negotiable instrument
A negotiable instrument is a written document that entitles a person to a sum of money and is transferable by delivery (if payable to bearer) or by endorsement and delivery (if payable to order). The Negotiable Instruments Act, 1881 recognises three: promissory notes, bills of exchange and cheques.
Its key feature is that a holder in due course, who took it for value, in good faith and before maturity, gets a good title free from defects in the title of earlier parties. This is an exception to the rule nemo dat quod non habet. The Act also contains presumptions in favour of the holder and makes dishonour of a cheque for insufficient funds an offence.
Example
Because the cheque is a negotiable instrument, the holder in due course could sue the drawer despite the fraud on the original payee.
In Indian law
- Sections 4, 5, 6 and 13, Negotiable Instruments Act, 1881
- Section 138, Negotiable Instruments Act, 1881 (dishonour of cheque)
See also
promissory note · bill of exchange · cheque · holder in due course
Read more in the study notes
- History and evolution of banking in India (Banking Law)
- Bank: definition, kinds of banks and their functions (Banking Law)
- Banker and customer: who they are and the legal character of the relationship (Banking Law)
- Rights of a banker: lien, set-off, appropriation and charges (Banking Law)
- Duties of banker and customer: honouring cheques and secrecy of accounts (Banking Law)
- Kinds of accounts, opening an account, and special classes of customers (Banking Law)