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A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. According to the Negotiable Instruments Act, 1881 in India there are just three types of negotiable instruments i.e., promissory note, bill of exchange and cheque. Cheque also includes Demand Draft. More specifically, it is a document contemplated by a contract, which (1) warrants the payment of money, the promise of or order for conveyance of which is unconditional; (2) specifies or describes the payee, who is designated on and memorialized by the instrument; and (3) is capable of change through transfer by valid negotiation of the instrument. As payment of money is promised subsequently, the instrument itself can be used by the holder in due course as a store of value; although, instruments can be transferred for amounts in contractual exchange that are less than the instruments face value (known as discounting). Under United States law, Article 3 of the Uniform Commercial Code as enacted in the applicable State law governs the use of negotiable instruments, except banknotes (Federal Reserve Notes, aka "paper dollars").

Negotiable instruments distinguished from contracts

A negotiable instrument can serve to convey value constituting at least part of the performance of a contract, albeit perhaps not obvious in contract formation, in terms inherent in and arising from the requisite offer and acceptance and conveyance of consideration. The underlying contract contemplates the right to hold the instrument as, and to negotiate the instrument to, a holder in due course, the payment on which is at least part of the performance of the contract to which the negotiable instrument is linked. The instrument, memorializing (1) the power to demand payment; and, (2) the right to be paid, can move, for example, in the instance of a 'bearer instruments, wherein the possession of the document itself attributes and ascribes the right to payment. Certain exceptions exist, such as instances of loss or theft of the instrument, wherein the possessor of the note may be a holder, but not necessarily a holder in due course. Negotiation requires a valid endorsement of the negotiable instrument. The consideration constituted by a negotiable instrument is cognizable as the value given up to acquire it (benefit) and the consequent loss of value (detriment) to the prior holder; thus, no separate consideration is required to support an accompanying contract assignment. The instrument itself is understood as memorializing the right for, and power to demand, payment, and an obligation for payment evidenced by the instrument itself with possession as a holder in due course being the touchstone for the right to, and power to demand, payment. In some instances, the negotiable instrument can serve as the writing memorializing a contract, thus satisfying any applicable Statute of frauds as to that contract.

The holder in due course

The rights of a holder in due course of a negotiable instrument are qualitatively, as matters of law, superior to those provided by ordinary species of contracts:

The rights to payment are not subject to set-off, and do not rely on the validity of the underlying contract giving rise to the debt (for example if a cheque was drawn for payment for goods delivered but defective, the drawer is still liable on the cheque) No notice need be given to any party liable on the instrument for transfer of the rights under the instrument by negotiation. However, payment by the party liable to the person previously entitled to enforce the instrument "counts" as payment on the note until adequate notice has been received by the liable party that a different party is to receive payments from then on. [U.C.C. 3-602(b)] Transfer free of equitiesthe holder in due course can hold better title than the party he obtains it from (as in the instance of negotiation of the instrument from a mere holder to a holder in due course)

Negotiation often enables the transferee to become the party to the contract through a contract assignment (provided for explicitly or by operation of law) and to enforce the contract in the transferee-assignees own name. Negotiation can be effected by endorsement and delivery order instruments), or by delivery alone (bearer instruments). In addition, the rights and obligations accruing to the transferee can be affected by the rule of derivative title, which does not allow a property owner to transfer rights in a piece of property greater than his own.

Common prototypes of bills of exchanges and promissory notes originated in China. Here, in the 8th century during the reign of the Tang Dynasty they used special instruments called feitsyan for the safe transfer of money over long distances. Later such document for money transfer used by Arab merchants, who had used the prototypes of bills of exchange suftadja and hawala in 1013th centuries, then such prototypes had used by Italian merchants in the 12th century. In Italy in 1315th centuries bill of exchange and promissory note obtain their main features and further phases of its development have been associated with France (1618th centuries, where the endorsement had appeared) and Germany (19th century, formalization of Exchange Law). In England(and later in the U.S.) Exchange Law was different from continental Europe because of different legal systems.

Promissory Notes Definition
A promissory note is an instrument in writing (not 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 instrument

Examples of Promissory Notes

A signs instruments in the following terms:

"I acknowledge myself to be indebted to 'B' in Rs. 1000, to be paid on demand, for value received."

Followings are Not Promissory Notes. (i) "Mr. B, I.O.U. (I owe you) Rs. 1000." (ii) "I promise to pay B Rs. 1500 on D's death, provided he leaves me enough to pay that sum,"

(iii) "I promise to pay B Rs. 500 seven days after my marriage with C."

Essentials or Characteristics of a Promissory Note

(1) (2) From the definition, it is clear that a promissory note must have the following essential elements. In writing - A promissory note must be in writing. Writing includes print and typewriting. Promise to pay - It must contain an undertaking or promise to pay. Thus, a mere acknowledgement of indebtedness is not sufficient. Notice that the use of the word `promise' is not essential to constitute an instrument as promissory note. Unconditional - The promise to pay must not be conditional. Thus, instruments payable on performance or non-performance of a particular act or on the happening or non-happening of an event are not promissory notes.


(4) Signed by the Maker The promissory note must be signed by the maker, otherwise it is of no effect. (5) Certain Parties - The instrument must point out with certainty the maker and the payee of the promissory note. (6) (7) Certain sum of money - The sum payable must be certain or capable of being made certain. Promise to pay money only - If the instrument contains a promise to pay something in addition money, it cannot be a promissory note. Number, place, date etcetera - These are usually found in a promissory note but are not essential in law. If a promissory note does not bear a date, it is deemed to have been made when it was delivered. It may be payable in installments



(10) It may be payable on demand or after a definite period - Payable 'on demand' means payable immediately or any time till it becomes time-barred. A demand promissory note becomes time barred on expiry of 3 years from the date it bears. (11) It cannot be made payable to bearer on demand or even payable to bearer after a certain period (12) It must be duly stamped under the Indian Stamp Act - It means that the stamps of the requisite amount must have been affixed on the instrument and duly cancelled either before or at the time of its execution. A promissory note, which is not so stamped, is a nullity.

