Negotiable instrument
A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, whose payer is usually named on the document. More specifically, it is a document contemplated by or consisting of a contract, which promises the payment of money without condition, which may be paid either on demand or at a future date. The term has different meanings, depending on its use in the application of different laws and depending on countries and contexts. The word "negotiable" refers to transferability, and "instrument" refers to a document giving legal effect by the virtue of the law.
Concept of negotiability
defines the concept of negotiability as follows:- Negotiable instruments are transferable under the following circumstances: they are transferable by delivery where they are made payable to the bearer, they are transferable by delivery and endorsement where they are made payable to order.
- Consideration is presumed.
- The transferee acquires a good title, even though the transferor had a defective or no title.
Jurisdictions
Additionally most Commonwealth jurisdictions have separate Cheques Acts providing for additional protections for bankers collecting unendorsed or irregularly endorsed cheques, providing that cheques that are crossed and marked 'not negotiable' or similar are not transferable, and providing for electronic presentation of cheques in inter-bank cheque clearing systems.
History
In India, during the Mauryan period in the 3rd century BC, an instrument called adesha was in use, which was an order on a banker desiring him to pay the money of the note to a third person, which corresponds to the definition of a bill of exchange as we understand it today.The ancient Romans are believed to have used an early form of cheque known as praescriptiones in the 1st century BC and 2,000-year-old Roman promissory notes have been found.
Common prototypes of bills of exchanges and promissory notes originated in China, where special instruments called fey tsien which were used to safely transfer money over long distances during the reign of the Tang dynasty in the 8th century.
In about 1150 the Knights Templar issued an early form of bank notes to departing pilgrims in exchange for a deposit of valuables at a local Templar preceptory in a European country, which could be cashed by the pilgrim concerned on arrival in the Holy Land, by presenting the note to a Templar preceptory there.
In the mid-13th century, the Ilkhanid rulers of Persia printed the "cha" or "chap" which was used as paper money for limited use for transactions between the court and the merchants for about three years before it collapsed. The collapse was caused by the court accepting the "cha" only at progressive discount.
Later, such documents were used for money transfer by Middle Eastern merchants, who had used the prototypes of bills of exchange from the 8th century to present. Such prototypes came to be used later by the Iberian and Italian merchants in the 12th century. In Italy in the 13–15th centuries, bills of exchange and promissory notes obtained their main features, while further phases of their development have been associated with France and Germany. The first mention of the use of bills of exchange in English statutes dates from 1381, under Richard II; the statute mandates the use of such instruments in England, and prohibits the future export of gold and silver specie, in any form, to settle foreign commercial transactions. English exchange law was different than continental European law because of different legal systems; the English system was adopted later in the United States.
In England, two of the main reasons why the use of negotiable instruments became so popular was:
- Carrying large amounts of coins from one place to the other was deemed unsafe, so the usage of negotiable instruments was to prevent merchants from being robbed of their coins either on land or by sea.
- During the 1300s, there was an increase in the use of counterfeit English money, so the aim of the English Crown was to eradicate the exchange of genuine English coins for such forgeries as well as foreign goods. As such, statutes such as the Statute of Money of 1335 and 1379 were implemented to prevent the importation of money that was deemed as counterfeit, and also to prevent the exportation of valuable items like gold and silver in the absence of any special licenses.
Distinguished from other types of contracts
A negotiable instrument can serve to convey value constituting at least part of the performance of a contract, albeit perhaps not obvious in contract formation, in terms inherent in and arising from the requisite offer and acceptance and conveyance of consideration. The underlying contract contemplates the right to hold the instrument as, and to negotiate the instrument to, a holder in due course, the payment on which is at least part of the performance of the contract to which the negotiable instrument is linked. The instrument, memorializing: the power to demand payment; and, the right to be paid, can move, for example, in the instance of a "bearer instrument", wherein the possession of the document itself attributes and ascribes the right to payment. Certain exceptions exist, such as instances of loss or theft of the instrument, wherein the possessor of the note may be a holder, but not necessarily a holder in due course. Negotiation requires a valid endorsement of the negotiable instrument.The consideration constituted by a negotiable instrument is cognizable as the value given up to acquire it and the consequent loss of value to the prior holder; thus, no separate consideration is required to support an accompanying contract assignment. The instrument itself is understood as memorializing the right for, and power to demand, payment, and an obligation for payment evidenced by the instrument itself with possession as a holder in due course being the touchstone for the right to, and power to demand, payment. In some instances, the negotiable instrument can serve as the writing memorializing a contract, thus satisfying any applicable statute of frauds as to that contract.
The holder in due course
The rights of a holder in due course of a negotiable instrument are qualitatively, as matters of law, superior to those provided by ordinary species of contracts:- The rights to payment are not subject to set-off, and do not rely on the validity of the underlying contract giving rise to the debt
- No notice need be given to any party liable on the instrument for transfer of the rights under the instrument by negotiation. However, payment by the party liable to the person previously entitled to enforce the instrument "counts" as payment on the note until adequate notice has been received by the liable party that a different party is to receive payments from then on.
- Transfer free of equities—the holder in due course can hold better title than the party he obtains it from
Classes
Promissory notes and bills of exchange are two primary types of negotiable instruments. The following chart shows the main differences:Promissory note
Although possibly non-negotiable, a promissory note may be a negotiable instrument if it is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand to the payee, or at fixed or determinable future time, a sum certain in money, to order or to bearer. The law applicable to the specific instrument will determine whether it is a negotiable instrument or a non-negotiable instrument.Bank notes are frequently referred to as promissory notes, a promissory note made by a bank and payable to bearer on demand. According to section 4 of India's Negotiable Instruments Act, 1881, "a Promissory Note is a writing, containing an unconditional undertaking, signed by the maker to pay a certain sum of money only to or to the order of a certain person or the bearer of the instrument".
Bill of exchange
A bill of exchange or "draft" is a written order by the drawer to the drawee to pay money to the payee. A common type of bill of exchange is the cheque, defined as a bill of exchange drawn on a banker and payable on demand. Bills of exchange are used primarily in international trade, and are written orders by one person to his bank to pay the bearer a specific sum on a specific date. Prior to the advent of paper currency, bills of exchange were a common means of exchange. They are not used as often today.A bill of exchange is essentially an order made by one person to another to pay money to a third person. A bill of exchange requires in its inception three parties—the drawer, the drawee, and the payee. The person who draws the bill is called the drawer. He gives the order to pay money to the third party. The party upon whom the bill is drawn is called the drawee. He is the person to whom the bill is addressed and who is ordered to pay. He becomes an acceptor when he indicates his willingness to pay the bill. The party in whose favor the bill is drawn or is payable is called the payee. The parties need not all be distinct persons. Thus, the drawer may draw on himself payable to his own order.
A bill of exchange may be endorsed by the payee in favour of a third party, who may in turn endorse it to a fourth, and so on indefinitely. The "holder in due course" may claim the amount of the bill against the drawee and all previous endorsers, regardless of any counterclaims that may have disabled the previous payee or endorser from doing so. This is what is meant by saying that a bill is negotiable.
In some cases a bill is marked "not negotiable"—see crossing of cheques. In that case it can still be transferred to a third party, but the third party can have no better right than the transferor.