What is the Negotiable Instruments Act 1881? Negotiable instruments are seen to have great significance in the modern business world. It has to be noted that these instruments have gained significant prominence as the principal instruments for paying and discharging business obligations. So what essentially is a negotiable instrument? A negotiable instrument is any transferable document that satisfies certain conditions. These instruments pass freely from hand to hand and thus form an integral form part this modern business instruments.
Here are the articles to answer, What are the doubts about Define and Explain the Negotiable Instruments Act 1881?
It also has to be noted that in our country, the law relating to negotiable instruments, is governed by the Negotiable Instruments Act 1881. How to define the Consideration in Contract Law? This Negotiable Instruments Act 1881 does not in specific define what a negotiable instrument is, it merely states that a negotiable instrument means “a promissory note, bill of exchange or cheque payable either to the bearer”.
Section 13 of the Act, does not indicate the characteristics of a negotiable instrument but only states that three instruments-cheque, a bill of exchange, and a promissory note, are negotiable instruments act 1881. Thus these three instruments are therefore negotiable instruments as per the statute. But it has to be noted that S.13, does not prohibit any other instrument which satisfies the essential features of negotiability, to be treated as a negotiable instrument.
Thomas defines the negotiable instrument as an instrument is negotiable which it is, by a legally recognized custom of trade or law, transferable by delivery or by endorsement and delivery, without notice to the party liable, in such a way that a. a holder of it may for the time being may sue upon it in his name. The property in it passes on to a bonafide transferee for value-free from any defect in the title of the person from whom he obtained it. What is the objective of the Minimum Wages Act?
A negotiable instrument is a transferable document either by the application of the law or by the custom of the trade concerned.
Thus it has to be noted that a negotiable instrument, firstly is easily transferable from person to person and the ownership of the property may be passed on by mere delivery. Secondly, a negotiable instrument confers absolute faith and good title on a transferee, provided that he takes it in good faith for value and without notice of the fact that the transferor had defective title thereto.
It is seen that the negotiable instruments can be essentially classified into two major types of Negotiable instruments by statute: The three instruments, cheque, bill of exchange, and promissory notes are negotiable instruments by statute
Negotiable instruments by custom or usage: Some instruments have acquired the character of negotiability by custom or usage of trade. Section 137 of the Transfer of Property Act, 1882, also recognized that an instrument might be negotiable by law or custom. Therefore we have cases of promissory notes, delivery orders, and hundreds being held as negotiable instruments act 1881.
Liabilities of Parties;
The main aim of this project would essentially be to look into the liability of parties to a Negotiable Instruments act 1881. But before moving on to the liabilities, a brief on the parties and their capacity to capacity parties to contract is required. The parties to a negotiable instrument, namely, the maker, drawer, drawee, and the payee, enter into a contract among themselves.
It is therefore very essential that they should have the capacity to enter into valid contracts. Section 26 of the Negotiable Instrument Act, states that
“Every person capable of contracting, according to the law to which he is subject, may bind himself and be bound by the making, drawing, acceptance, endorsement, delivery, and negotiations of a promissory note, bill of exchange, or a cheque”.
S.11 of the Indian Contract Act, states the requirements of parties to contract. Thus as per this section, any person who is of a sound mind, above the age of majority, and not disqualified from entering in to contract by any Act, is competent to enter into a valid contract.
Liability of drawer of the bill or a cheque;
Essentially the liability of the parties to a ‘negotiable instrument’ has its statutory provisions under Sections 30, 32, and 35 of the Negotiable Instruments Act 1881.
The first section in this aspect to be analyzed would be S.30 of the Act, which provides for the Liability of the drawer of the bill or a cheque.
