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 economy. “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”

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.

“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.”

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

instrument are still in use.

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Classes of Instrument

Instruments can either be negotiable or non-negotiable. Negotiable and Non-negotiable instrument

have many classes in them but all the instruments will come under one of the two categories

namely,

“An undertaking to pay a sum of money

An order to another to pay a sum of money”

“A negotiable instrument is one which, by statute or mercantile usage, may be transferred by

delivery and endorsement to a bona fide purchaser for value in such circumstances that he takes

free from defects in the title of prior parties.

A non negotiable instrument is one which, though capable of transfer by delivery (with any

necessary endorsement) in the same way as a negotiable instrument, can never confer on the older

a better right than vested in the transferor.”

Advantages of A Negotiable Instrument

Before 1874 in common law it was not permitted that the assignment of a promise to pay money

negotiable instrument comes into being because the transfer of promise to pay money was not

permitted in common law. At the end the negotiable instrument achieved it. The important

advantages of the negotiable instruments are as follows

“the transferee of a negotiable instrument can sue his own name even though there has been

no assignment in writing or notice to the obligator or even if the transfer is not absolute as

required for assignment under the statue.

The transferee of a negotiable instrument who takes it for a value and in good faith acquires a good title free from equities, whereas an assignee under the statue always takes subject to equities”

The negotiable instrument helps to provide investment.

Bills Of Exchange

Bills of exchange can be considered as the most popular negotiable instrument which is not only

used in foreign trade but It is also used in domestic trade. The bills of exchange act 1882 is the

primary source of law of bills of exchange. Sir Mackenzie Charmers drafted the bills of exchange

act 1882. Section 3 of bills of exchange 1882 defines bills of exchange as “ A bill of exchange is

an unconditional order in writing, addressed by one person to another , signed by the person giving

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it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable

future time a sum certain in money to or to the order of a specified person, or to bearer”

The common terms which are used in the bills of exchange are:

Drawer – the person or a seller who issues the bill ordering to pay

Drawee – the person or any party upon whom the bill is drawn

Payee – the person to whom the amount mentioned in the bill is to be paid.When the bill is

delivered to a payee he becomes the first holder.

Acceptor – the person who accepts the bill

The bills of exchange are used in 2 context associated with international trade

Documentary credit

Acceptance credit

The instrument to be a bill of exchange has to fulfill certain requisites. They are

The order given by the drawer to the drawee should be an unconditional order

The unconditional order given by the drawer to the drawee should be written and it should

include print.

The drawer should sign the instrument personally or to his agent. If the instrument is forged

and if the drawer is arguable, then the instrument cannot be treated as the bills of exchange.

The instrument can be treated as bills of exchange only if it addressed by one person to

another

The name of the drawer and the payee should be clearly mentioned and also who are the

parties

“The instrument should contain the exact amount payable in it to be a bill of exchange. If

the amount is mentioned as upto or not exceeding or atleast”, then it cannot be a bill of

exchange.

The instrument should be drawn at a fixed time or at a ascertainable future time if is drawn

on a demand.

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To enforce the bill and to claim payment from the drawer and endorser, the holder has to follow a

number of duties which are

“A duty to present the bill for acceptance

A duty to give notice of dishonor by non- acceptance or non – payment to the drawer and

prior endorser.

A duty to protect a foreign bill if dishonored for non – acceptance or non – payment.”

If the holder fails with these duties, he will release the drawer and endorser from their liability on

the bill. Bill of exchange is an order made by one person to another to pay money to a third person.

Cheques

Cheques are considered as an important negotiable instrument in international sales. Cheques are

primarily a payment direction and it is not a credit instrument. Cheque plays an important role in

the mechanism of banking. Therefore, cheques are deeply rooted in the relationships of the bank

and the customer. “Section 73 of the Bills of Exchange Act, 1882, defines cheques as Bills of

Exchange drawn on a banker payable on demand.”

The nature of the cheque is that when it is presented, the payment is almost immediately made.

the cheques can be paid only to the named payee or his endorsee.

The cheque cannot be negotiated to a third party

The crossed cheque must be presented through a bank account for payment; the holder of a crossed

cheque cannot present it in person for cash. The bank does not accept the cheque on which they are

drawn.

The cheque may be considered as a debit instrument. For the payment, the cheque must be

presented to the paying bank i.e. the bank where the drawer keeps his account. The cheque when it

is presented for payment goes through a clearing system where the collecting bank is entrusted to

collect the amount of the cheque on behalf of the customer and later credits it to his own account.

Cheques play a fundamental part in the banking field. Normally, the cheques are not discounted.

Promissory Note

Promissory note is also one of the important negotiable instruments in international sales. Section

83 (1) of the Bills of Exchange Act, 1882, defines promissory notes as “a promissory note is an

unconditional promise in writing made by one person to another signed by the maker, engaging to 4

pay, on demand or at a fixed or determinable future time, a sum certain in money, to, or to the

order f a specified person or to bearer.”

A promissory note is just a promise to pay and it is not an order to pay. Therefore, in a promissory

note, there is no drawee. The maker of the promissory note is termed as a ‘promissor' and he

corresponds with the acceptor of a bill. The note can be negotiated by endorsement by the payee.

“The maker of a promissory note by making it

Engages that he will pay it according to his tenure.

Is precluded from denying to a holder in due course, the existence of the payee and is then

capacity to endorse.”

According to Section 89 (1) (2), the indorser of a promissory note has to follow the same duties

and liabilities which an indorser of a bill under Section 55 (3) follows. But, there is no reference to

the accepted. If the drawer and the drawee are the same, the bill holder has the option of treating it

as a promissory note.

