Short notes on the Classification of Negotiable Instruments

Negotiable instruments may be classified as follows:

1. Inland and Foreign Instruments:

Instruments may be inland or foreign.

(a) Inland instrument (Sec. 11). A promissory note, bill of exchange or cheque drawn or made in India and made payable in or drawn upon any person resident of India shall be deemed to be an inland instrument.

Thus, an instrument will be an inland instrument if it is (i) made or drawn in India and payable in India, or (ii) drawn upon a person resident of India, although payment is to be made outside India.

If we analyse the above rules, we come to the following conclusion:

(b) Foreign instrument (Sec. 12) An instrument which is not an inland instrument is a foreign instrument:

(i) A promissory note made in India but payable outside India.

(ii) A promissory note made outside India and payable outside India and accepted payable outside India.

(iii) A bill drawn in India on a person who is residing outside India and accepted payable outside India.

(iv) A bill drawn outside India made payable in India or outside India.

(v) A bill drawn outside India on a person who is residing outside India.

Examples:

(a) A writes a promissory note in India in favour of B of London, which is payable in London.

A writes a promissory note in London payable in London.

A draws a bill in Delhi on B of London and accepted payable in London.

A draws a bill in London and it is accepted payable in Delhi. If the above bill is accepted payable in London, even then it is a foreign bill.

A draws a bill in London on B, a resident of Paris.

Usance:

A usance is the time fixed for the payment of bills drawn in one country and made payable in another. It is fixed by the custom of the country. The length of usance differs from country to country.

Via:

A foreign bill is generally drawn in sets of three. Each set is called ‘via’. The three copies are sent by different mails so that at least one copy may reach the acceptor as there are greater chances of loss during transit over long distances.

Rules Regarding Bills in Sets :

The rules regarding bills inlets are given in Sees. 132 and 133. These are as follows:

(i) A foreign bill may be drawn in parts (two, three or four, as the case may be).

(ii) Each part of a bill in set must be numbered and must contain a provision that it shall continue to be payable only so long as the other parts remain unpaid. Each part must contain a reference to the other parts. All the parts together constitute a set and the whole set constitutes one bill.

(iii) The entire bill is extinguished when payment is made on one part.

(iv) The drawer must sign each part. However, the acceptor should accept only one part of the set.

(v) Where a person accepts or endorses different parts of the bill to different persons, he and the subsequent endorsers of each part are liable on each part as if it were a separate bill.

(vi) Where two or more parts of a set are endorsed to different holders in due course, he who first acquired title to his part, is entitled to the other parts and the money represented by the bill.

2. Ambiguous Instruments:

Where the instrument is written in such a manner that it can be treated as a bill or a note, it is called an ambiguous instrument. Where an instrument may be construed either as a promissory note or a bill of exchange, the holder may at his option treat it as a bill or a note and the instrument thereafter shall be treated accordingly (Sec. 17).

The Negotiable Instrument Act, 1881 does not give the cases in which such a situation may arise. However, Sec. 5 (2) of the English Bills of Exchange Act, 1882 lays down that where sec. 5 (2) of the drawer and the drawee are the same persons or where the drawer is a fictitious person or a person not having the capacity to contract, the holder may treat the instrument at this option either as a bill or note.

Example:

A draws a bill on B. The bill is endorsed to C.B. is a fictitious person. Although it is a bill but C can treat it as a note because B is a fictitious person, As such A is liable to pay money to C.

It should be noted that the terminology used is not important, see above example. Again the option to treat the instrument as a bill or note is to be exercised once for all. No change later on is allowed. If the amount in the instrument differs in figures and words, the amount stated in words shall be the amount payable (Sec. 18).

3. Inchoate Instruments (Sec. 20):

A blank but stamped instrument is called inchoate instrument. Where one person signs and delivers to another a paper stamped in accordance with the law relating to negotiable instrument then in force in India, and either wholly blank or having written thereon an incomplete negotiable instrument, he thereby has given prima facie authority to the holder to make or complete it as a negotiable instrument for any amount specified therein and not exceeding the amount covered by the stamp.

It further provides that the person so signing shall be liable upon such instrument in the capacity in which he signed the same, to any holder in due course for such amount. A person who is not a holder in due course cannot recover anything in excess of the amount intended by him to be paid there under.

Example:

A signed as maker a blank stamped paper and gave it to B and authorized him to fill it as a note for Rs. 500 to secure an advance which C was to make to B. B fraudulently filled it up as a note for Rs. 2,000 payable to C, who is entitled to Rs. 2,000 from A. [Lloyds Banks v. Cooke].

To make a person liable on an inchoate instrument, the following conditions must be satisfied.

(i) Liability arises only when the blank space is filled in:

Unless the blank spaces are filled, the liability does not arise as the instrument is not valid.

(ii) Delivery and stamp necessary:

Delivery of an instrument is necessary in all cases to pass property (ownership). An inchoate instrument is valid only when it is stamped in accordance with the law in force.

(iii) Only holder has the authority to fill up the instrument:

No one else has the right to fill up. For example, an agent has no right to fill up such an instrument.

(iv) Holder can recover only that amount:

Which was intended by the person signing?

(v) Holder in due course can recover, the amount mentioned in the instrument, provided it is covered by the stamp.

4. (i) Instrument payable on demand:

Payable on demand implies that the payment is to be made immediately or at once on demand.

1. A cheque is always payable on demand (Sec.6 and 19).

2. A promissory note or bill of exchange is payable on demand in the following cases:

(a) When it is marked “payable on demand”.

(b) When it is marked ‘payable at sight”, or “payable on presentment” (Sec. 21).

(c) When no time for payment is specified (Sec. 19).

It should be noted that an instrument marked “payable on demand” is not required to be presented before payment, whereas the documents marked “payable at sight or payable on presentment” must be presented for payment before payment is demanded.

From the point of view of law of limitation, the term “at sight” or “on demand” is regarded as different. In the case of a bill marked “at sight” the period of limitation starts from the date of presentation, whereas in the case of a bill marked “on demand”, it starts from the date of the bill of note.

(ii) Instrument payable at a future time:

An instrument marked “after sight” or “after date’ means an instrument payable at a future date. Again, an instrument payable on the happening of an event which is bound to happen, although the time of its happening may be uncertain, e.g. the death of a certain person, is an instrument which is payable at a future date. Thus an instrument may be made payable “60 days after sight” or “60 days after date”. Again it may be marked payable “60 days after the death of X”.

These instruments are not payable on demand but are payable on maturity, i.e. after the period for which these were drawn.

In case the instrument is a bill of exchange and it is marked “after sight” then its payment cannot be demanded unless it has been presented for acceptance before payment and the specified period has been over.

5. Instrument payable to the bearer on demand:

At the outset, it was pointed out that Sec. 31 of the Reserve bank of India Act, 1934 prohibits issue of bill of exchange or promissory note payable to bearer on demand. It is only the Reserve Bank of India and the Central Government which can issue bills or notes payable to bearer on demand. Any person who issues such bill or notes payable to bearer on demand is punishable with fine which may extend to the amount of the instrument.