Business Laws · The Negotiable Instruments Act, 1881

Introduction and Types of Negotiable Instruments (CA Foundation Business Laws)

Updated 4 October 2026 · Fact-checked

A negotiable instrument is a promissory note, bill of exchange or cheque payable to order or to bearer (Section 13). To solve questions, test the document against the definition: writing, unconditional promise or order, signature, certain sum, certain payee. Then name the type, apply the rule, and conclude.

Understand Introduction and Types of Negotiable Instruments

Think of a negotiable instrument as a written promise or order to pay money that can be passed from one person to another like cash. The person who receives it can sue in their own name and, if they take it properly, may get a better title than the person who handed it over.

Section 13 says a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer. These are the three types you must know for the exam.

An instrument is payable to order if it says so, or if it names a particular person and has no words stopping transfer. It is payable to bearer if it says so, or if the only or last indorsement is in blank. Under Section 13(2), it can be payable to two or more payees jointly, or to one of several in the alternative.

The three types differ in who promises and who orders. A promissory note (Section 4) is an unconditional undertaking by the maker to pay. A bill of exchange (Section 5) is an unconditional order by the drawer directing another person to pay. A cheque is a bill drawn on a banker and payable on demand (the definition of a cheque is in Section 6, which is not in the text supplied here, so learn it from your study material). Section 19 confirms that a cheque is payable on demand.

Two features make these instruments special. Transfer is by delivery (bearer) or by indorsement and delivery (order), as Section 46 says. And the law presumes in favour of the instrument: Section 118 presumes consideration, the date, and that the holder is a holder in due course, until the contrary is proved.

Key rules to remember

Negotiable instrument (Section 13): Promissory note + Bill of exchange + Cheque, payable to order or to bearer; Payable to order if it names a person and has no words prohibiting transfer. Payable to bearer if so expressed or last indorsement is in blank.
Promissory note (Section 4): In writing + unconditional undertaking to pay + signed by maker + certain sum only + to a certain person, his order or bearer; A bank-note or currency-note is not a promissory note. Only two parties: maker and payee.
Bill of exchange (Section 5): In writing + unconditional order + signed by drawer + directs a certain person to pay + certain sum only + to a certain person, his order or bearer; Three parties at the start: drawer, drawee and payee. The drawee becomes the acceptor on accepting.
Cheque: Bill of exchange drawn on a specified banker, payable on demand; Section 19 says a cheque is payable on demand. Cite the definition without a section number unless you have learnt it.
Instruments payable on demand (Section 19): No time for payment specified (note or bill) or cheque = payable on demand; A note or bill with a fixed period is not payable on demand.
Mode of negotiation (Section 46): Bearer: delivery. Order: indorsement + delivery; Making, acceptance or indorsement is completed by delivery, actual or constructive.
Ambiguous instrument (Section 17): Holder may elect to treat it as a note or a bill; Once elected, it is treated accordingly from then on.
Presumptions (Section 118): Presumed until contrary proved: consideration, date, time of acceptance, time of transfer, order of indorsements, stamp on lost instrument, holder in due course; If the instrument was obtained by an offence, fraud or unlawful consideration, the holder must prove he is a holder in due course.

How to solve Introduction and Types of Negotiable Instruments questions

Use this order for any problem or theory question on types of negotiable instruments.

1Read the facts and identify the document: is it a promise to pay, an order to pay, or an order on a bank?
2Write the matching definition (Section 4, Section 5, or cheque) in one line.
3Tick each essential against the facts: in writing, unconditional, signed, certain sum, certain payee, money only.
4Spot any condition, uncertainty or extra promise that defeats an essential, such as an event that may never happen.
5Name the instrument: promissory note, bill of exchange, cheque, or not a negotiable instrument at all.
6Check payability: order or bearer (Section 13) and demand or fixed time (Section 19).
7State the consequence, such as how it is negotiated (Section 46) or what is presumed (Section 118).
8Write a one-line conclusion that answers the exact question asked.

Quickest way: Three-question test: Who, What, Whom

When to use it: Use it for short-answer and case-study questions where you must classify a document in a few minutes.

Who signs? If the signer promises to pay, it is a note. If the signer orders someone else to pay, it is a bill. If the order is to a bank on demand, it is a cheque.
What is promised? Look for unconditional wording and a fixed sum of money only. Words like 'and deliver my horse' or 'after my marriage' kill it.
Whom is it payable to? Check for a certain person, his order, or bearer.
Write the section number next to the definition you used. Examiners look for it.
Finish with the conclusion in the first line of your answer: 'This is / is not a promissory note because...'.

