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Unit 6: Law of Negotiable Instruments

Capacity of Parties to the Negotiable Instrument Notes

The capacity of a party to draw, accept, make or endorse a negotiable instrument is coextensive
with his capacity to enter into contract. Thus, Sec.11 of the Indian Contract Act, 1872, if negatively
interpreted prohibits minors, persons of unsound mind and persons forbidden under any other
Act like insolvency to make a valid contract.

Essential Elements of a Negotiable Instrument

After discussing the characteristics of different negotiable instruments, it is with profit that we
can sum up the essential elements of a negotiable instrument. These are as follows:
1. It must be in writing, which includes, typing, computer print out or engraving.
2. The instrument must be signed by the person who is the maker (in the case of a promissory
note) or a drawer (as in the case of a bill of exchange or a cheque).
3. There must be an unconditional promise (as in the case of a promissory note) or order (as
in the case of a bill of exchange or cheque) to pay.
4. The instrument must involve payment of a certain sum of money only and nothing else.
5. The instrument must be payable at a time which is certain to arrive. If it is payable ‘when
convenient’ the instrument is not a negotiable one. However, if the time of payment is
linked to the death of a person, it is nevertheless a negotiable instrument as death is certain,
though the time thereof is not.

6. In case of a bill or cheque, the Drawee must be named or described with reasonable
certainty.
7. The instrument must be such or in such a state that it can be transferred like cash by mere
delivery (as in the case of a bearer instrument) or by delivery and endorsement (as in the
case of an order instrument).

6.3 Promissory Notes and Bills of Exchange

6.3.1 Promissory Note

A promissory note is an instrument in writing (not being a bank or a currency note) 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 to the bearer of the instrument (Sec.4). The following are two illustrations
of promissory notes.

Example: “We have received a sum of ` 9,000 from Shri R.R. Sharma. This amount will
be repaid on demand. We have received this amount in cash.” This is a promissory note.
Where A signs instruments in the following terms:
(i) “I promise to pay B or order ` 500.”

(ii) “I acknowledge myself to be indebted to B in ` 1000, to be paid on demand, for value
received.”
But, the following are NOT promissory notes:
(i) “Mr B, I.O.U. (I owe you) ` 1000.”

(ii) “I am liable to pay you ` 500”.

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