In international trade, promissory notes are mainly used in forfeiting transactions. Here, the

importer makes the promissory notes and the exporter will indorse to a forfeiter at a discount. The

forfeiter also bears all the credit risk, economic risk and political risk and he must obtain the

payment of the instrument. The forfeiter can also rediscount the promissory note in the secondary

market. In domestic trade, promissory note has two functions

They provide more security if made by a debtor or hirer

Unlike in international trade, they facilitate the refinancing of transactions in which the

notes can be discounted to a financial institution.

The negotiation of a promissory note can pass a title which is free from any defects in the title of

previous parties. This is the reason which makes promissory notes the main negotiable instruments

which are used as security for inland transactions.

Bank Note

Bank note is a kind of negotiable instrument. These bank notes are a special form of promissory

notes which are made by a bank, which engages to pay the bearer on demand the sum which is

expressed in the note. These bank notes are used as money. They are also governed by the Bills if

Exchange Act, 1882. The bank notes, after delivery, can be transferable. If the bank notes are lost

or destroyed, a duplicate can also be demanded from the Bank of England by providing a

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satisfactory indemnity. The bank notes are issued by Bank of England, Bank of Scotland and Bank

of Northern Ireland. In many jurisdiction, bank notes are legal tender.

Treasury Bills

Treasury bill is a kind of negotiable instrument which is used by the government. The government

issues it to raise the short term loans. These bills, usually, mature in less than a year and the bills

do not pay interest before the maturity. Therefore, the bills are used by the bank as a source of

short term funding. To create a positive field of maturity, these bills can be sold at a discounted

rate compared to the present value. These bills are issued every week which are called as ‘regular

weekly treasury bills' with the maturity days like 28 days, 91 days, 182 days and 364 days. The

treasury bills are largely purchased by banks and other financial institution.

Banker's Draft

Banker's draft is a draft in which the funds are directly taken from the financial institution instead

of taking it from individual drawer's account. The draft can be paid at head office or any branch

office of the same bank. This banker's draft is mainly used in commercial transactions to make

payments. The banker's draft cannot be considered as legal cheque because the drawer and the

drawee are the same person. “But the cheques Act, 1957, the protection of bankers paying and

collecting such instruments is as with valid cheques.”

Dividend Warrants

Dividend warrants can be defined as demand drafts which are drawn by a company on a bank

ordering to pay a stock holder or shareholder with a sum of money which represents his profit in

the share of the company. The shareholder will be entitled with a share of the declared dividend.

Such amount can be drawn either in the form of a cheque or a banker's draft.

Share Warrants

The public and the private companies, if authorized by their articles issue in respect of fully paid

shares. A share warrant under a common law which states, that the bearer of the share warrant is

entitled to the share which is specified in it. When a company issues a share warrant, it must strike

out the name of the share holder from the registry of members. A share warrant is also negotiable,

because it passes a title free from defects in the title of previous holders upon mere delivery. The

important feature and advantage of a share warrant is that the owner of the share warrant cannot be

identified by anyone even if they look into the companies' public records. These warrants are easy

to transfer.

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Bearer Scrip

This is a type of negotiable instrument which is nothing but a certificate which is been issued when

a payment is deposited. The bearer scrip issued to an existing share holder indicates that, the

shareholder is entitled for the payment of further installments. The bearer scrip is usually, used by

the government and public companies.

Bearer Debenture

Bearer debentures are negotiable instruments which are transferable free from equities upon mere

delivery. There is no need to give the company a notice of transfer. Interests are paid by attaching

the coupon to the debenture. These coupons are the instruction to the companies' banker which

assist to pay the bearer a sum of money which is stated on the coupon after a certain date. Only by

advertisement, the company can communicate with the holders of bearer debenture. The holders of

bearer debenture may exchange them for registered debentures. A debenture can also be in the

form of promissory notes.

Bearer Bonds

It is a kind of negotiable instruments which acts as a security for debt which is issued by a

government or a corporation. These bearer bonds are completely different from other common

type investment securities. This instrument is not registered and there are no records of the owner

of the bond and no clue regarding the transactions involving ownership. The person who

physically holds the paper on which the bond is issued is the owner of the instrument. So, if there

is any loss or destruction of this bearer bond, recovering the value is not possible.

Floating Rate Note

Floating rate notes are the type of bonds which have a variable coupon. These coupons are equal to

a money market reference rate. They also have a rate which remains constant. Most of the floating

rate notes are quarterly coupons. They are called so because they pay back the interest only after

every three months. Initially, every coupon period is calculated by taking into account the fixing of

the reference rate, which is therefore, that day and by adding a rate, which remains constant. The

floating rate notes carry an interest rate risk with them.

Certificate Of Deposit

This negotiable instrument can be explained as a final product which is commonly offered to

consumers by bank and credit unions. The certificate of deposits has specified fixed term and the

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terms are valid for a period like three months, 6 months or 1 – 5 years. They also have a fixed rate

of interest. If the certificate of deposit is kept till the maturity date, the money can be with the

drawer including the accrued interest. If the money is kept as a deposit for an agreed term, we can

get a higher rate of interest. The main requirement of a certificate of deposit is a minimum deposit

which may offer higher rate for larger deposits. Interests are paid periodically through cheque or

may be transferred into the savings account according to the wish of the purchaser.

Conclusion

The above discussion makes clear that the negotiable instruments plays 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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