Introduction, Meaning and Definition, Characteristics, Kinds of Negotiable Instruments

26/02/2024 0 By indiafreenotes

Negotiable instruments represent a unique category of documents that facilitate the commercial and financial transactions by allowing the transfer of money in a manner that is recognized by law. They play a pivotal role in the modern economic system by providing a secure and efficient mechanism for the payment and settlement of debts without the need for the physical exchange of money. The concept of negotiable instruments is governed by various legal frameworks across different jurisdictions, with the Negotiable Instruments Act, 1881 being the guiding statute in India.


A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand or at a set time, with the payer named on the document. These instruments are “negotiable” in that they enable one party to pay another party using the document itself as a form of currency that can be passed on – or negotiated – from one party to another, substituting for actual money. The key characteristic of a negotiable instrument is its ability to be transferred from one person to another, legally empowering the holder in due course to claim the amount mentioned therein, free from all defects of title of prior parties, and to hold the instrument free from some defenses available to prior parties.


The Negotiable Instruments Act, 1881, in India, does not explicitly define a negotiable instrument but describes these documents through the characteristics and features of promissory notes, bills of exchange, and cheques. However, a general definition accepted in legal and commercial contexts is:

A Negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand or at a specified or determinable future date, that is payable either to order or to bearer.

This definition encapsulates the essence of what makes a document a negotiable instrument: its ability to be transferred (negotiated) as a substitute for money, in a manner that the rights to the instrument’s value can be passed along through endorsement or delivery.

Characteristics of Negotiable Instruments

Negotiable instruments are fundamental to commercial and financial transactions, providing a secure and standardized method for representing and transferring value. Their characteristics make them a versatile tool for facilitating payments and settlements.

  1. Transferability

Negotiable instruments can be transferred from one person to another. The transfer process may vary depending on whether the instrument is payable to bearer or to order. Bearer instruments are transferred by simple delivery, while order instruments require endorsement and delivery.

  1. Title

The holder in due course, or the person who has acquired the instrument in good faith and for value, obtains an absolute and good title to the instrument. This means that the holder can claim the amount due on the instrument, free from any defects of title of previous holders, and is not affected by any defenses that could be raised against prior parties, except in cases of fraud or illegality.

  1. Rights

The holder of a negotiable instrument can sue in their own name. This is significant because it allows the person in possession of the instrument to directly enforce the rights arising from it, without needing to involve previous holders.

  1. Presumptions

The Negotiable Instruments Act, 1881, provides certain presumptions that apply to all negotiable instruments, such as:

  • Consideration: Every negotiable instrument is deemed to have been made, drawn, accepted, endorsed, or transferred for consideration.
  • Date: The instrument is presumed to have been dated on the date it bears.
  • Acceptance: Every bill of exchange was accepted within a reasonable time after its date and before its maturity.
  • Order of endorsements: The endorsements appearing on the instrument are presumed to have been made in the order in which they appear.
  • Stamp: The instrument is presumed to have been stamped in accordance with the law.
  1. Payment in Money

Negotiable instruments represent a payment of money either on demand or at a future date. They do not involve the transfer of goods or provision of services but are strictly financial instruments.

  1. Unconditionality

A genuine negotiable instrument contains an unconditional promise or order to pay. The promise or order should not be contingent upon the occurrence of a particular event or performance of a particular act.

  1. Freedom from All Defects

The principle of “in due course” holding protects the holder from all defects in the title of the transferor, provided the instrument was acquired under certain conditions outlined by law, including good faith and without knowledge of any defect.

  1. Bearer or Order

Negotiable instruments are payable either to bearer or to the order of a specified person. This feature underlines the ease with which ownership and the right to the instrument’s value can be transferred.

Kinds of Negotiable Instruments

Negotiable instruments play a vital role in commercial transactions by facilitating the transfer of funds and settlement of debts. The kinds of negotiable instruments can be broadly classified based on their features, usage, and legal recognition. Here are the primary types:

  1. Promissory Note

Promissory note is an unconditional written promise by one party (the maker) to pay a certain sum of money to another party (the payee) or to the bearer of the note, either on demand or at a specified future date. It specifies the amount to be paid and the conditions under which it will be paid. This instrument is commonly used in financing and lending transactions.

  1. Bill of Exchange

Bill of exchange is a written order from one party (the drawer) to another (the drawee) to pay a specified sum to a third party (the payee) on demand or at a predetermined future date. Bills of exchange are used primarily in international trade for the buying and selling of goods and services.

  1. Cheque

Cheque is a specific type of bill of exchange drawn on a bank, directing the bank to pay a specified sum from the drawer’s account to the payee or to the bearer. It is payable on demand without any conditions. Cheques are widely used for personal and business transactions as a safer alternative to carrying cash.

  1. Treasury Bills

Treasury bills are short-term debt instruments issued by the government. They are considered a secure form of investment, as they are backed by the government’s credit. T-bills are sold at a discount to their face value, and their return is the difference between the purchase price and the face value paid at maturity.

  1. Commercial Paper

Commercial paper is an unsecured, short-term debt instrument issued by corporations to finance their immediate needs. It is typically issued at a discount and has a fixed maturity period ranging from a few days to one year. Commercial papers are used by companies to manage their short-term liquidity.

  1. Certificates of Deposit (CDs)

Certificates of Deposit are time deposits offered by banks with a fixed interest rate and maturity date. Unlike regular savings accounts, CDs require the holder to lock in their funds until the maturity date, after which they receive the principal amount along with accrued interest.

  1. Banker’s Acceptance

A banker’s acceptance is a short-term debt instrument issued by a company but guaranteed by a bank. It is used in international trade transactions to finance the buying and selling of goods. The acceptance acts as a promise by the bank to pay the face value of the instrument at maturity.

  1. Bearer Bonds

Bearer bonds are debt securities issued by corporations or governments. Unlike regular bonds, they are not registered to any owner and can be transferred simply by delivery. The interest and principal are paid to the holder of the instrument at maturity.