Negotiation of Negotiable Instruments: Definition, Meaning and Modes

A pillar of commercial law, the Negotiable Instruments Act (NI Act) established a robust legal framework for the regulation of a wide range of financial instruments vital to commerce and industry. The intricacy of negotiable instruments is resolved by the NI Act, which was enacted into law in India in 1881 and offers consistency and clarity in their transfer, use, and enforcement. The NI Act promotes transparency and equity in business dealings by outlining the rights, responsibilities, and duties of parties engaging in negotiable instruments. Its rules regulate the creation, bargaining, and implementation of these instruments, ensuring adherence to the law and promoting confidence in the financial system.

Geeky Takeaways:

• A negotiated instrument is a written agreement that guarantees a certain payment to the instrument’s specified holder.
• A legal foundation for several types of negotiable instruments was established by the Negotiable Instruments Act 1881.
• The procedure by which a third party is made the holder of the instrument to be entitled to its ownership and the payment owed on it in his name is known as negotiation.
• Making the transferee of a promissory note, bill of exchange, or check the holder thereof is the fundamental goal of negotiation.

Negotiation of Negotiable Instruments

As per Section 14 of the Negotiable Instruments Act 1881, a promissory note, bill of exchange, or check is considered to have been negotiated when it is transferred to a third party, making that third party the legal holder. Negotiation of the instrument refers to the act of giving someone else a promissory note, bill of exchange, or check and having them take ownership of it. Thus, for there to be negotiation, two requirements must be met:

1. The instrument must be transferred to another individual; and

2. The transfer must be accomplished in a way that makes the recipient of the transfer the instrument’s holder.

For example, suppose that Riya has a promissory note where she is due to receive ₹1,000 from Jyoti on a specific date. Riya needs cash immediately, so she transfers this promissory note to her friend Alia by endorsing it on the back and delivering it to him. Now, Alia becomes the holder of the note and has the right to receive the ₹1,000 from Jyoti on the due date.

Who can Negotiate under Negotiable Instruments Act?

Section 51 of The Negotiable Instruments Act 1881 states that if an instrument is negotiable and its negotiability hasn’t been restricted or excluded as stated in section 50, then any solo maker, drawer, payee, or indorsee of the instrument, or all of multiple joint makers, drawers, payees, or indorsees, may endorse and negotiate the instrument.

Explanation: Nothing in this section gives a maker, drawer, or payee the ability to endorse or negotiate an instrument unless they are in lawful possession of it or are its holder. It also does not provide a payee or indorsee the ability to do so unless he is holding the document.

Duration of Negotiability

As stated under Section 60 of Negotiable Instrument Act 1881, A negotiable instrument may be discussed until it is paid or satisfied by the maker, drawee, or acceptor at or after maturity, but not after such payment or satisfaction (unless the maker, drawee, or acceptor does so after maturity). A negotiable document, such as a promissory note or check, can be transferred to several parties as needed; this process is known as “negotiation.” That being said, the instrument cannot be transferred beyond its maturity date by the creator, the drawee, or the acceptor, who are the parties that agree to pay. Furthermore, the instrument cannot be transferred once payment has been received or the maker, drawee, or acceptor has satisfied their duty when or after it is due.

For example: Jiya has a cheque that he received from Riya, which is due to mature on April 30th. Jiya can endorse or transfer this cheque to someone else, say his friend Minakshi, any time before the cheque’s maturity date, as long as Jiya is not the maker, drawee, or acceptor of the cheque. If Jiya endorses the cheque to Minakshi on April 29th, Minakshi can further negotiate it. However, once Riya, the drawee, pays the amount on the cheque or it is otherwise satisfied on or after April 30th, the cheque cannot be negotiated further. So if Jiya still has the cheque on May 1st and it has been paid by Riya, he cannot transfer it to Minakshi anymore because it has lost its negotiable character post maturity and payment.

Negotiation and Assignment Distinguished

The following are some ways that Negotiation and Assignment differ from one another:

1. In a Negotiation, a transfer is only considered complete upon delivery; in an Assignment, the transferor must sign a formal agreement.

2. When a transfer occurs through Negotiation, consideration is always taken into account. When it comes to Assignments, proof of consideration is required.

3. In the event of Negotiation, there is no need for notification of transfer; but, in the event of Assignment, the assignee is required to notify the debtor of the transfer.

4. Subject to any transferor title deficiencies, the assignee accepts the instrument under Assignment. The assignee’s title is also faulty if the assignor’s title is flawed. In contrast, under Negotiation, the transferee accepts the instrument free and clear of any faults in transferor title. Any flaw in the transferor’s title has no bearing on the holder in due course. Thus, he could be entitled to a superior title than the transferor.

Modes of Negotiation under Negotiable Instruments Act

Two methods can be used to carry out negotiations:

1. Delivery-based Negotiation (Section 47): A promissory note, bill of exchange, or cheque that is payable to a bearer may be delivered-based or negotiated. Example: B’s agent receives a negotiable instrument payable to the bearer from A, who is the holder, and wants to retain it for B. The tool has undergone negotiations.

2. Agreement by Endorsement and Delivery (Section 48): The only way to negotiate a promissory note, cheque, or bill of exchange payable to an order is by endorsement and delivery. The transferee does not become a holder unless the holder signs the instrument and delivers it. Each payee must approve it if there are several payees.

Conclusion

The procedure by which a third party is made the holder of the instrument in order to be entitled to its ownership and the payment owed on it in his own name is known as negotiation. Establishing the transferee as the holder of a promissory note, bill of exchange, or check is the fundamental goal and goal of negotiation. There are two methods to conduct negotiations: delivery-based negotiations (Sec. 47) and endorsement-and-delivery negotiations (Sec. 48).

Negotiation of Negotiable Instrument- FAQs

Which act covers provisions for negotiated instruments?

The Negotiable Instruments Act 1881 covers the provisions regarding promissory notes and other negotiable instruments.

What is a negotiable instrument?

In essence, a negotiable instrument is a legal document that may be transferred from one person to another, guaranteeing the payment of a specific amount of money. Promissory notes, bills of exchange, and checks are a few examples. Having one is comparable to having paper money because it may be redeemed for goods, services, or cash.

What is the fundamental goal of negotiation?

Making the transferee of a promissory note, bill of exchange, or check the holder thereof is the fundamental goal of negotiation.

What are the requirements of negotiable instruments?

For there to be negotiation, two requirements must be met:

1. The instrument must be transferred to another individual; and

2. The transfer must be accomplished in a way that makes the recipient of the transfer the instrument’s holder.

What is a delivery based negotiation?

A promissory note, bill of exchange, or check that is payable to a bearer may be delivered-based or negotiated. Example: B’s agent receives a negotiable instrument payable to the bearer from A, who is the holder, and wants to retain it for B. The tool has undergone negotiations.