Meaning, Characteristics of Negotiable Instrument - Business Law | Business Law - B Com PDF Download

Meaning and Definition of Negotiable Instrument:- The meaning and definition of negotiable instruments are discussed below:
Meaning:- The word “ negotiable” means “transferable from one person to another by mere delivery or by endorsement and delivery, in return for consideration, and “ instrument” means a written document creating a right in favor of some person, which may be a duty for another”. Therefore a ‘negotiable instrument’ is

1. A written document
2. Signed by the maker or drawer of the instrument
3. That contains an unconditional promise or order to pay
4. A fixed amount of money ( with or without interest which may be a specified amount or at a specified rate)
5. Payable on demand or at a specified exact future date
6. To a specific person or to order or to its bearer

Therefore, a negotiable instrument must fulfill the following conditions:
1.The document must be freely transferable, either by delivery (when it is payable to the bearer of the document), or by endorsement and delivery (when the document is payable to order).

 2. Even if the title of the Transferor is defective the transferee, taking the instrument in good faith and for consideration, gets a good title to it.

 3. The party holding the instrument should be entitled to maintain a suit thereon, in case, the instrument gets dishonored while in his custody.

Characterstics of Negotiable Instruments:- The characteristics of negotiable instruments may be described as follows:

1. Writing and Signed by Its Maker: A negotiable instrument being an instrument, must be in writing and signed by its maker. Therefore an oral promise to pay certain sum at a future date with out any written document is not enforceable in the eyes of law. Similarly, if the maker does not sign the instrument, it is not a valid negotiable instrument.

2. Unconditional: A negotiable instrument contains an unconditional promise or order to pay some money. Therefore if payment of money is conditional to the completion of some condition, then, it is not a valid negotiable instrument.

3. Fixed Sum of Money: A negotiable instrument is a promise to pay a fixed sum of money only, which may include interest at a fixed rate. Any promise to pay an uncertain sum will not make a valid negotiable instrument.

4. Transferable: A negotiable instrument is transferable easily from one person to another any number of times. The instrument is freely transferable, either by delivery when it is payable to the bearer of the document, or by endorsement and delivery when the document is payable to order. Transferability is an essential feature of negotiable instruments, but all transferable instruments are not negotiable instruments.

5. Absolute And Good Title: The transferee of a negotiable instrument who receives it in good faith and for value gets the instrument free from all defects. He gets an absolute and good title, irrespective of any defect in the title of the transferor.

 
6. Right to Recovery: The transferee has a right to recovery, i.e., he can sue on the instrument in his own name to enforce his rights. Moreover he need not give any notice of transfer to the party liable on the instrument.

7. The operations regarding the negotiable instruments are based on certain resumptions, unless the contrary is proved. These presumptions are discussed below.

Types of Negotiable Instruments:-
Promissory notes:- A promissory note refers to a written promise to its holder by an entity or an individual to pay a certain sum of money by a pre-decided date. In other words, Promissory notes show the amount which someone owes to you or you owe to someone together with the interest rate and also the date of payment.
For example, A purchases from B INR 10,000 worth of goods. In case A is not able to pay for the purchases in cash, or doesn’t want to do so, he could give B a promissory note. It is A’s promise to pay B either on a specified date or on demand. In another possibility, A might have a promissory note which is issued by C. He could endorse this note and give it to B and clear of his dues this way.
However, the seller isn’t bound to accept the promissory note. The reputation of a buyer is of great importance to a seller in deciding whether to accept the promissory note or not

Bill of exchange:- Bills of exchange refer to a legally binding, written document which instructs a party to pay a predetermined sum of money to the second(another) party. Some of the bills might state that money is due on a specified date in the future, or they might state that the payment is due on demand.
A bill of exchange is used in transactions pertaining to goods as well as services. It is signed by a party who owes money (called the payer) and given to a party entitled to receive money (called the payee or seller), and thus, this could be used for fulfilling the contract for payment. However, a seller could also endorse a bill of exchange and give it to someone else, thus passing such payment to some other party.
It is to be noted that when the bill of exchange is issued by the financial institutions, it’s usually referred to as a bank draft. And if it is issued by an individual, it is usually referred to as a trade draft.
A bill of exchange primarily acts as a promissory note in the international trade; the exporter or seller, in the transaction addresses a bill of exchange to an importer or buyer. A third party, usually the banks, is a party to several bills of exchange acting as a guarantee for these payments. It helps in reducing any risk which is part and parcel of any transaction.