A PROJECT ON

“SIGNIFICANCE OF NEGOTIABLE INSTRUMENT IN MODERN BUSINESS: A CRITICAL STUDY”

Submitted By
HARISH KUMAR SALAME
BA LLB (HONS)
Semester IX
Roll No. 55

Submitted To

Mrs. Kiran Kori

(Faculty: BANKING LAW (Optional- 1))

HIDAYATULLAH NATIONAL LAW UNIVERSITY

RAIPUR CHHATTISGARH

Submitted On 25TH OCTOBER 2018

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 ACKNOWLEDGEMENT

Thanks to the Almighty who gave me the strength to accomplish the project with sheer hard
work and honesty.
I would like to sincerely like to thank my Banking law teacher Mrs. Kiran Kori for giving me
this topic and guiding me throughout the project. Through this research project I have learned a
lot about the aforesaid topic and this in turn has helped me grow as a student.
My heartfelt gratitude also goes out to the staff and administration of HNLU for the
infrastructure in the form of our library and IT lab that was a source of great help in the
completion of this project.
I also thank my friends for their precious inputs which have been very helpful in the completion
of this project.

_____________________
HARISH KUMAR SALAME
Roll No. 55

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 CONTENTS

Introduction…………………………………………………………………………………….04

Objectives……………………………………………………………………………………...06

Research methodology…………………………………………………………………………06

Negotiable instruments under negotiable instruments act, 1881 …………………………….07

Kinds of negotiable instrument………………………………………………………………..08

How instruments become negotiable …………………………………………………………09

Significance of negotiability …………………………………………………………………..10

Advantages of negotiable instruments ………………………………………………………..10

electronic negotiable instrument………………………………………………………………10

Electronic payments and traditional negotiable instruments………………………………….11

Conclusion………………………………………………………………………………………13

References………………………………………………………………………………………14

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Introduction

Negotiable Instruments plays a major role in the trade world. We can also see the use of
negotiable instruments in the international trade. We can assume that the international trade is
also developing with the negotiable instrument. The nature of negotiable instrument is an area of
law which has major influence on any person in his professional field. Negotiable instrument
plays a major role in different part of the world in raising the economy1. “The term negotiable
instrument does not have a statutary definition. To define the term the concept of ‘instrument'
and ‘negotiability' requires a separate consideration. Thus any definition must be drawn from the
common law.”

“According to professor Goode, instrument is described as a document of title of money”2

Therefore an instrument is a document which physically expresses the payment obligation. An
instrument will be in deliverable state only if it is signed by the possessor or it should be with the
authority of that person. The instrument clearly states the contractual right to payment and the
right will be transferred only after the complete delivery. The person who has that entitlement
and posses the instrument is consider as the true owner.

The negotiable instrument is of contractual in nature and it characterizes the fact that it is
negotiable. The instrument can be transferred in a special manner which is established by the law
merchant i.e. by negotiation.3

“According to Blackburn J, a negotiable instrument has two characteristics namely:

1. It is transferable, like cash, by delivery (which assumes it is in a deliverable state) so that the
transferee can enforce the rights embodied in it in his own name.

2. The transferee being a bonafide holder for value can acquire a better title to it than that of his
transferor.”

1
WHAT ARE NEGOTIABLE INSTRUMENTS? http://resources.lawinfo.com/real-estate/foreclosure/what-are-negotiable-
instruments.html
2
NEGOTIABLE INSTRUMENTS PLAYS A MAJOR ROLE, http://www.lawteacher.net/tort-law/essays/negotiable-
instruments-plays-a-major-role.php
3
Ibid

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Negotiable Instrument is moreover a document of title which clearly explains the rights towards
the payment of money or a security for money which is transferable by delivery either by custom
or by legislation. The use of negotiable Instrument is mainly to facilitate payment for exports and
imports of trade. The rapid growth of technology has revolutionized the world with computer,
which is used in every field of profession. This has reduced the use of negotiable instrument and
in future it may decline more. Even though the electronic revolution has got more advantages it
may be considered as the next step because the world needs time to get used to it. But, the
negotiable instruments are still in use.