The ‘drawer’ of the cheque, essentially, as defined by S.7 of the Act, is “The maker of a bill of exchange or Cheque”
Thus Section 30 of the Act, goes on to define the liability of the drawer of a bill or cheque
“The drawer of a bill of exchange or cheque is bound in case of dishonor by the drawee or acceptor thereof, to compensate the holder, provided due notice of dishonor has been given to or received by, the drawer as hereinafter provided”
The critical thing to be noted here is that the liability of the drawer here arises only in case of dishonor of the cheque or a bill of exchange and nothing before it. A bill of exchange is seen as dishonored by non-acceptance or by non-payment, but on the other hand, a cheque is dishonored by non-payment only.
As soon as this bill or exchange or a cheque has been dishonored by non-acceptance by the drawee, it is seen that the holder of the has the right to recourse against the drawer. The drawee, as per Section 7 of the Act, is “the person directed to pay”
It also has to be noted that the drawer, becomes liable only when the drawee has dishonored the bill of exchange or the cheque.
But unlike the bill of exchange, it has to be noted that in case of dishonor of a cheque, the drawer remains liable thereto, even if the cheque is not presented by the holder to the drawer bank. This was held by the Supreme Court, in Harish Chander v. M/s. Ganga Singh and Sons and others. Here again, the relevance of Sections 72 and 84, were looked into. These sections essentially deal with the discharge of the liability of the drawer, in case he suffers damage as a result of the presentment of the cheque
Another aspect that needs to be looked into before the drawer can be held liable, is the fact that ‘due and sufficient prior notice of dishonor’, has been given.
But again taking Section 98 into consideration, no notice is required if the provision of this section is being taken into consideration. It has to be noted that the service of this notice, may be oral or written or may even be faxed, but it is a must.
V.V.L.N.Chary and Others v. N.A.Martin and others is another case, which needs to be looked into. The issue here was whether a post-dated cheque for payment of goods is only a promise to pay on a future date or not?. The court, held in the affirmative and stated that it is but a promise.
It further held that if this promise is broken by the dishonor of the cheque, it will enforce a civil liability only. The liability of proving the dishonest intention of the drawer was put on the shoulders of the holder, as the court stated that only if prior knowledge was present on the part of the drawer that he intended to dishonor the cheque, can he be convicted.
This case essentially put the drawer in a rather better position, by ensuring that unnecessary accusations and liabilities would not be enforced on him.
So then would a drawer ever be criminally liable?. The answer to this came later on in the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act 1988, which was further modified by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 As per this act, the dishonor of cheques due to the insufficiency of funds, was deemed to be an offense for which the drawer could be punished with imprisonment for a term up to a year or with a fine up to twice the amount of the cheque or with both. More specifically Sections 138-142, were inserted which deal with these offenses.
Another section to be noted here is Section 31 of the Act, which deals with the liability of the drawee of the cheque. As per this section, “The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required so to do, and, in default of such payment, must compensate the drawer for any loss or damage caused by such default”.
Section 32 of the Act, deals with the liability of the maker of the note and the acceptor of the bill. As per this section, “In the absence of a contract to the contrary, the maker of a promissory note and the acceptor before the maturity of a bill of exchange are bound to pay the amount thereof at maturity according to the apparent tenor of the note or acceptance respectively, and the acceptor of a bill of exchange at or after maturity is bound to pay the amount thereof to the holder on demand.
In default of such payment as aforesaid, such maker or acceptor is bound to compensate any party to the note or bill for any loss or damage sustained by him and caused by such default”.
Here, it has to be noted that the maker of a promissory note and the acceptor of a bill of exchange are the principal debtors and their liability on the instrument, is absolute and unconditional. The first part of this section deals with the liability of the maker of a note and the second part with the consequences of default.
The crux of this section can be summed up as. This section essentially puts the maker of the note and the acceptor of the bill on the same footing. It makes both liable as principal debtors. Besides this, it can be seen that a bill may be accepted before maturity or at or after maturity. An acceptor of the bill, it is seen before maturity is bound to pay the amount at maturity and an acceptor at or after maturity shall have to pay the amount to the holder on demand.
