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Elements of Law relating to Negotiable Instruments: formula sheet

Full chapter guide

Key formulas

Short title (Section 1): Negotiable Instruments Act, 1881; Know the name and the year. The Act has no other short title.
Extent (Section 1): Extends to the whole of India; The words 'except the State of Jammu and Kashmir' were omitted by Act 62 of 1956, so the Act now covers the whole of India.
Commencement (Section 1): In force from 1 March 1882; The Act says 'the first day of March, 1882'.
Saving of usages (Section 1): Local usage for oriental-language instruments (hundis) is saved, unless excluded by words in the instrument showing the parties are governed by this Act; The Act also does not affect section 21 of the Indian Paper Currency Act, 1871.
Instrument made out of India (Section 136): Instrument made, drawn, accepted or indorsed outside India in accordance with Indian law: foreign invalidity of the agreement does not invalidate a later acceptance or indorsement made within India; The key conditions are 'in accordance with the law of India' and 'within India'.
Definition (Section 13(1)): Negotiable instrument = promissory note / bill of exchange / cheque, payable to order or to bearer; Memorise the three types and the two modes of payability.
Negotiation (Section 46): Bearer instrument: delivery. Order instrument: indorsement + delivery; Making, acceptance or indorsement is completed by delivery, actual or constructive.
Holder in due course (Section 9): For consideration + possession (bearer) or payee/indorsee (order) + before maturity + no sufficient cause to believe title defective; All four conditions together are needed: (1) consideration; (2) possession of a bearer instrument, or being the payee or indorsee of an order instrument; (3) taking it before the amount became payable; (4) no sufficient cause to believe that any defect existed in the transferor's title.
Derivative title (Section 53): Holder deriving title from a holder in due course has that holder's rights; Applies even if the later holder is not himself a holder in due course.
Liability of prior parties (Section 36): Every prior party is liable to a holder in due course until the instrument is duly satisfied; This gives the holder confidence to accept the instrument.
Presumptions (Section 118): Consideration, date, time of acceptance, time of transfer, order of indorsements, stamp of lost instrument, holder in due course; They hold until the contrary is proved.
Promissory note (Section 4): Writing + unconditional undertaking + signed by maker + certain sum only + certain person or order or bearer; A bank-note or currency-note is excluded. Only two parties: maker and payee.
Bill of exchange (Section 5): Writing + unconditional order + signed by drawer + directs a certain person + certain sum only + to a certain person or order or bearer; Three parties: drawer, drawee, payee. The drawee becomes the acceptor on acceptance.
Cheque (Section 6): Cheque = bill of exchange + drawn on a specified banker + payable on demand; Includes the electronic image of a truncated cheque and a cheque in electronic form.
Negotiable instrument (Section 13): Promissory note, bill of exchange or cheque payable to order or to bearer; Payable to order if expressed so, or to a named person without words prohibiting transfer.
Payable on demand (Section 19): No time for payment specified, or a cheque = payable on demand; Applies to a note or bill with no time stated, and to every cheque.
Delivery and negotiation (Section 46): Bearer: negotiable by delivery. Order: negotiable by indorsement and delivery; Making, acceptance or indorsement is complete only on delivery.
General crossing (Section 123): Two parallel transverse lines, or "and company" between two parallel lines, with or without "not negotiable"; Any such addition makes the cheque crossed generally.
Principal debtors (Section 37): Maker, drawer (until acceptance) and acceptor = principal debtors; others = sureties; Applies in the absence of a contract to the contrary.
Authority of the holder: Signed + stamped + delivered (blank or incomplete) → prima facie authority to complete; The paper must be stamped as per the law on negotiable instruments then in force in India, and must be signed and delivered.
Limit on amount: Amount completed ≤ amount covered by the stamp; The holder may complete for any amount specified, but not above what the stamp covers.
Liability to a holder in due course: Signer is liable to a holder in due course for the full completed amount (within stamp); Liability is in the capacity in which the person signed.
Liability to others (proviso): Holder who is not a holder in due course: recovery ≤ amount intended by the signer; No person other than a holder in due course can recover more than the signer intended.
Holder (Section 8): Holder = entitled in own name to possess + entitled to receive or recover the amount; Consideration is not required. A finder or thief is not a holder. If the instrument is lost or destroyed, the holder is the person so entitled at the time of loss.
Holder in due course (Section 9): HDC = consideration + possession as bearer, payee or indorsee + before maturity + no sufficient cause to believe title defective; Remember it as four tests: value, proper possession, before maturity, good faith.
Title through an HDC (Section 53): Holder deriving title from HDC = same rights as that HDC; Even a person who gives no value later, or who knows of a defect, gets the HDC's rights if he derives title from an HDC.
Liability of prior parties (Section 36): Every prior party is liable to an HDC until the instrument is duly satisfied; Liability continues until proper payment or satisfaction.
Estoppel against drawer or maker (Section 120): Maker or drawer cannot deny validity of instrument as originally made or drawn against an HDC; Section 121 also stops the maker of a note, or acceptor of an order bill, from denying the payee's capacity to indorse.
Defective title (Section 58): Instrument lost or got by offence, fraud or unlawful consideration: possessor gets no right to recover unless he, or someone through whom he claims, is an HDC; An HDC cures the defect for those who claim through him.
Negotiation: Instrument transferred so that the transferee becomes the holder = negotiated (Section 14); Transfer must make the person a holder. Mere custody for safekeeping is not enough.
Bearer instrument: Negotiated by delivery (Sections 46, 47); No endorsement is needed.
Order instrument: Negotiated by endorsement + delivery (Sections 46, 48); Both are needed. Endorsement without delivery is incomplete.
Effect of endorsement: Endorsement + delivery = property passes to the endorsee with the right of further negotiation (Section 50); Unless express words restrict or exclude that right, or make the endorsee only an agent.
Bearer by endorsement in blank: Only or last endorsement in blank = payable to bearer (Section 13); Then delivery alone can pass it on.
Excuse for delay in presentment: Delay beyond holder's control and not due to his default, misconduct or negligence is excused; present within a reasonable time after the cause ceases (Section 75A); Applies to presentment for acceptance or payment.
Conditional delivery: Delivered on condition that it takes effect only on a certain event = not negotiable until the event happens (Section 47 exception); Exception: a holder for value without notice of the condition.
Cheque payable to bearer: Drawee is discharged by payment in due course to the bearer despite any endorsement, even a restrictive one (Section 85(2)); Applies where the cheque was originally expressed payable to bearer.
Section 138 punishment: Imprisonment up to 2 years, or fine up to twice the cheque amount, or both; Applies when a cheque for a legally enforceable debt is returned for insufficient funds or excess over arrangement.
Condition (a): presentment: Present within 6 months of the date of the cheque or within its validity, whichever is earlier; Late presentment means no Section 138 offence.
Condition (b): demand notice: Written notice to drawer within 30 days of receiving information from the bank about return; Given by the payee or holder in due course.
Condition (c): drawer's time to pay: Drawer fails to pay within 15 days of receiving the notice; Only after this failure does the cause of action arise.
Section 142 complaint: Written complaint by payee or holder in due course within 1 month of the cause of action under 138(c); Court may take cognizance later if sufficient cause is shown. Trial only by Metropolitan Magistrate or Judicial Magistrate of the first class.
Section 142(2) jurisdiction: Cheque delivered for collection through an account: court where the payee's account branch is. Otherwise: court where the drawer's drawee-bank branch is; Section 142A covers pending and later complaints against the same drawer before the same court.
Section 140: Drawer's lack of belief that the cheque might bounce is not a defence; Knowledge of the drawer is irrelevant to liability.
Section 82 discharge: Cancellation, release, or payment in due course; Payment in due course discharges all parties only for bearer or blank-indorsed instruments.