BILL OF EXCHANGE A 'bill of exchange' is defined by as 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.

Characteristic Features of a Bills of Exchange

1. 2. 3. 4. 5. 6. 7. 8. 9. It must be in writing. It must contain an order to pay and not a promise or request. The order must be unconditional. There must be three parties, viz., drawer, drawee and payee. The parties must be certain. It must be signed by the drawer. The sum payable must be certain or capable of being made certain. The order must be to pay money and money alone. It must be duly stamped as per the Indian Stamp Act.

10. Number, date and place are not essential.

Meaning of a Cheque
A Cheque, in essence, is an order by the customer of the bank directing his banker to pay on demand, the specified amount, to or to the order of the person named therein or to the bearer. It has been defined as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. A 'Cheque in the electronic form' means a Cheque, which contains the exact mirror image of a paper Cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system. A "truncated Cheque" means a Cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the Bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.

Features of a Cheque
A Cheque is a bill of exchange with following features, viz., (i) must be in writing; (ii) contain an unconditional order to pay (iii) drawn on a specified banker; (iv) for a certain sum of money; (v) the payee must be a definite person; (vi) amount must be written both in figures and words;

(vii) (viii) (ix)

it must be dated. it is always drawn on a specified banker; and it is always payable on demand and not otherwise.

Cheques in electronic form

In view of the banking transforming from traditional banking to e-banking, the electronic form or electronic image of a Cheque as a valid Cheque has also now been recognized [Negotiable Instruments (Amendment) Act, 2002].

Bills of Exchange and Cheque distinguished

1) 2) 3) 4) 5) 6) It must be drawn only on a banker. The amount is always payable on demand. The cheque is not entitled to days of grace. Acceptance is not needed. A cheque can be crossed Notice of dishonour is not necessary. The parties thereon remain liable, even if no notice of dishonour is given.

Bills of Exchange
1) It can be drawn on any person including a banker. 2) The amount may be payable on demand or after a. specified time. 3) A usance (time) bill is entitled to three days of grace. 4) A bill payable after sight must be accepted. 5) Crossing of a bill of exchange is not possible. 6) Notice of dishonour is necessary to hold the parties liable thereon. A party who does not receive a notice of dishonour can generally escape its liability thereon. 7) A bill is noted or protested to establish dishonour. 8) No such protection is available in the case of bills.


A cheque is not to be noted or protested in case of dishonour. 8) The protection given to the paying banker in respect of crossed cheques is peculiar to this instrument.

Promissory Note and Bill of Exchange distinguished

Promissory Note 1) There are only two parties the maker (debtor) and the payee (creditor). 1) Bill of Exchange There are three parties the drawer, the drawee and the payee- although any two of these capacities may be filled by one and the same person. It contains an unconditional order to the drawee to pay according to the drawer`s directors. A bill payable `after sight` must be accepted by the drawee or his agent before it is presented for payment. The liability of the drawer is secondary and conditional upon non-payment by the drawee. Notice of dishonour must be given by the holder to the drawer and the intermediate endorsers to hold them liable thereon.


A note contains an unconditional promise by the maker to pay the payee. 3) No prior acceptance is needed.

2) 3) 4)


The liability of the maker or drawer is primary and absolute. 5) No notice of dishonour need be given.



The maker or drawer does not stand in immediate relation with the acceptor drawee.


The maker of the note stands in immediate relation with the payee.


(1) An instrument may be negotiable either by Statute - Promissory notes, bills of exchange and cheques are negotiable instruments under the Negotiable Instruments Act, 1881; or By usage - Bank notes, bank drafts, share warrants, bearer debentures, dividend warrants, scripts An instrument is to be called 'negotiable' if it possesses the following characteristic features:


1) Freely transferable - Transferability may be by

(a) delivery, or (b) by endorsement and delivery. 2) Holder's title free from defects: The holder (of the negotiable instrument) in due course acquires a good title not withstanding any defect 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 title of the transferor. 3) The Holder can sue in his own Name - Another characteristic feature of a negotiable instrument, is that its holder in due course, can sue on the instrument in his own name. 4) A negotiable instrument can be transferred infinitum, i.e., can be transferred any number of times till its maturity. 5) A negotiable instrument is subject to certain presumptions.

Presumptions as to negotiable instruments [Sections 118-119] 1) As to Consideration - Every negotiable instrument is deemed to have been made, drawn, and
2) 3) accepted endorsed, negotiated or transferred for consideration. As to date- Every negotiable instrument bear the date on which it is made or drawn.

As to Acceptance- Every bill of exchange was accepted within a reasonable time after the date mentioned therein and before the date of its maturity.

4) As to Transfer- Every transfer of a negotiable instrument was made before the date of its maturity in case of an instrument payable otherwise than on demand. 5) As to the order of Endorsements - The endorsements appearing on it were made in the order in which they appear thereon. 6) As to lost Instruments - Where an instrument has been lost or destroyed, that it was duly stamped and the stamp was duly cancelled. 7) As to holder-in-due course - The holder of the instrument is a holder in due course. 8) As to dishonour - If a suit is filed upon an instrument, which has been dishonoured, the Court shall,

on proof of the protest, presume the fact of dishonour unless it is disproved.