Negotiable Instruments Act, 1881: Nature and Parties
This domain introduces instruments that pass by delivery or endorsement and the persons who are liable on them.
Core rules
- Section 13 defines a negotiable instrument as a promissory note, bill of exchange or cheque payable either to order or to bearer. 'Negotiable' here is statutory; other instruments may become negotiable by mercantile usage.
- Promissory note (s4): an unconditional written promise, signed by the maker, to pay a certain sum to the bearer or to order. The maker is the principal debtor and no acceptance is needed.
- Bill of exchange (s5): an unconditional written order, signed by the drawer, directing the drawee to pay a certain sum to the payee or bearer. The drawee becomes the acceptor by signing acceptance; the drawer and endorsers are secondary parties.
- Cheque (s6): a bill drawn on a banker payable on demand. The banker is the drawee.
- Parties include maker, drawer, drawee, acceptor, payee, holder, holder in due course, endorser and endorsee. A holder in due course (s9) takes for consideration, before maturity, in good faith and without notice of defect, and gets a good title free from prior defects.
- Transfer: bearer instruments by delivery; order instruments by endorsement plus delivery. Presumptions under ss118–119 include consideration and date.
- Liability: maker of a note and acceptor of a bill are primarily liable; drawer and endorsers are liable after notice of dishonour.
Worked example
A draws a bill on B payable to C or order. B accepts. C endorses it to D for value before maturity. D, who has no notice of any defect, is a holder in due course. If B dishonours the bill, D may sue B as acceptor and, after notice of dishonour, may also proceed against A and C as prior parties.
Traps
A holder is not necessarily a holder in due course; consideration and good faith before maturity matter. Acceptance must be by the drawee in writing on the bill. A cheque is a bill but is drawn on a banker and payable on demand.