Negotiable Instruments plays a major role in the trade world. We can also see the use of negotiable instruments in the international trade. We can assume that the international trade is also developing with the negotiable instrument. The nature of negotiable instrument is an area of law which has major influence on any person in his professional field. Negotiable instrument plays a major role in different part of the world in raising the economy. “The term negotiable instrument does not have a statutary definition. To define the term the concept of ‘instrument’ and ‘negotiability’ requires a separate consideration. Thus any definition must be drawn from the common law.”
“According to professor Goode, instrument is described as a document of title of money” Therefore an instrument is a document which physically expresses the payment obligation. An instrument will be in deliverable state only if it is signed by the possessor or it should be with the authority of that person. The instrument clearly states the contractual right to payment and the right will be transferred only after the complete delivery. The person who has that entitlement and posses the instrument is consider as the true owner.
The negotiable instrument is of contractual in nature and it characterizes the fact that it is negotiable. The instrument can be transferred in a special manner which is established by the law merchant i.e. by negotiation.
“According to Blackburn J, a negotiable instrument has two characteristics namely 1. It is transferable, like cash, by delivery (which assumes it is in a deliverable state) so that the transferee can enforce the rights embodied in it in his own name. 2. The transferee being a bonafide holder for value can acquire a better title to it than that of his transferor.”
Negotiable Instrument is moreover a document of title which clearly explains the rights towards the payment of money or a security for money which is transferable by delivery either by custom or by legislation. The use of negotiable Instrument is mainly to facilitate payment for exports and imports of trade. The rapid growth of technology has revolutionized the world with computer, which is used in every field of profession. This has reduced the use of negotiable instrument and in future it may decline more. Even though the electronic revolution has got more advantages it may be considered as the next step because the world needs time to get used to it. But, the negotiable instrument are still in use.
Classes Of Instrument
Instruments can either be negotiable or non-negotiable. Negotiable and Non-negotiable instrument have many classes in them but all the instruments will come under one of the two categories namely,
- “An undertaking to pay a sum of money
- An order to another to pay a sum of money”
“A negotiable instrument is one which, by statute or mercantile usage, may be transferred by delivery and endorsement to a bona fide purchaser for value in such circumstances that he takes free from defects in the title of prior parties.
A non negotiable instrument is one which, though capable of transfer by delivery (with any necessary endorsement) in the same way as a negotiable instrument, can never confer on the older a better right than vested in the transferor.”
How Instruments Come To Be Negotiable
The documents can be recognized as negotiable instruments in two ways i.e.
- Mercantile usage
- Statute- statute is a formal written enactment which is made by a legislature, which governs the state or city for the statute to become a law. It must be agreed by the highest authorities in the government, and finally it is published by the court. The term statute is an alternate word for law. In most of the cases, the statutory recognition of negotiability altogether confirms the earlier judicially acceptance of a mercantile usage which recognizes an instrument as negotiable.
The instruments like bills of exchange and cheques were accepted as negotiable by the courts before they were recognized as a negotiable instrument by the Bills of Exchange Act, 1882.
- Mercantile usage- Through judicially recognized mercantile usage, an instrument may be regarded as negotiable. The above mentioned statement can be made stronger if we refer to the important case
Goodwin V/s Robarts. Here Cockburn CJ said that “the instruments have derive their negotiability from the law merchant had their origin, and that no very remote period, in mercantile usage , and were adapted into the law by courts as being in conformity with the usage of sale.”
For the court to recognize the instrument through mercantile usage it must fulfill the below mentioned conditions like:
- The usage must be well known, definite and fair mercantile usage.
- The mercantile usage should be general in nature i.e it should not be confined to any mere custom which is used only to a particular section of the commercial world
Advantages Of A Negotiable Instrument
Before 1874 in common law it was not permitted that the assignment of a promise to pay money negotiable instrument comes into being because the transfer of promise to pay money was not permitted in common law. At the end the negotiable instrument achieved it. The important advantages of the negotiable instruments are as follows
- “the transferee of a negotiable instrument can sue his own name even though there has been no assignment in writing or notice to the obligator or even if the transfer is not absolute as required for assignment under the statue.
- The transferee of a negotiable instrument who takes it for a value and in good faith acquires a good title free from equities, whereas an assignee under the statue always takes subject to equities”
The negotiable instrument helps to provide investment.
Bills Of Exchange
Bills of exchange can be considered as the most popular negotiable instrument which is not only used in foreign trade but It is also used in domestic trade. The bills of exchange act 1882 is the primary source of law of bills of exchange. Sir Mackenzie Charmers drafted the bills of exchange act 1882. Section 3 of bills of exchange 1882 defines bills of exchange as “ A bill of exchange is an unconditional order in writing, addressed by one person to another , signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person, or to bearer”
The common terms which are used in the bills of exchange are:
- Drawer – the person or a seller who issues the bill ordering to pay
- Drawee – the person or any party upon whom the bill is drawn
- Payee – the person to whom the amount mentioned in the bill is to be paid.When the bill is delivered to a payee he becomes the first holder.
