Concept/ Object and Purpose of Negotiable instruments

banking laws and practices  NEGOTIABLE INSTRUMENTS

The object and purpose of the Act is to legalise the system under which claims upon certain mercantile instruments are treated like ordinary goods passing from hand to hand. The Act is not exhaustive of all matters relating to negotiable instruments nor does it purport to deal with all kinds of negotiable instruments. It merely regulates the issue and negotiations of bills notes and cheques and even as regards them it does not deal with its transmissions of rights in them by operation of law or by assignment by deed. In the absence of any express provisions in this Act to the contrary, the general rules contained in the Contract Act are applicable to such instruments as to obligations of parties to the negotiable instruments are contractual in nature. For example the Act does not declare what consideration is sufficient and valid for a bill or note and therefore any consideration which will support a simple contract will support a bill or a note also.

This clause as provided in section 3 of the Negotiable Instrument Act 1881 is reproduced here under:

In this Act, unless there is anything repugnant in the subject or context:-

“accommodation party” means a person who has signed a negotiable instrument as a marker, drawer acceptor or endorser without receiving the value thereof and for the purpose of lending his name to some other person;

“Banker” means a person transacting the business of accepting, for the purpose of lending or investment, of or deposits of money from the public, repayable on demand otherwise withdraw able by cheque, draft, order, or otherwise, and includes any Post Office Savings Bank;

“Bearer” means a person who by negotiable comes into possession of a negotiable instrument, which is payable to bearer,

“Delivery” means transfer of possession actual or constructive, from one person to another;

“issue” means the first delivery of a promissory notice, bill of exchange of cheque complete in form to a person’ who takes it as holder .

“material alteration” in relation to a Promissory note, bill, of exchange or cheque includes an alteration of the date, the sum payable, the time of payment, the of payment, and, where any such instrument has been accepted generally, the addition of a place of payment without the acceptor’s assent, and

“Notary public” includes any person appointed by the Central Government to perform the functions of notary public under this Act and a notary appointed under the Notaries Ordinance, 1961.


The words “material alteration” is not defined in the Act, but in the definition clause with reference to negotiable instrument these words are followed by “include”, which has an effect of enlarging the scope of the already understood meaning of the words. The definitions extends the scope of the words to take into its folds the change or alteration in relation to the date, sum payable, time and place of payment with reference to negotiable instrument. It means any material and substantial change, variation, modification, substitution, insertion, erosion, addition or alteration in the contents or body of the negotiable instrument including any alteration of date, the sum payable, the time and place of payment after its due execution which affects the rights, liabilities or legal position of a party.

Some of the important concepts as discussed in the Act are given below:

Negotiable means the quality of transferability by delivery or by endorsement and delivery.

Instrument means a written document by which a right is created in favor of some person.

Negotiable Instrument means a written document, which is freely transferable and which creates a right in favor of some person to receive some money.

Negotiable Instrument as defined in section 13 of the Act is given below:

“A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer”.

The Act besides above three negotiable instruments recognizes any other instrument satisfying the characteristics of negotiability, as a Negotiable Instrument.

Quasi Negotiable Instruments—the negotiable Instruments Act, 1881 besides the three negotiable instruments as contained in section 13 also recognizes the following instruments as negotiable instrument. These are called Quasi Negotiable Instruments.

Dividend Warrants

Share Warrants

Bearer Debentures

Government Promissory Notes etc.

Promissory Note

It has been defined in section 4 of the Act which is given here under:

“A promissory note is an instrument in writing (not being a bank note or a currency note) containing unconditional undertaking, signed by the maker to pay on demand or at a fixed or determinable future time a certain sum of money only to or to the order of a certain person, or to the bearer of the instrument.

Specimen of a Promissory

Rs. 100,000/-                                        Lahore

August 20, 2007

Thirty days after date, I promise to pay Mr. Ahmad Kamal or order the sum of rupees one hundred thousand only for value received.

Signature                                               Revenue Stamp

Yasir Mehmood

(The Maker)


The definition of promissory note as given in the Act is much the same as that in section 83 (1) of the Bills of Exchange Act. This and the following sections attempts to define different kinds of negotiable instruments dealt with by the Act. To understand the essentials of a negotiable instrument we have to bear in mind the purpose of such instruments, which is, that they may represent money and do all the work of money in business transactions. It is obvious, therefore, that the first and essential requisite is certainty. Certainty as to the person to make the payment, the person to receive it, the time and place of payment, the conditions of liability, and also as to the amount to be paid. These sections endeavor to define these certainties not “ in such exact and technical way as would only embarrass the transaction of business but substantially, in a perfect and practical way. “ A promissory note may be in the form of a letter or in any other form of words which fulfill the requirements of this section, and from which the intention to make a note appears.

How promissory note differs from agreement:

It depends upon the circumstances and wording in each case as to whether a document is a promissory note or an agreement. One of the tests to be applied to find out is the intention of the parties. The second is whether the document as drawn out can be said to be negotiable, that is to say, could a third person file a suit on the strength of the document. If he could not, then it is a mere agreements, where the document clearly stated that the amount was kept in deposit the mere fact that the document bore twenty five paisa stamps and the impression of the scribe would not make it a promote.

Notice to surety:

Delivery of notice to surety is not a condition precedent for making him liable on a negotiable instrument if the maker does not pay


A party seeking to prove a promissory note need not go behind the promissory note, he has only to prove due execution of the note. Where the plaintiff bank produced two witnesses who categorically stated all documents including promissory notes, hypothecation agreement, letter of revival and balance credit slips having been signed by the defendant, no evidence was produced by defendant to discharge the burden placed upon him in the face of the positive evidence produced by the plaintiff, the genuineness of the promissory note stood proven

Under Article 73 of the Limitation Act, a suit based on a promissory note payable on demand has to be filed with in 3 years from the date of the note. Under Article 64-A a suit under Order XXXVII of the Code of Civil Procedure, is required to be filed within 3 years from the date when the debt becomes payable immediately where a promissory note makes it obligatory on the holder to sue on expiry of three days after notice to pay was given, limitation of the suit begins three days after the notice to pay was given.

Mere fact that there was an oral understanding between the parties to return the amount within three months, would not take away the unconditional effect of the pronote.

Promissory Note:

Proof of promissory note, would be unquestionable when witnesses were subjected to lengthy cross-examination but noting was extracted to demolish their credibility and neutrality.

Promissory note is not required to be attested. Requirement as to attestation of promissory note prescribed in Art. 17 (2) (a), Qanun-e-Shahadat, 1984, would not override Negotiable Instruments Act, 1881 which does not require attestation of promissory note.

We shall carry on with the negotiable instruments in the coming Lessons.

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