Negotiation of negotiable instruments

Last updated on October 3rd, 2021 at 06:20 pm

The negotiation has been defined under section 34 of The Negotiable Instrument Act as follows:

‘When a promissory note, bill of exchange or cheque is transferred to any person so as to constitute that person the holder thereof, the instrument is said to be negotiated”.

Conditions of Negotiation

When we analyze this definition we find that following conditions must be fulfilled for the negotiations of the instrument;

1. There must be transfer of the promissory note, bill of exchange or cheque from one person to another.
2. The person to whom an instrument is transferred must constitute as the holder of the instrument.
3. He must have all the rights of the holder of the instrument.

So by negotiation means the transfer of negotiable instrument from one person to another in such a way that the transferee must become the holder of the instrument.

Modes of Negotiation

The following are the methods of negotiations:

Negotiation by Delivery

A promissory note, bill of exchange or cheque payable to bearer is negotiated by delivery thereof. Sec, 47.

According to section 47 when an instrument is payable to bearer can be negotiated simply by transferring the possession of instrument by one person to another.

Negotiation by Endorsement

“A promissory note, bill of exchange or cheque payable to order is negotiable by the holder by endorsement and delivery thereof’. Sec. 43. This section provides that when an instrument is payable to order is transferable only by endorsement and delivery thereof. Without the endorsement, the transferee cannot be constituted as the holder of the Instrument.

Generally, when the holder of the instrument transfers the possession of the instrument to another by delivery actual or constructive, the negotiations are said to be completed. But according to section 47 of this Act, when the delivery is conditional and the person acquires the delivery with the knowledge of such condition, the negotiations cannot complete unless and until such condition is fulfilled. Actual delivery means physically handing over the possession of the instrument to another person. But the delivery is constructive when the mean to acquire possession is handed over.