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Unit 14: Law of Negotiable Instruments

endorsee thereof, if payable to order, before the amount mentioned in it becomes payable and Notes

without having sufficient cause to believe that any defect existed in the title of the person from
whom he derived his title (Sec.9). Thus, where a person receives a negotiable instrument without
consideration, he may be a holder but will not be called a holder in due course. Besides, the
title of holder of a negotiable instrument is always subject to the title of its transferor whereas a
holder in due course acquires a better title than that of its transferor. So where a lost negotiable
instrument is transferred to a person who takes it, say, without consideration and thus becomes
the holder, he will not be entitled to enforce his claim against its real owner. But, if he is a holder
in due course as per Sec.9, he will be able to establish his claim even against the real owner of
that instrument.

Privileges of a Holder in Due Course

A holder in due course is given certain additional privileges under the Act, which are not
available to a holder.
1. Privilege against inchoate stamped instruments. According to Sec.20, a person, who signed
and delivered to another a stamped but otherwise inchoate (incomplete) instrument, is
stopped from asserting, as against a holder in due course, that the instrument has not been
filled in accordance with the authority given by him provided the amount filled is covered

by the stamp affi xed.
2. As per Sec.3, every prior party to a negotiable instrument, i.e., the maker or drawer, the
acceptor and all the intermediate endorsers continue to remain liable to the holder in due
course until the instrument is duly satisfi ed.

3. Fictitious drawer or payee. Where a bill of exchange is drawn by a fictitious person and is
payable to his order, the acceptor cannot be relieved from his liability to the holder in due
course. The holder in due course shall, however, have to prove that the instrument was
endorsed by the same hand as drawer’s signature (Sec.42).
4. When a negotiable instrument is made, drawn accepted or transferred without consideration
and the negotiable instrument gets into the hands of a holder in due course, then the plea
of absence of consideration cannot be raised against him or against any subsequent holder
deriving title from him (Sec.43).

5. Where an instrument is negotiated to a holder in due course, the parties to the instrument
cannot escape liability on the ground that the delivery of the instrument was conditional or
for a special purpose only (Sec.46).
6. Right of an endorsee from a holder in due course. Not only that the title of the holder in
due course is not subject to the defect in previous holder’s title but once that instrument
passes through the hands of a holder in due course, it is purged of all defects. Any person
acquiring it takes it free of all defects, unless he was himself a party to the fraud (Sec.53).

14.6 Negotiation of a Negotiable Instrument

14.6.1 Meaning of Negotiation

The transfer of an instrument by one party to another so as to constitute the transferee a holder
thereof is called ‘negotiation’.

14.6.2 Negotiation and Assignment

Both the assignment and negotiation involve the transfer of the right to receive the payment of
debt. However, the rights, which the transferee of an instrument by negotiation acquires are

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