- Acceptor – the person who accepts the bill
The bills of exchange are used in 2 context associated with international trade
- Documentary credit
- Acceptance credit
The instrument to be a bill of exchange has to fulfill certain requisites. They are
- The order given by the drawer to the drawee should be an unconditional order
- The unconditional order given by the drawer to the drawee should be written and it should include print.
- The drawer should sign the instrument personally or to his agent. If the instrument is forged and if the drawer is arguable, then the instrument cannot be treated as the bills of exchange.
- The instrument can be treated as bills of exchange only if it addressed by one person to another
- The name of the drawer and the payee should be clearly mentioned and also who are the parties
- “The instrument should contain the exact amount payable in it to be a bill of exchange. If the amount is mentioned as upto or not exceeding or atleast”, then it cannot be a bill of exchange.
- The instrument should be drawn at a fixed time or at a ascertainable future time if is drawn on a demand.
To enforce the bill and to claim payment from the drawer and endorser, the holder has to follow a number of duties which are
- “A duty to present the bill for acceptance
- A duty to give notice of dishonor by non- acceptance or non – payment to the drawer and prior endorser.
- A duty to protect a foreign bill if dishonored for non – acceptance or non – payment.”
If the holder fails with these duties, he will release the drawer and endorser from their liability on the bill. Bill of exchange is an order made by one person to another to pay money to a third person.
Cheques are considered as an important negotiable instrument in international sales. Cheques are primarily a payment direction and it is not a credit instrument. Cheque plays an important role in the mechanism of banking. Therefore, cheques are deeply rooted in the relationships of the bank and the customer. “Section 73 of the Bills of Exchange Act, 1882, defines cheques as Bills of Exchange drawn on a banker payable on demand.”
The nature of the cheque is that when it is presented, the payment is almost immediately made.
- the cheques can be paid only to the named payee or his endorsee.
- The cheque cannot be negotiated to a third party
The crossed cheque must be presented through a bank account for payment; the holder of a crossed cheque cannot present it in person for cash. The bank does not accept the cheque on which they are drawn.
The cheque may be considered as a debit instrument. For the payment, the cheque must be presented to the paying bank i.e. the bank where the drawer keeps his account. The cheque when it is presented for payment goes through a clearing system where the collecting bank is entrusted to collect the amount of the cheque on behalf of the customer and later credits it to his own account. Cheques play a fundamental part in the banking field. Normally, the cheques are not discounted.
Promissory note is also one of the important negotiable instruments in international sales. Section 83 (1) of the Bills of Exchange Act, 1882, defines promissory notes as “a promissory note is an unconditional promise in writing made by one person to another signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money, to, or to the order f a specified person or to bearer.”
A promissory note is just a promise to pay and it is not an order to pay. Therefore, in a promissory note, there is no drawee. The maker of the promissory note is termed as a ‘promissor’ and he corresponds with the acceptor of a bill. The note can be negotiated by endorsement by the payee. “The maker of a promissory note by making it
- Engages that he will pay it according to his tenure.
- Is precluded from denying to a holder in due course, the existence of the payee and is then capacity to endorse.”
According to Section 89 (1) (2), the indorser of a promissory note has to follow the same duties and liabilities which an indorser of a bill under Section 55 (3) follows. But, there is no reference to the accepted. If the drawer and the drawee are the same, the bill holder has the option of treating it as a promissory note.
In international trade, promissory notes are mainly used in forfeiting transactions. Here, the importer makes the promissory notes and the exporter will indorse to a forfeiter at a discount. The forfeiter also bears all the credit risk, economic risk and political risk and he must obtain the payment of the instrument. The forfeiter can also rediscount the promissory note in the secondary market. In domestic trade, promissory note has two functions
- They provide more security if made by a debtor or hirer
- Unlike in international trade, they facilitate the refinancing of transactions in which the notes can be discounted to a financial institution.
The negotiation of a promissory note can pass a title which is free from any defects in the title of previous parties. This is the reason which makes promissory notes the main negotiable instruments which are used as security for inland transactions.
Bank note is a kind of negotiable instrument. These bank notes are a special form of promissory notes which are made by a bank, which engages to pay the bearer on demand the sum which is expressed in the note. These bank notes are used as money. They are also governed by the Bills if Exchange Act, 1882. The bank notes, after delivery, can be transferable. If the bank notes are lost or destroyed, a duplicate can also be demanded from the Bank of England by providing a satisfactory indemnity. The bank notes are issued by Bank of England, Bank of Scotland and Bank of Northern Ireland. In many jurisdiction, bank notes are legal tender.
