Negotiable Instruments Act, 1881

The Negotiable Instruments Act, 1881 is a foundational piece of legislation in India that governs the use of negotiable instruments, such as promissory notes, bills of exchange, and cheques. Here’s a detailed overview of the Act, its history, and the types of instruments it governs.

Overview of the Negotiable Instruments Act, 1881

Definition and Purpose

• The term “negotiable” refers to the transferability of the instrument, while an “instrument” is a legal document that carries a financial obligation.
• The Act establishes the legal framework for the creation, transfer, and enforcement of negotiable instruments, providing certainty and protection to parties involved in financial transactions.

History

• The roots of the Negotiable Instruments Act date back to 1866, when it was first drafted by the 3rd Indian Law Commission.
• After facing objections from the mercantile community and undergoing several revisions, the Bill was introduced again in 1880 and was passed into law in 1881.
• The Act has undergone significant amendments since its enactment, adapting to the changing needs of commerce and finance in India.

Evolution of Credit Instruments

• One of the oldest forms of credit instruments in India is the Hundi, widely used in trade since the twelfth century. Historically, Hundis facilitated trade and remittances and can be seen as an early form of a traveler’s cheque.

Key Provisions

• Section 13 defines a negotiable instrument as a promissory note, bill of exchange, or cheque that is payable either to order or to bearer.
• Section 1 outlines the geographical scope of the Act, stating it extends to the whole of India but does not affect the Indian Paper Currency Act, 1871, or any local customs regarding instruments in an oriental language.

Types of Negotiable Instruments

The Act recognizes and governs the following types of negotiable instruments:

Promissory Note

• A written promise by one party (the maker) to pay a specified sum of money to another party (the payee) on demand or at a future date.

Bill of Exchange

• A written order from one party (the drawer) to another (the drawee) to pay a specified amount to a third party (the payee) on demand or at a predetermined future date.

Cheque

• A specific type of bill of exchange drawn on a bank, directing the bank to pay a specified amount from the drawer’s account to the payee on demand.

Structure

The Act comprises 148 sections classified into 17 chapters and they are as follows:

Chapter	Sections	Contents
Chapter I	Sections 1 – 3	Preliminary
Chapter II	Sections 4 – 25	Notes, Bills and Cheques
Chapter III	Sections 26 – 45A	Parties to Notes, Bills and Cheques
Chapter IV	Sections 46 – 60	Negotiation
Chapter V	Sections 61 – 77	Presentment
Chapter VI	Sections 78 – 81	Payment and Interest
Chapter VII	Sections 82 – 90	Discharge from Liability of Notes, Bills and Cheques
Chapter VIII	Sections 91 – 98	Notice of Dishonour
Chapter IX	Sections 99 – 104A	Noting and Protest
Chapter X	Sections 105 – 107	Reasonable Time
Chapter XI	Sections 108 – 116)	Acceptance and Payment for Honour and Reference in Case of Need
Chapter XII	Section 117	Compensation
Chapter XIII	Sections 118 – 122	Special Rules of Evidence
Chapter XIV	Sections 123 – 131A	Crossed Cheques
Chapter XV	Sections 132 – 133	Bill in Sets
Chapter XVI	Sections 134 – 137	International Law
Chapter XVII	Sections 138 – 148	Penalties in Case of Dishonour of Certain Cheques for Insufficiency of Funds in the Accounts