Common mistakes in Introduction and Types of Negotiable Instruments

Treating an IOU as a promissory note.
It looks like an acknowledgement of debt, so it seems to be a promise.
Fix: Remember Section 4 illustration (c): 'Mr. B, I O U Rs. 1,000' is not a promissory note because it contains no undertaking to pay.
Calling a conditional promise a promissory note.
Students focus on the amount and signature and miss the condition.
Fix: Check for the word 'unconditional'. A promise to pay after the maker's marriage, or on D's death only if D leaves enough, is not a note. But a time tied to an event certain to happen, even if the date is uncertain, is not conditional (Section 5).
Saying a bank-note or currency-note is a promissory note.
It carries a promise-like wording and is signed.
Fix: Section 4 expressly excludes bank-notes and currency-notes from promissory notes.
Mixing up the parties of a note and a bill.
Both involve a payee and a signer, so the roles blur.
Fix: A note has the maker and the payee. A bill has the drawer, the drawee and the payee. Draw the party arrows before you write.
Thinking a promise to pay money plus something else is valid.
Students read 'certain sum' loosely.
Fix: Section 4 says 'money only'. A promise to pay Rs. 500 and deliver a horse, or Rs. 500 and all other sums due, is not a note.
Saying every instrument needs a stated payment date.
Students assume time must always be written.
Fix: Section 19: a note or bill with no time specified, and a cheque, is payable on demand.

Worked examples

Example 1

A signs and gives B a paper reading: 'I promise to pay B or order Rs. 500.' C signs and gives B a paper reading: 'I promise to pay B Rs. 500 and to deliver to him my black horse on 1st January next.' Decide which is a promissory note.

Show the solution

Recall Section 4: a promissory note is a written, signed, unconditional undertaking to pay a certain sum of money only to a certain person, his order or bearer.
A's paper is in writing, signed, and contains a promise to pay Rs. 500, a certain sum, to B or his order. The promise is unconditional.
So A's paper meets every essential and is a promissory note. It is also payable to order under Section 13.
C's paper promises Rs. 500 and also delivery of a horse. The undertaking is not to pay money only.
So C's paper fails the 'money only' essential and is not a promissory note.

Answer: A's instrument is a promissory note. C's instrument is not, because it promises something other than money.

Example 2

X draws a document on Y, signed by X, reading: 'Pay Z or order Rs. 10,000 sixty days after date.' Identify the instrument, name the parties, and state how it is negotiated if Z wants to transfer it.

Show the solution

The document is a written, signed, unconditional order directing a certain person (Y) to pay a certain sum to Z or his order. This matches Section 5.
The order is to pay a person, not a bank on demand, and a time of sixty days is fixed, so it is a bill of exchange and not a cheque.
Parties: X is the drawer, Y is the drawee (who becomes the acceptor on accepting), and Z is the payee.
It is payable to order because it names Z with the words 'or order' (Section 13).
By Section 46, an instrument payable to order is negotiable by the holder by indorsement and delivery. So Z must indorse it and deliver it.

Answer: It is a bill of exchange drawn by X on Y in favour of Z. Z can negotiate it by indorsement and delivery.

Exam tips

Start every classification answer with the section's definition, then apply the facts to each essential. This earns the provision marks first.
Learn the eight illustrations to Section 4. Examiners adapt them directly into case studies.
In a 'difference between' question, use a clear two-column style in your answer sheet: definition, parties, who promises or orders, acceptance needed, and payability.
Always add the Section 13 point that the instrument must be payable to order or to bearer. Many students forget it.
Finish with a firm conclusion that names the instrument. Do not leave the answer open-ended.

Practice questions from The Negotiable Instruments Act, 1881

Introduction and Types of Negotiable Instruments: frequently asked questions

What is a negotiable instrument under the Negotiable Instruments Act, 1881?

Section 13 says it means a promissory note, bill of exchange or cheque payable either to order or to bearer. It can be passed from one person to another by delivery or by indorsement and delivery.

What is the main difference between a promissory note and a bill of exchange?

A promissory note contains an unconditional promise by the maker to pay, so it has two parties. A bill of exchange contains an unconditional order by the drawer to another person to pay, so it has a drawer, a drawee and a payee. A bill also needs acceptance by the drawee to bind him, while a note does not.

Is a cheque a bill of exchange?

Yes. A cheque is a special kind of bill of exchange drawn on a specified banker and payable on demand. Section 19 confirms that a cheque is payable on demand.

What makes an instrument payable to bearer?

Under Section 13, it is payable to bearer if it is expressed so, or if the only or last indorsement is in blank. A bearer instrument is negotiated by delivery alone, as Section 46 states.

What if an instrument can be read as either a note or a bill?

Section 17 lets the holder choose to treat it as either. After that choice, it is treated accordingly.