In Arnold, Justice Colderidge wrote:

"Generally speaking negotiable instruments are such as may be transferred by endorsement if

payable to order or delivery if payable to bearer; the holder can sue in his own name, and if he
is a holder for value, he takes free from equities. To complete an endorsement there must be
delivery with intention to transfer the property".

In London and County Banking, Justice Manistay adopted these words:

"What is a negotiable instrument?

"A negotiable instrument been clearly transferable by any person holding it, so as by delivery
thereof to give a good title to any person honestly acquiring it.

"... (W)henever an instrument is such that the legal right to the property secured thereby passes
from one man to another by the delivery thereof, it is, properly speaking, a negotiable
instrument, and the title to it will vest in any person taking it bona fide, and for value, whatever
may be the defects in the title of the person transferring it to him....

"... (W)here an instrument is by the custom of trade transferable, like cash, by delivery, and is
also capable of being sued upon by the person holding it pro tempore, there it is entitled to the
name of a negotiable instrument, and the property in passes to a bona fide transferee for value,
though the transfer may not have taken place in market overt."

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OBJECTIVES

 To know about Significance of Negotiable Instrument in Modern Business;

 To critical analysis the Significance of Negotiable Instrument in Modern Business.

RESEARCH METHODOLOGY

This research is descriptive and analytical in nature. Secondary and Electronic resources have
been largely used to gather information about the topic. Books and other references have been
primarily helpful in giving this project a firm structure. Websites, dictionaries and articles have
also been referred.Footnotes have been provided wherever needed to acknowledge the source.

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Negotiable Instruments under Negotiable Instruments Act, 1881

According to Section 13 (a) of the Act, “Negotiable instrument means a promissory note, bill of
exchange or cheque payable either to order or to bearer, whether the word “order” or “ bearer”
appear on the instrument or not.”

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 favour
of some person and which is freely transferable. Although the Act mentions only these three
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
negotiability4:

1. the instrument should be freely transferable (by delivery or by endorsement and delivery) by
the custom of the trade; and

2. 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.

But, it does not follow that there can be no other negotiable instrument other than those
enumerated under the Act. Section 17 of the Transfer of Property Act, 1882 speaks of
“instruments which are for the time being, by law of custom, negotiable”, implying that the
Courts in India may follow the practice of English Courts in extending the character of
Negotiable Instruments Act5.

4
NEGOTIABLE INSTRUMENTS ACT, 1881, http://www.ddegjust.ac.in/studymaterial/mcom/mc-207-f.pdf
5
THE NEGOTIABLE INSTRUMENTS ACT, 1881, http://www.icaiknowledgegateway.org/littledms/folder1/chapter-2-
the-negotiable-instruments-act-1881.pdf

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Kinds of Negotiable Instrument

There are three kinds of Negotiable Instruments enumerated in the Act, namely:

1. Promissory Note: Section 4 of the Act defines, “A promissory note is an instrument in

writing (note being a bank-note 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 instruments.”

2. Bills of Exchange: Section 5 of the Act defines, “A bill of exchange is an instrument in

writing containing an unconditional order, signed by the maker, directing a certain person
to pay a certain sum of money only to, or to the order of a certain person or to the bearer
of the instrument”.

A bill of exchange, therefore, is a written acknowledgement of the debt, written by the creditor
and accepted by the debtor. There are usually three parties to a bill of exchange drawer, acceptor
or drawee and payee. Drawer himself may be the payee.6

3. Cheque: Section 6 of the Act defines “A cheque is a bill of exchange drawn on a

specified banker, and not expressed to be payable otherwise than on demand”.

A cheque is bill of exchange with two more qualifications, namely,

(i) it is always drawn on a specified banker, and

(ii) it is always payable on demand.

Consequently, all cheque are bill of exchange, but all bills are not cheque. A cheque must satisfy
all the requirements of a bill of exchange; that is, it must be signed by the drawer, and must
contain an unconditional order on a specified banker to pay a certain sum of money to or to the
order of a certain person or to the bearer of the cheque7. It does not require acceptance.

