiable Act enacted during the British time with some changes. The Act was first drafted in 1861 by the 3rd Indian Law Commission and was introduced in Council in December 1867 in order to refer it to a Select Committee but the objections were raised and the Bill was again redrafted in 1877. In 1880 the Bill was again referred to a new Law Commission by the order of the Secretary of the State and again it was redrafted and finally the draft that is prepared for the fourth time was accepted and Negotiable Instrument Act, 1881 was enacted, it came on force on 1st March 1882 and extends to the whole of India.


The main objectives behind the enactment of the Negotiable Instrument Act, 1881 are:

  1. The Act facilitates the settlement of payment in business as they pass freely from holder to holder due to easy transferability of the value of the instrument.
  2. The enactment of the Act provides protection to different mercantile instruments.
  3. The Act regulates the different kinds of negotiable instruments that include cheque, bill of exchange and promissory note.
  4. The Act enshrines rights and liabilities of the parties dealing with the negotiable instruments.
  5. The Act explains other aspects under negotiation that are endorsement, assignment etc.

The main purpose behind the Act is to avoid the risk of carrying a higher amount of money from robbery, theft etc., and it also gives legal effect to negotiable instruments in India.


The term Negotiable means “transferable by delivery” and instrument means “written document by which a right is created in favour of some person”, so negotiable instruments means any written signed document which creates right in favour of any person and is freely transferable. These documents have monetary values.

Justice Wills define negotiable instruments as “the property which is acquired by anyone who takes it bonafide and for value notwithstanding any defects of the title in the person from whom he took it”.

The Negotiable Instruments Act, 1882 does not define the term negotiable instruments in detail but section 13(a) of the Act defines negotiable instruments as “negotiable instruments mean a promissory note, bill of exchange or cheque payable either to order or to bearer, whether the word order or bearer appear instrument or not”.  


The negotiable instruments have the following characteristics:

  1. FREELY TRANSFERABLE: The negotiable instruments are freely transferable by person to another person merely by the process of delivery if the instrument is payable to bearer, endorsement and delivery.
  2. TITLE: The person who acquires the instrument in good faith and for consideration (holder) in due course gets title free from all defects.
  3. PROPERTY: The person in whose possession the instrument is presumed to be the owner of the property contained in the instrument. It does not only give the possession of the possession of the instrument but also to the right to the property.
  4. PAYABLE TO ORDER OR BEARER: The negotiable instrument is payable to either order or bearer.


Section 118 of the Negotiable Instruments Act makes certain presumptions in case of negotiable instruments.

  1. Of consideration – that every negotiable instrument was made or drawn for consideration, and was made or drawn for consideration, and that every such instrument, when it has been accepted, indorsed, negotiated or transferred, was accepted, indorsed, negotiated or transferred for considerations;
  2. As to date – that every negotiable instrument bearing a date was made or drawn on such date;
  3. As to time of acceptance – that every accepted bill of exchange was accepted within a reasonable time after its date was made or drawn on such date;
  4. As to time of transfer – that every transfer of negotiable instrument was made before its maturity;
  5. As to order of indorsements – that the indorsements appearing upon a negotiable instrument were made in the order in which they appear thereon;
  6. As to stamps – that a lost promissory note, bill of exchange or cheque was duly stamped;
  7. That holder is a holder in due course – that the holder of a negotiable instrument is a holder in due course[1].

There is no need to prove these presumptions, it is presumed they exist in every negotiable instrument.


The negotiable instruments are divided into two broad categories one that is recognized by the statute and the other that are based on the customs.

Section 13 of the Act enshrines that negotiable instruments mean promissory notes, cheques and bills of exchange and they are the negotiable instruments that are recognized by the statute.


A promissory note is “an instrument in writing containing an unconditional undertaking, signed by the maker, to pay a certain sum of money to or to the order of a certain person, or the bearer of the instrument”.[2]


  • I promise to pay X Rs 1500/-, and all other sum which shall be due on him.
  • I promise to pay Y  Rs 6000/-, first deducting there out any money which he may owe to me.





          On demand I promise to pay ………the sum of Rs. 2000/-.


1                                                                                                             Stamp

2                                                                                                        Signature


Every promissory note must possess the following elements.