It is however not that there is o difference between the liability of the maker of the note and the acceptor of the bill. The maker of the note, it is seen is bound to pay the amount according to the apparent tenor of the note. That he, as he makes it himself, he cannot change its terms and shall have to abide by the tenor of the note.
But on the other hand, it is seen that the acceptor of the bill, is liable to pay the amount according to the apparent tenor of his acceptance. That is to say, if the acceptor accepts the bill, he is required to honor the bill as per his qualified acceptance and not according to the tenor of the bill.
This cane very simply is illustrated by the following example. If A, draws a bill of Rs.10,00 on B, to be paid after a year, and B, gives his acceptance to pay the amount after 18 months, B is liable to pay after 18 months and not a year.
It has to be noted that in case of a promissory note signed by two or more promisors and the consideration has been received by only one of them, irrespective of any reason, all the promisors shall be equally liable for the amount of the promissory note.
It also has to be noted that Sections 78, 41 42, and 88 of the Act, also deal with the liability of the maker of the note and the acceptor of a bill
Liability of the endorser;
This is provided for under Section 35 of the Act, which states that
“In the absence of a contract to the contrary, whoever endorses and delivers a negotiable instrument before maturity, without in such endorsement, expressly excluding or making conditional his liability, is bound thereby to every subsequent holder, in case of dishonor by the drawee, acceptor or maker, to compensate such holder for any loss or damage caused to him by such dishonor, provided due notice of dishonor has been given to or received by, such endorser as hereinafter provided. Every endorser after dishonor is liable as upon an instrument payable on demand.”
Before moving on further, it is pertinent to study Section 15 of the Act in relevance to the term ‘endorsement’ and define an ‘endorser’. As per Section 15 of the Act, which defines endorsement,
“When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for negotiation, one the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to endorse the same and is called the endorser.”
It is seen that to invoke Section 35, firstly and most importantly, there has to be an endorsement of an instrument, which has to be delivered to the endorsee. It has to be noted that if either of these acts does not occur, the liability of the endorser does not arise.
Secondly, this section again puts the endorser of the cheque on the same footing as the drawer of a bill/cheque or maker of a note. In the sense that it confers upon him the same levels of liability.
This concept of endorsement is based on the belief that the bill, cheque, or note, will be duly accepted or honored by the drawee or the maker. On the failure of this event happening, the liability of the endorser occurs. So essentially, it is seen that the role of the endorser is pretty much equivalent to that of a surety, who undertakes the performance by the acceptor of the bill.
It is seen that immediately on the dishonor of an instrument, the older of the instrument, gets an inherent right to sue the endorser at once, which can in no way be challenged. The holder stands in a rather advantageous position as he is in a better position to sue either party, the drawer for non-compliance or the endorser for failure to ensure compliance on the part of the drawer
Then again it has to be noted that the liability of an endorser arises only when there is an absence of a contract to the contrary. As mentioned in the section itself, the endorser may save himself from liability by either excluding his liability thereon by endorsing sans recourse or by making his liability conditional. If these acts have been adhered to, the endorser would save himself the trouble of being liable.
An aspect that needs to be looked into is when the endorser’s liability is discharged?. To answer this, Section 36 of the Act which deals with the liability of prior parties to the holder in due course, needs to be looked into first. This Section states that “Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied.”
Section 40 of the act also needs to be looked into, which states that “Where the holder of a negotiable instrument, without the consent of the endorser, destroys or impairs the endorser’s remedy against a prior party, the endorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity.”
Negotiable Instruments Act 1881; The essence of these liabilities being imposed upon the parties is nothing by an act to being upon a greater sense of responsibilities on the part of the parties. The Sections provided here, are rather comprehensive and cover a relatively broad range of parties to a negotiable instrument, and also impose penal sanctions on them, if they turn into offenders. Although before the various amendments, there was no criminal liability imposed on parties, the amendment of 2002, imposed a greater sense of responsibility as it brought upon more stringent measures to counter the offending parties.