Tuesday, August 25, 2020

Nature and Definition of Negotiable Instruments

 Nature and Definition of Negotiable Instruments

Documents of a certain type, used in commercial transactions and monetary dealings, are called, negotiable instruments. 'Negotiable' means transferable by delivery and 'instrument' means a written document by which a right is created in favor of some person. The fact that it creates a right implicitly follows that it also creates a corresponding obligation on the person who signs on it and becomes a party thereof.

The term 'negotiable instrument' literally means “a document transferable by delivery”. However, this definition does not clearly tell us the true nature, characteristics and valid requirements of a negotiable instrument because not all documents transferring a right could be categorized as negotiable instruments.

Regarding a formal definition, you have to bear in mind that negotiable instruments must meet special requirements as to form and content. Those elements will help us to distinguish between negotiable and non-negotiable instruments. The later generally refers to assignment of contractual rights and are governed by the relevant civil code provisions.

A negotiable instrument could be formally defined as:

“A signed writing that contains an unconditional promise or order to pay an exact sum of money on demand or at an exact future time to a specific person or order, or to bearer.”

This definition clearly summarizes the basic requirements for a valid negotiable instrument, which will be discussed later.

The definition given by the Indian negotiable act is restricted in scope which states that ” A negotiable instrument means a promissory note, bills of exchange or cheque payable either to order or bearer.” This definition apart from the fact that it narrowly considers only these three types of instruments as negotiable, simply enumerates them without giving any indication as to their nature and characteristics.

A definition given by Black’s Law reads as follows:

“A written instrument (1) signed by the maker or drawer, (2) includes an unconditional promise or order to pay a specified sum of money, (3) is payable on demand or a definite time, and (4) is payable to bearer or order.”

This definition is more or less similar with the first definition given above. It clearly summarizes the factors necessary to qualify a certain instrument as negotiable.

Now, let us turn to the definition given in Art 715 of the Commercial Code. The provision defines negotiable instruments too broadly and in the negative which makes it difficult to comprehend.

 Art. 715-Definitions

A negotiable instrument is any document incorporating a right to an entitlement in such manner that it be not possible to enforce or transfer the right separately from the instrument

The Code recognizes the following instruments as negotiable. Namely;

i)          Commercial instruments

ii)        Transferable securities

iii)       Document of title to goods. 

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