6
Ibid
7
Supra Note 6.

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How Instruments Become Negotiable

There are two method recognised in which a document may become negotiable instrument. They
are8:

1. STATUTE

In most are all the cases, statutory recognition of negotiability merely confirms the judicial
acceptance of a mercantile usage which recognised an instrument as negotiable. The landmark
case Clerke V Martin held that a promissory note playable to order was not a bill of exchange,
and was, therefore not negotiable. Lord Holt said that ‘the promissory note could note be a bill of
exchange. That the maintain of these actions upon such notes, were innovations upon the rules of
the common law; and that it amounted to the setting up a new sort of speciality, unknown to the
common law, and invented in the Lombard Street, which attempted in these matters of bill of
exchange to give laws to Westminster Hall. But most of the commentators have interpreted this
decision wrong and have held that the 1704 Act to declaratory of the case law as it existed prior
to Clerke V Martin.

2. MERCANTILE USAGE

These are instruments which are regarded as negotiable through judicially recognised mercantile
usage. In Goodwin V Robarts, Clockburn CJ traced out the history of bills of exchange, bankers
notes, promissory notes, exchequer bills and cheques came to be regarded as negotiable and
continued.

8
PRINCIPLE OF NEGOTIABILITY OF NEGOTIABLE INSTRUMENTS, http://www.lawteacher.net/tort-law/essays/principle-
of-negotiability-of-negotiable-instruments.php

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Significance Of Negotiability

The most important theme of modern legal profession's sense of the law of commercial paper is
that the concept of negotiability and always has been dominant of this body of law. Negotiability
has become important and a very useful concept in the present day law and that negotiability has
been the keystone of the law of bills and notes from at least the eighteenth century. 9 We can see
that recently there has been some retreat from the view that negotiability is necessarily the
beneficiary doctrine in modern commercial transactions. For an example, during the 1960's the
application of the holder in due course rules to commercial transactions was under an attact,
culminating in 1975 with the promulgation of the Federal Trade Commission rule annulling the
doctrine in consumer transactions.

Advantages of Negotiable Instruments

The assignment of a promise to pay money was not permitted at common law before 1874.
However it was the refusal of the common law to allow the transfer of promises to pay money
which made way for the usage of negotiable instruments.10 There are a number of distinct
advantages of negotiable instruments and two of its important benefits can be summarised as
follows

1. the transferee of a negotiable instrument can see his own name, even though there has been no
assignment I writing, or a notice to the obligor or even if the transferee is not absolute, as
required for assignments under the statute; and

2. The transferee of the negotiable instruments who takes it for value and in good faith acquires
title free from equities; where as an assignee under the statute always takes subject to equities.

Electronic Negotiable Instrument

The rapid development of Information Technology has revolutionized the way people and
business transfer goods and services. Electronic business is real and continues to grow as a
medium to order tickets, goods or services. Compared with traditional payment methods, such as
checks, electronic payments, indeed, have many advantages. However, electronic payments are

9
Supra Note 10
10
Ibid

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often costly, challenging to implement and sometimes technically difficult to understand. When
you pay for a good or service in a shop using a credit or debit card, the retailer must pay a
commission to the financial institution processing the card details; additionally, there will be
operating costs for the system used to process the cards. These hurdles represent a “barrier to
entry”, which, if overcome, can give someone the competitive edge. In addition, in this real
world, checks are still a viable payment method and will continue to be so well into the future.11

Electronic Payments and Traditional Negotiable Instruments

The recognition of electronic negotiable instruments is outside the scope of the drafting
committee’s mandate. Attempting to draft a complete electronic negotiable instrument law was
deemed premature and improvident at this time, before marketplace acceptance of the concept
has been conclusively demonstrated and in the face of possible opposition from financial market
regulators and consumer advocates.

However, it indeed opens the door to include electronic payments as a i negotiable instrument.
Before the publication of this law, the issues dealt with whether the paperless electronic
payments could be adjusted under the legal framework of traditional negotiable instruments
which are paper-based.

