Page 177 - DMGT102_MERCANTILE_LAWS_I

Unit 14: Law of Negotiable Instruments

14.10 Paying Banker Notes
14.11 Summary
14.12 Keywords
14.13 Self Assessment

14.14 Review Questions
14.15 Further Readings

Objectives

After studying this unit, you will be able to:
z Discuss meaning of negotiable instrument
z Explain promissory notes and features of promissory note
z Describe law relating to paying and collector banker
z Discuss bill of exchange

Introduction

In the earlier unit, you came to know about the law of sales of goods. In this unit, you will study
about the law of negotiable instruments.
In this unit, you will study law relating to negotiable instruments is primarily contained in the
st
Negotiable Instruments Act, 1881, which came into force on 1 March, 1882. Bills of exchange,
cheques and promissory notes have been dealt with in considerable detail in this Act.
The term ‘instrument’ means ‘any written document by which a right is created in favour of some
person’. The word ‘negotiable’ has a technical meaning whereby rights in an instrument can be
transferred by one person to another.

14.1 Negotiable Instrument

An ‘Instrument’ as referred to in the Act is a legally recognised written document, whereby
rights are created in favour of one and obligations are created on the part of another. The
word ‘negotiable’ means transferable from one person to another either by mere delivery or by
endorsement and delivery, to enable the transferee to get a title in the instrument. An instrument
may possess the characteristics of negotiability either by statute or by usage. Promissory note,
bill of exchange and cheque are negotiable instruments by statute as they are so recognised by
Sec.13. There are certain instruments which are recognised as negotiable instruments by usage.
Thus, bank notes, bank drafts, share warrants, bearer debentures, dividend warrants, scripts
and treasury bills are negotiable by usage. An instrument is called ‘negotiable’ if it possesses the
following features:
1. Freely transferable. Transferability may be by (a) delivery, or (b) by endorsement and
delivery.

2. Holder’s title free from defects. The term ‘negotiability’ means that not only is the instrument
transferable by endorsement and/or delivery, but that its holder in due course acquires a
good title notwithstanding any defects in a previous holder’s title. A holder in due course
is one who receives the instrument for value and without any notice as to the defect in the
title of the transferor.

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