Quick revision

A negotiable instrument is a promissory note, bill of exchange or cheque payable either to order or to bearer.
The Act extends to the whole of India and came into force on 1 March 1882.
A bill of exchange contains an unconditional order, signed by the maker, to pay a certain sum only to a certain person, to his order or to the bearer.
A promise or order is not conditional just because payment is due after an event that is certain to happen, even if its timing is uncertain.
An instrument is payable to bearer if it says so, or if the only or last indorsement is in blank.
A holder is entitled in his own name to possess the instrument and to recover the amount due from the parties.
A holder in due course gave consideration, became possessor before the amount became payable, and had no sufficient cause to believe the title was defective.
A person who derives title from a holder in due course has that holder's rights.
A holder who takes after dishonour with notice, or after maturity, has only the rights of his transferor.
Every prior party is liable to a holder in due course until the instrument is duly satisfied.
A minor may draw, indorse, deliver and negotiate an instrument so as to bind all parties except himself.
For an inchoate stamped instrument, the signer is liable to a holder in due course up to the amount covered by the stamp.

Common mistakes

Writing the year as 1882 for the short title. Fix: Remember: Act of 1881, in force from 1 March 1882.
Saying the Act does not extend to Jammu and Kashmir. Fix: The exclusion was omitted by Act 62 of 1956. The Act extends to the whole of India.
Saying any document promising payment is a negotiable instrument. Fix: Always check the type and the order or bearer test from Section 13.
Thinking a holder in due course must be the payee. Fix: For bearer instruments any possessor for consideration qualifies; for order instruments the payee or indorsee qualifies.
Saying a promissory note has three parties. Fix: A note has only the maker and the payee. The maker promises to pay the payee, so no third person is ordered to pay and there is no drawee.
Treating a cheque as different from a bill of exchange. Fix: Remember Section 6: a cheque is a bill of exchange drawn on a specified banker and payable on demand.
Thinking the holder can fill any amount he likes. Fix: Always compare the filled amount with the amount covered by the stamp.
Saying the signer is never liable if he did not intend the amount. Fix: Intention matters only against a holder who is not a holder in due course. A holder in due course recovers the full amount within the stamp.
Treating holder and HDC as the same thing. Fix: Holder needs only entitlement in his own name. HDC needs the extra tests of consideration, before maturity and good faith.
Saying a person who received a cheque as a gift is an HDC. Fix: A donee can be a holder, but not an HDC, because he gave no consideration.

Exam tips

Learn the three Section 1 facts word for word: name and year, whole of India, 1 March 1882.
Watch for options that swap 1881 and 1882. This is the commonest trap.
For Section 136, check both conditions in the facts: Indian law followed, and the later act done within India.
Remember that hundi usages are saved unless excluded by words in the instrument.
There is no negative marking in Paper 4, so attempt every question.
In Paper 4 MCQs, look for the exact phrase 'payable to order or to bearer' from Section 13.
Learn the four Section 9 conditions as a list, since options often drop one.
Remember that the Section 118 presumptions are rebuttable, and note the fraud proviso on holder in due course.