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All about Negotiable Instruments

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  • A negotiable instrument is a written order or unconditional promise to pay a fixed sum of money on demand or at a certain time. A negotiable instrument can be transferred from one person to another. Once the instrument is transferred, the holder obtains full legal title to the instrument.
  • A document that promises payment to a specified person or the assignee. The payee (the person who receives the payment) must be named or otherwise indicated on the instrument. A check is considered a negotiable instrument. This type of instrument is a transferable, signed document that promises to pay the bearer a sum of money at a future date or on demand. Examples also include bills of exchange, promissory notes, drafts and certificates of deposit.


The following are the special features of the negotiable instruments : 


1. The negotiable instruments are easily transferable from person to person and the ownership of the property in the instrument may be passed on by mere delivery, in case of a bearer instrument, or by endorsement and delivery, in case of an order instrument. Transferability is an essential features of a negotiable instrument but all transferable instruments are not negotiable instruments. Herein lies the difference between transferability and negotiability, which is explained below.


2. A negotiable instrument confers absolute and good title on the transferee, who takes it in good faith, for value and without notice of the fact that the transferor had defective title thereto. This is the most important characteristic of a negotiable instrument. A person who takes a negotiable instrument from another person, who had stolen it from somebody else, will have absolute and undisputable title to the instrument, provided he receives the same for values (i.e. after paying its full value) and in good faith without knowing that the transferor was not the true owner of the instrument. Such a person is called the holder in due course and his interest in the instrument is well protected by the law.


Difference between transferability and negotiability: 

In case of any goods or commodity, which is transferable from person to person, the general rule of law is that the transferor cannot transfer to the transferee title better than what he himself possesses. For example, X purchases an article or a commodity, say, a book, from Y against payment of its full value. But Y had stolen the book from the house of Z. If the thief, i.e. Y, is caught for this theft or if the stolen article is found in the possession of X, the latter shall have to return the same to the true owner of the article, because the title of X to the property is not deemed to be better than the title possessed by Y. In fact, Y had no title thereto and hence Y will also stand on the same footing.
A negotiable instrument is an exception to this general rule of law. Suppose in the above illustration X takes a cheque from Y, instead of a book, for value and without knowledge of the latter’s defective title, he will have good title thereto and will not be responsible to the true owner. The latter will have a right against Y, the thief of the instrument. This privilege of the holder of a negotiable instrument in due course constitutes the main difference between a transferable instrument or article and a negotiable instrument.

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