Types of Negotiable Instruments

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Negotiable Instruments Act

Section 13 of the Negotiable Instruments Act states that a negotiable instrument is a promissory note, bill of exchange or a cheque payable either to order or to bearer.

Classification of Negotiable Instruments

Broadly, Negotiable instruments are classified into 4 types.

  1. Based on Transfer (Bearer, Order)
  2. Based on payment (Demand, Time)
  3. Based on Location (Inland, Foreign)
  4. Other Instruments (Ambiguous, Inchoate)

Types of Negotiable Instruments

8 major types of negotiable instruments are discussed below:

  1. Bearer instrument
  2. Order instrument
  3. Demand instrument
  4. Time instrument
  5. Inland instrument
  6. Foreign instrument
  7. Ambiguous instrument
  8. Inchoate Instrument

Based on Transfer

There are 2 types of negotiable instruments that are based on transfer:

Bearer instrument

The negotiable instrument is payable to bearer when –

  1. It is expressed to be payable to bearer.
  2. The last endorsement is in the blank.
  • A promissory note cannot be payable to bearer.
  • The bill of exchange cannot be made payable to bearer on demand.

Order instrument

The negotiable instrument is payable to order –

  1. Which is payable to a particular person.
  2. Which is payable to a particular person or his order.
  3. Which is payable to the order of a particular person.

Based on payment

There are 2 types of negotiable instruments that are based on payment:

Demand instrument

  • The negotiable instrument, on which time for payment is not specified, is an instrument payable on demand.
  • The negotiable instrument which is expressed to be payable on demand is also a demand instrument.

A cheque is always payable on demand. A demand instrument may be presented for payment at any-time. The demand instrument is not entitled to any days of grace.

Time instrument

An instrument in which the time for payment is specified is known as time instrument. The time instrument may be payable-

  1. On a specified day or
  2. After a specified period or
  3. Certain period after sight or
  4. On the happening of an event which is certain to happen.

Based on Location

There are 2 types of negotiable instruments that are based on location:

Inland instrument

A negotiable instrument is an inland instrument if it is –

  1. Drawn or made in India.
  2. Payable in India or is drawn on a person resident in India.

Example: A bill drawn in India payable in Japan, upon a person in India is an inland instrument.

Foreign instrument

The negotiable instrument which is not an inland instrument is called a foreign instrument.

The foreign instrument must be drawn outside India and made payable outside or inside India.

Other Instruments

2 other types of negotiable instruments are:

Ambiguous instrument

An ambiguous instrument means an instrument which can be constructed either as a promissory note or bill of exchange. Once the option is exercised, the instrument shall be treated accordingly.

Inchoate Instrument

Conditions for an inchoate instrument

  1. A person signs a negotiable instrument.
  2. The negotiable instrument is stamped.
  3. The negotiable instrument is either wholly blank or is partially blank.
  4. The person signing such negotiable instrument delivers it to another person.

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Business Law Book References

  1. Goel, P. K. (2006). “Business Law for Managers” Wiley
  2. Sheth, T. (2017). “Business Law” (2ed.) Pearson.
  3. Kuchhal. M.C. & Prakash. “Business Legislation for Management” (2ed.) Vikas Publishing.

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