Question based on Anna University BL Solved Assignment and other course
Answer:
To understand the meaning of negotiable instruments let us take a few examples of day-to-day business transactions.
Suppose Kaushal, a book publisher has sold books to Jhanvi for Rs 1,00,000/- on six months credit. To be sure that Jhanvi will pay the money after six months, Kaushal may write an order addressed to Jhanvi that she is to pay after six months, for value of goods received by her, Rs.1,00,000/- to Kaushal or anyone holding the order and presenting it before her (Jhanvi) for payment. This written document has to be signed by Jhanvi to show her acceptance of the order. Now, Kaushal can hold the document with him for six months and on the due date can collect the money from Jhanvi. He can also use it for meeting different business transactions.
For instance, after a month, if required, he can borrow money from Sunil for a period of two months and pass on this document to Sunil. He has to write on the back of the document an instruction to Jhanvito pay money to Sunil, and sign it. Now Sunil becomes the owner of this document and he can claim money from Jhanvi on the due date. Sunil, if required, can further pass on the document to Amit after instructing and signing on the back of the document. This passing on process may continue further till the final payment is made.
In the above example, Jhanvi who has bought books worth Rs. 1,00,000/- can also give an undertaking stating that after six month she will pay the amount to Kaushal. Now Kaushal can retain that document with himself till the end of six months or pass it on to others for meeting certain business obligation (like with sunil, as discussed above) before the expiry of that six months time period.
You must have heard about a cheque. What is it? It is a document issued to a bank that entitles the person whose name it bears to claim the amount mentioned in the cheque. If he wants, he can transfer it in favor of another person. For example, if Mr Ramju issues a cheque worth Rs. 5,000/ – in favor of Mr Mugal, then Mr Mugal can claim Rs. 5,000/- from the bank, or he can transfer it to Mr Ali to meet any business obligation, like paying back a loan that he might have taken from Mr Ali. Once he does it, Ali gets a right to Rs. 5,000/- and he can transfer it to Pawan, if required. Such transfers may continue till the payment is finally made to somebody.
In the above examples, we find that there are certain documents used for payment in business transactions and are transferred freely from one person to another. Such documents are called Negotiable Instruments. Thus, we can say negotiable instrument is a transferable document, where negotiable means transferable and instrument means document. To elaborate it further, an instrument, as mentioned here, is a document used as a means for making some payment and it is negotiable i.e., its ownership can be easily transferred.
Thus, negotiable instruments are documents meant for making payments, the ownership of which can be transferred from one person to another many times before the final payment is made.
1 Definition of Negotiable Instrument
The term “Negotiable Instrument” means a document transferable from one person to another. However the Act has not defined the term. It merely says that “A negotiable instrument” means a promissory note, bill of exchange or cheque payab1e either to order or to bearer. [Negotiable Instruments Act, 1881, Section 13(1)]
According to Thomasb, “An instrument is negotiable when it is, by a legally recognized custom of trade or by law, transferable by delivery or by indorsement and delivery, without notice to the party liable in such a way that (a) the holder of it for the same being may sue upon it in his own name, and (b) the property in it passes to a bonafide transferee for value free from any defect in the title of the person from whom he obtain it
In the words of Justice, Willis, “A negotiable instrument is one, the property in 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”.
Thus, the term, negotiable instrument means a written document which creates a right in favor of some person and which is freely transferable. Although the Act mentions only these six instruments (such as a promissory note, a bill of exchange and cheque), it does not exclude the possibility of adding any other instrument which satisfies the following two conditions of negotiability:
- The instrument should be freely transferable (by delivery or by indorsement. and delivery) by the custom of the trade; and
- the person who obtains it in good faith and for value should get it free from all defects, and be entitled to recover the money of the instrument in his own name.
As such, documents like share warrants payable to bearer, debentures payable to bearer and dividend warrants are negotiable instruments. But the money orders and postal orders, deposit receipts, share certificates, bill of lading, dock warrant, etc. are not negotiable instruments. Although they are transferable by delivery and indorsements, yet they are not able to give better title to the bonafide transferee for value than what the transferor has.
