Definition and Types of Negotiable Instruments
A negotiable instrument is a signed document that promises or orders a payment to a specified person or assignee.
Examples of negotiable instruments include cheques, money orders, and promissory notes. There are two basic types of negotiable instruments: an order to pay (covering drafts and checks) and a promise to pay (promissory notes and CDs) .
Definitions by Different Authors
According to the Indian Negotiable Instruments Act, 1881, a negotiable instrument is a document that can be transferred from one person to another by mere delivery. It can be a promissory note, bill of exchange, or cheque.
Black’s Law Dictionary defines a negotiable instrument as “a written document that evidences a promise to pay a sum of money to a specified person or to bearer.”
The Uniform Commercial Code (UCC) defines a negotiable instrument as “an unconditional promise or order to pay a fixed amount of money, either to bearer or to order, on demand or at a definite time.”
Cheques
Cheques are a variant of bills of exchange, where the drawee is a bank . They are a widely used negotiable instrument in banking.
Bills of Exchange
Bills of exchange are unconditional, written orders in which one party instructs another (the drawee) to pay a specific sum of money to a third party .
They are governed by legislation and are an essential part of domestic and international commerce, facilitating predictability, protection of parties’ justified expectations, and the elimination of the risk involved in the physical carriage of money .
Promissory Notes
Promissory notes involve two main parties: the Drawer (also called the maker, debtor, or payor) and the Drawee (bearer, creditor, or payee). They are negotiable instruments that promise to pay money, and their main characteristics are financial value and ease of transfer.
Importance in Banking Transactions
Negotiable instruments play a crucial role in banking transactions, as they provide a means of transferring funds between parties. They offer several advantages, such as:
- Facilitating predictability and protection of parties’ justified expectations .
- Reducing the risk involved in the physical carriage of money .
- Allowing for the transfer of financial value without the need for physical cash.
As commerce continues to advance, negotiable instruments remain relevant, and payment mechanisms will not disappear in the digitalization era. All essential elements of negotiable instruments could be functionally adjusted to this reality, making digital negotiable instruments powerful competitors to credit cards and online methods of payment .
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