During this processing of the EDSL, some bank regulators and consumers were wary of the
introduction of electronic negotiable instrument. Some bank regulators have express skepticism
at the idea of granting legal recognition to electronic negotiable instruments for several reasons.
The concern of bank regulators is based on fears that electronic negotiable instruments might
become too popular and lead to the creation of new financial markets that not clearly subject to
existing regulations. Electronic negotiable instruments, such as electronic checks, might fall into
a regulatory void somewhere between the regulation of the paper-based check processing system
and the wholly electronic word of electronic funds transfers. Even in the U.S, those concerns
from bank regulators and consumers also exist12. Without any experience to predict the risk of
loss, and hence, no adequate basis for developing new regulations, and without enough existing

11
Check volume is increasing by 1.5 billion per year and is estimated to increase 1% - 2% annually until the year
2025. Industry statistics show 200 million Americans have checking accounts and approximately 84% use personal
checks as their primary method of payment. Consumers write over 60 billion checks annually, and approximately 11
billion are written at the retail point- of-sale.
12
Jane K. Winn, BNA ELECTRONIC COMMERCE & LAW REPORT 1060 (October 25, 2000).

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consumer protection laws, bank regulators and consumers will balk at the notion of electronic
negotiable instrument in Macau.

Aside from legal issues that may arise, there are still many problems waiting to be resolved in the
technology. In effect, Electronic Signature technology can confirm the “chain of title”, but
cannot alone provide the equivalent of possession of a tangible object. Possession of a negotiable
instrument is usually essential to establishing ownership of the instrument, and is also essential
to establishing holder-in-due status. Electronic Signatures can guarantee the authenticity of
signatures and the integrity of the contents of a relevant record, but unless combined with strong
access controls, they would not be sufficient to produce an “authoritative copy.” 13 As a practical
matter, the only way to accomplish this will be through the implementation of sophisticated
security procedures. However, to build such a restricting access to resources stored in the
computer is more expensive and difficult to maintain than the kind of computer system used for
other business information processing purposes14.

13
According to the Federal Electronic Signatures in Global and National Commerce Act (the USA) and also the
Uniform Commercial Code of the United States, Prof. Jane K. Winn indicated that the authoritative copy is
“authoritative” because it identifies a unique party as the legal owner, who alone has the authority to make changes
to the record or to transfer ownership of it. It is a “copy” because in the digital world, information will inevitably be
copied over and over as it is processed within a computer system. A transferable record control system must provide
a way to distinguish between the authoritative copy and all other copies.
14
Supra Note 12.

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Conclusion

The above discussion makes clear that the negotiable instruments play a major role in the
commercial world. These instruments can either be negotiable or non negotiable. But, they must
come under one of the two categories. An instrument becomes negotiable either by statute or by
mercantile usage. Among all other negotiable instruments, bills of exchange, cheque and
promissory notes are the three important negotiable instruments which are widely used in
international trade. Even though electronic revolution has brought about many changes in the
present world, but negotiable instruments are still in use. The electronic revolution is considered
as the next major step which replaces the negotiable instruments. For this the future could
improve and develop the problems which prevail in e- revolution. In the present world, people in
all fields of profession are getting used to e- revolution. The present world, need to be trained to
get used to this system of working with e- revolution. It still takes time for the next generation to
be ready to use the e- revolution with no difficulties.

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REFRENCES

ACT REFERED

 NEGOTIABLE INSTRUMENT ACT, 1881

WEBSITE

 http://resources.lawinfo.com/real-estate/foreclosure/what-are-negotiable-instruments.html

 http://www.lawteacher.net/tort-law/essays/negotiable-instruments-plays-a-major-role.php

 http://www.ddegjust.ac.in/studymaterial/mcom/mc-207-f.pdf

 http://www.icaiknowledgegateway.org/littledms/folder1/chapter-2-the-negotiable-
instruments-act-1881.pdf

 http://www.lawteacher.net/tort-law/essays/principle-of-negotiability-of-negotiable-
instruments.php

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