The advent of modern business practices contributed to the growth of newer ways of facilitating financial transactions. Previously, cash was the most common mode of exchanging goods and services for their value. The rise of negotiable instruments, however, brought radical changes in business practices. These days there are several types of such instruments which have made commerce simpler. Here, we will learn about negotiable instruments meaning.
Negotiable Instruments Meaning
These instruments are nothing but documents which have monetary value and are exchangeable. Hence, the two main characteristics of Negotiable Instruments are financial worth and transferability.
In India, the Negotiable Instruments Act, 1881 is responsible for governing NIs. This law defines these instruments and also deals with each type of them individually.
It governs the use of cheques, promissory notes, and bills of exchange. There are other customary payment methods similar to NIs in India (like Hundis) but this law does not cover them.
Other modes of transactions can also be similar to NIs if they fulfill certain basic requirements. For example, any instrument can be a NI if it is freely transferable by delivery or endorsement. Furthermore, it should carry certain rights, like the right of the holder to sue for it in his own name.
Learn more about Features and Types of Negotiable Instrument here.
Browse more Topics under Negotiable Instruments Act
- Classification of Negotiable Instruments
- Promissory Notes
- Bills of Exchange
- Parties of a Cheque and Essentials
- Crossing and Types of Cheque Crossing
- Liability of Parties – Cheque
- Endorsement of Instruments
- Presentment for Acceptance
- Notice of Dishonor
- NEFT and RTGS
Definition of Negotiable Instruments
As we saw above, a negotiable instrument meaning – It is just a document that has features of monetary worth and transferability. Although the Negotiable Instrument Act does not contain a definition for this term, these features always remain constant in its relation.
The Act has not defined negotiable instruments clearly but it has provided an inclusive meaning for them.
Section 13(1) says NIs include promissory notes, bills of exchange or cheques payable either to order or to bearer. Hence, the Act only includes these three types of NIs within its ambit.
A negotiable instrument is nothing but a document. Some laws and definitions also treat it as movable property.
Since every property has some monetary worth, even NIs possess some financial value. In order to purchase it, one just has to pay its value to its owner and acquire it as property.
According to these definitions, an instrument of this kind must always possess the following characteristics:
- It should be freely transferable either by simple delivery or by endorsement and delivery.
- Defects in the title of sellers of these instruments do not affect persons who purchase them in good faith.
- Holders of these instruments can sue upon them in their own names.
Effect of Negotiability
One of the most important principles relating to property transfers is ‘nemo dat quad non-habet’. This maxim basically means nobody can pass a better title than that he himself possesses.
In other words, one cannot transfer anything that does not belong to him in the first place. The effect of this rule is that any transfer without the transferor’s title is null and void.
Negotiable instruments are common exceptions to this very important rule requiring a proper title for transfers. Hence, a person may validly acquire NIs from a seller who does not possess a title over them. This only requirement of this exception is that the purchase of NIs must be for bona fide reasons.
Solved examples for you
Question: Mention the words that are absent in the following sentences.
(1) The law that governs NIs in India is __________.
(2) Previously, __________ was the most common method of payment for commercial transactions.
(3) __________ is an example of customary payment methods similar to NIs.
(4) Nobody can pass a better __________ than he possesses in property transfers.
(5) NIs can be freely transferable either by simple delivery or by __________ and delivery.
Answers: (1) Negotiable Instruments Act, 1881 (2) cash (3) hundi (4) title (5) endorsement