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warranting (1) the payment of money, the promise of or order for conveyance
of which is unconditional; and, which specifies or describes the payee, who is
designated on and memorialized by the instrument and which is capable of
change through transfer by valid negotiation of the instrument.
The rights to payment are not subject to set-off, and do not rely on the
validity of the underlying contract giving rise to the debt (for example if a
cheque was drawn for payment for goods delivered but defective, the drawer
is still liable on the cheque)
No notice need be given to any party liable on the instrument for transfer of
the rights under the instrument by negotiation. However, payment by the
party liable to the person previously entitled to enforce the instrument
"counts" as payment on the note until adequate notice has been received by
the liable party that a different party is to receive payments from then on.
[U.C.C. §3-602(b)]
Transfer free of equities—the holder in due course can hold better title than
the party he obtains it from (as in the instance of negotiation of the
instrument from a mere holder to a holder in due course)
Negotiation often enables the transferee to become the party to the contract
through a contract assignment (provided for explicitly or by operation of law)
and to enforce the contract in the transferee-assignee’s own name.
Negotiation can be effected by indorsement and delivery (order instruments),
or by delivery alone (bearer instruments). In addition, the rights and
obligations accruing to the transferee can be affected by the rule of
derivative title, which does not allow a property owner to transfer rights in a
piece of property greater than his own.
Classes
Promissory notes and bills of exchange are two primary types of negotiable
instruments.
Promissory note
Bill of exchange
The person who draws the bill is called the drawer. He gives the order to pay
money to third party. The party upon whom the bill is drawn is called the
drawee. He is the person to whom the bill is addressed and who is ordered to
pay. He becomes an acceptor when he indicates his willingness to pay the
bill. (Sec.62) The party in whose favor the bill is drawn or is payable is called
the payee.
The parties need not all be distinct persons. Thus, the drawer may draw on
himself payable to his own order. (see Sec. 8)
LOCAL USAGE PREVAILS UNLESS EXCLUDED - The Act does not affect any
local usage relating to any instrument in an oriental language. However, the
local usage can be excluded by any words in the body of the instrument,
which indicate an intention that the legal relations of the parties will be
governed by provisions of Negotiable Instruments Act and not by local usage.
[section 1]. - - Thus, unless specifically excluded, local usage prevails, if the
instrument is in regional language.
Transferee can get better title than transferor – Normal principle is that a
person cannot transfer better title to property that he himself has. For
example, if a person steals a car and sells the same, the buyer does not get
any legal title to the car as the transferor himself had no title to the car. The
real owner of car can anytime obtain possession from the buyer, even if the
buyer had purchased the car in good faith and even if he had no idea that the
seller had no title to the car. This provision is no doubt sound, but would
make free negotiability of instrument difficult, as it would be difficult to verify
title of transferor in many cases. Hence, it is provided that if a person
acquires ‘Negotiable Instrument’ in good faith and without knowledge of
defect in title of the transferor, the transferee can get better title to the
negotiable instrument, even if the title of transferor was defective. This is
really to ensure free negotiability of instrument so that persons can deal in
the instrument without any fear.
If the instrument uses the expressions “on demand”, “at sight” or “on
presentment”, the amount is payable on demand. In such case, presentment
for acceptance is not required. The Negotiable Instrument will be directly
presented for payment.
Acceptance and payment for honour and drawee in need - Provisions for
acceptance and payment for honour have been made in case when the
negotiable instrument is dishonoured. Bill is accepted for honour when it is
dishonoured when presenting for acceptance, while payment for dishonour is
made when Bill is dishonoured when presented for payment.