Treasury bill is a kind of negotiable instrument which is used by the government. The government issues it to raise the short term loans. These bills, usually, mature in less than a year and the bills do not pay interest before the maturity. Therefore, the bills are used by the bank as a source of short term funding. To create a positive field of maturity, these bills can be sold at a discounted rate compared to the present value. These bills are issued every week which are called as ‘regular weekly treasury bills’ with the maturity days like 28 days, 91 days, 182 days and 364 days. The treasury bills are largely purchased by banks and other financial institution.
Banker’s draft is a draft in which the funds are directly taken from the financial institution instead of taking it from individual drawer’s account. The draft can be paid at head office or any branch office of the same bank. This banker’s draft is mainly used in commercial transactions to make payments. The banker’s draft cannot be considered as legal cheque because the drawer and the drawee are the same person. “But the cheques Act, 1957, the protection of bankers paying and collecting such instruments is as with valid cheques.”
Dividend warrants can be defined as demand drafts which are drawn by a company on a bank ordering to pay a stock holder or shareholder with a sum of money which represents his profit in the share of the company. The shareholder will be entitled with a share of the declared dividend. Such amount can be drawn either in the form of a cheque or a banker’s draft.
The public and the private companies, if authorized by their articles issue in respect of fully paid shares. A share warrant under a common law which states, that the bearer of the share warrant is entitled to the share which is specified in it. When a company issues a share warrant, it must strike out the name of the share holder from the registry of members. A share warrant is also negotiable, because it passes a title free from defects in the title of previous holders upon mere delivery. The important feature and advantage of a share warrant is that the owner of the share warrant cannot be identified by anyone even if they look into the companies’ public records. These warrants are easy to transfer.
This is a type of negotiable instrument which is nothing but a certificate which is been issued when a payment is deposited. The bearer scrip issued to an existing share holder indicates that, the shareholder is entitled for the payment of further installments. The bearer scrip is usually, used by the government and public companies.
Bearer debentures are negotiable instruments which are transferable free from equities upon mere delivery. There is no need to give the company a notice of transfer. Interests are paid by attaching the coupon to the debenture. These coupons are the instruction to the companies’ banker which assist to pay the bearer a sum of money which is stated on the coupon after a certain date. Only by advertisement, the company can communicate with the holders of bearer debenture. The holders of bearer debenture may exchange them for registered debentures. A debenture can also be in the form of promissory notes.
It is a kind of negotiable instruments which acts as a security for debt which is issued by a government or a corporation. These bearer bonds are completely different from other common type investment securities. This instrument is not registered and there are no records of the owner of the bond and no clue regarding the transactions involving ownership. The person who physically holds the paper on which the bond is issued is the owner of the instrument. So, if there is any loss or destruction of this bearer bond, recovering the value is not possible.
Floating Rate Note
Floating rate notes are the type of bonds which have a variable coupon. These coupons are equal to a money market reference rate. They also have a rate which remains constant. Most of the floating rate notes are quarterly coupons. They are called so because they pay back the interest only after every three months. Initially, every coupon period is calculated by taking into account the fixing of the reference rate, which is therefore, that day and by adding a rate, which remains constant. The floating rate notes carry an interest rate risk with them.
Certificate Of Deposit
This negotiable instrument can be explained as a final product which is commonly offered to consumers by bank and credit unions. The certificate of deposits has specified fixed term and the terms are valid for a period like three months, 6 months or 1 – 5 years. They also have a fixed rate of interest. If the certificate of deposit is kept till the maturity date, the money can be with the drawer including the accrued interest. If the money is kept as a deposit for an agreed term, we can get a higher rate of interest. The main requirement of a certificate of deposit is a minimum deposit which may offer higher rate for larger deposits. Interests are paid periodically through cheque or may be transferred into the savings account according to the wish of the purchaser.
The above discussion makes clear that the negotiable instruments plays a major role in the commercial world. These instruments can either be negotiable or non negotiable. But, they must come under one of the two categories. An instrument becomes negotiable either by statute or by mercantile usage. Among all other negotiable instruments, bills of exchange, cheque and promissory notes are the three important negotiable instruments which are widely used in international trade. Even though electronic revolution has brought about many changes in the present world, but negotiable instruments are still in use. The electronic revolution is considered as the next major step which replaces the negotiable instruments. For this the future could improve and develop the problems which prevail in e- revolution. In the present world, people in all fields of profession are getting used to e- revolution. The present world, need to be trained to get used to this system of working with e- revolution. It still takes time for the next generation to be ready to use the e- revolution with no difficulties.
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