  1.  A promissory note must be in writing, the mere verbal promise does not constitute a promissory note.
  2. The promise to pay must be certain and express, mere acknowledgement is not enough for a promissory note.
  3. The promise to pay must be unconditional and does not depend on any condition or happening of any situation, if the promise is not unconditional then the instrument is not the promissory note.
  4. Though the promissory note is made by the maker himself but it must be signed by the maker, the signature of the maker on the promissory note is one of the essential elements.
  5. In promissory note the promise should be to pay the money only, the promise to give any other thing other than money does not constitute promissory note.
  6. The maker , payee and amount all the three things of the promissory note must be certain.

The other formalities with regard to promissory note include place, date, consideration etc., with respect to the promissory notes.


There are two main parties of a promissory note, one is maker and the other is payee. Maker is also known as the drawer is the person who makes the promissory note to pay a certain amount as specified in the note, and payee also known as drawee is the person in whose favour promissory note is drawn.

So it is concluded that promissory note is a written instrument in which the maker promises the payee to pay him a certain amount of money.


Bills of exchange is define 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.”[3]


  • Please let the bearer have Rs 1500/- and oblige.
  • We hereby authorize you to pay on our account to the order of X, Rs 6000/-.

 SPECIMEN OF BILL OF EXCHANGE                                                 




     3 months after date pay …… or order the sum of one lakh rupees only for the value received.


Name ……..

Address ………..


The following elements are necessary to constitute bills of exchange:

  1. Like promissory note, the bills of exchange must be also in writing, a verbal direction to the payment of certain amount does not constitute bills of exchange
  2. The second essential for the bills of exchange is that it must be signed by the drawer, the signatures are necessary.
  3. In bills of exchange like in promissory note it is important all the parties ig the instrument and amount that is directed to pay must be certain.
  4. The bills of exchange must be properly stamped.
  5. The bills of exchange must contain the order to pay money only and not of any type of goods.


There are three parties in the bills of exchange, the drawer is the person that issues a bills of exchange and is also known as creditor second party is beneficiary or payee to which the bill of exchange is payable and the third party of the instrument is drawee to which the order to pay sent and is also known as the debtor.


A cheque is “a bill of exchange drawn on a specified banker, and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and cheque in the electronic form.”[4]. It is the document that specifies a bank to pay a certain amount of money from the person’s account to the person in whose name the cheque is made.Cheque is always drawn on a specified banker and is payable on demand only.

The essential elements of cheque are the same as that of the bills of exchange,  it must be in writing and must have the certain parties and the certain amount that has to be paid, all cheques are bills of exchange but all bills are not cheques.


There are three parties to the cheque, the drawer who is the depositor of money in the bank, second party is known as the drawee, it is the drawer’s banker on whom the cheque has been drawn and third party is payee who is entitled to receive the payment of the cheque.


Some of the other negotiable instruments are discussed below.

  1. BILL IN SETS: It is generally used in case of foreign bills, the bills are drawn in the set of 3 in order to avoid the delay and inconvenience which may cause in case bills are lost while in transit.[5]
  2. AMBIGUOUS INSTRUMENT : It is that form of instrument that is treated by the holder as the bill or as a note.[6]
  3. INCHOATE STAMPED INSTRUMENT : When instrument is given by one person to the other person, the other person is entitled to complete the instrument and make it into proper negotiable instrument upto the value covered by the stamp affixed on it.[7]


Negotiable instruments is, therefore, a piece of paper having legal value which entitles a person to the sum of money stated therein and is freely transferable from one to other through different methods , with the growth of commerce, business new securities will come under the ambit of negotiable instruments so it is not the closed chapter with development it will amend too.


[1] The Negotiable Instrument Act,1881, s.118.

[2] The Negotiable Instrument Act,1881, s. 4.

[3] The Negotiable Instrument Act.1881, s.5.

[4] The Negotiable Instrument Act,1881, s.6.

[5] The Negotiable Instrument Act,1881, s. 132.

[6] The Negotiable Instrument Act,1881, s.17.

[7] The Negotiable Instrument Act ,1881, s. 20.

BY-  Navdeep Kour | APG Shimla, University

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