A Study on Negotiable Instrument, Its Evolution and Features

A Term Paper of Banking Law

(In The Fulfillment of the Requirement for Board Examination of 8thSemester

B.A.LL.B)

Submitted To:

City Campus, School Of Law

B.A.LL.B Programme

Faculty of Humanities and Social Sciences

Lumbini Buddhist University

Submitted By:

Priyanka Bhurtel

B.A.LL.B, 8th Semester (Sec-A)

LBU Reg. No: 13-A-5-0135-2020

Symbol No.

Baisakh, 2082 B.S

1.1. Meaning of Negotiable Instrument

The word 'negotiable' means 'exchangeable' or 'transferable' by delivery and

'instrument' means a written document so, negotiable instruments means a document which

can be legally transferred to another party for money. Negotiable instruments can be

identified as "paper money," which is commonly known as commercial paper. Thus,

negotiable instrument is a document which is given to another person in exchange for

money in the business field. A negotiable instrument is a signed document that promises

payment to a specified person or assignee. Negotiable instruments are signed legal

agreement that commit a party to paying a certain amount to other party at a given period

or on demand. It is a written financial contract that includes a legally binding promise or

obligation to pay specific amount of money.1 In other words, it is a formalized type of IOU:

a transferable, signed document that promises to pay the bearer a sum of money at a future

date or on demand.2It includes a Bill of Exchange, Cheque, Promissory Note or any other

document which is transferable in exchange for money like, Government Promissory Note,

Hundi, Share warrants, Dividend warrants, Banker's Draft, Bearer Debentures etc.

Negotiable instrument means an unconditional promise or order to pay a fixed amount of

money, with or without interest or other charges described in the promise or order.3

1
SANDHYA KAFLE, LAW AND PRACTICE OF BANKING 163 (ASMITA BOOKS 2024).
2
NEGOTIABLE INSTRUMENT, INVESTOPEDIA, HTTPS://WWW.INVESTOPEDIA.COM/TERMS/N/NEGOTIABLE-
INSTRUMENT.ASP (LAST VISITED MAY 1, 2025).

3
U.C.C. § 3-104 (AM. LAW INST. & UNIF. LAW COMM’N 2023), HTTPS://WWW.LAW.CORNELL.EDU/UCC/3/3-
104 (LAST VISITED MAY 1, 2025).

1
In the modern business world, a large number of transactions take place involving

huge sums of money. It is quite inconvenient and hassling for both the parties to make

and receive payments in cash. Hence, it has become a common practice for the

businessmen to make use of certain documents to enable paying and receiving huge

amounts of money and types. Few of these documents are called negotiable

instruments. 4 A negotiable instrument can be transferred from one person to another.

Once the instrument is moved, the holder gains full legal title to the instrument.

1.2 Definitions of Negotiable Instrument

Black law dictionary “Negotiable instrument is a written and signed unconditional promise

or order to pay a specified sum of money on demand or at definite time payable to order or

bearer”.5

According to Justice, Willis, A negotiable instrument thus possesses two qualities:

(i) The right of ownership contained in the instrument can be transferred from one person

to another by mere delivery or sometimes by endorsement and delivery, and

(ii) The transferee who takes the negotiable instrument in good faith and for consideration

(technically known as a holder in due course) gets a good title to the same even though the

title of the transferor is defective.6

4
NEGOTIABLE INSTRUMENTS IN BANKING, TESTBOOK, HTTPS://TESTBOOK.COM/BANKING-
AWARENESS/NEGOTIABLE-INSTRUMENTS (LAST VISITED MAY 6, 2025).
5
SANDHYA KAFLE, SUPRA NOTE 1, AT 164.
6
JYOTI SAINI, MEANING, DEFINITION, FEATURES OF NEGOTIABLE INSTRUMENTS, SLIDESHARE (MAY 1,
2025), HTTPS://WWW.SLIDESHARE.NET/SLIDESHOW/MEANINGDEFINITION-FEATURES-OF-NEGOTIABLE-
INSTRUMENTS-HOLDER-AND-HOLDER-IN-DUE-COURSE/246673591.

2
According to Negotiable Instrument Act, 1881 of India a 'negotiable instrument' means a

promissory note, bill of exchange or cheque payable either to order or to bearer.7

According to negotiable instrument act, 2034 of Nepal negotiable instrument is a

promissory note and bill of exchange.8

7
NEGOTIABLE INSTRUMENTS ACT, 1881, NO. 26, § 13 (INDIA).
8
NEGOTIABLE INSTRUMENTS ACT, 2034, NO. 26, § 2(E) (NEPAL).

3
 Chapter Two: Evolution of Negotiable Instrument

In India, a tool called Adesha began to be used in the 1st century BC during the

Mauryan period in the 3rd century BC, an instruction asking the banker to pay the money

in the rice a third party which corresponds to the definition of a bill of exchange as we

understand it today the ancient Romans are believed to have lived in the 1st century BC.9

Early check papers called "praescriptiones" were used in the 1st century BC, and 2,000-

year-old Roman promissory not have been discovered. The common prototype of bills of

exchange and promissory notes originated in China during the 8th century Tang Dynasty,

when special instruments called feizian were used to safely transfer money over long

distances.10 Around 1150, the Templars issued an early banknote to departing pilgrims in

exchange for leaving their valuables willia local Templar diocese in a European country,

Pilgrims could redeem it by presenting it up arrival at the holy site was a memo to the

Templar leader.11

In the mid-13th century, the Ilkhanid rulers of Persia printed "cha" or "chap." It was used

as a banknote for limited use in transactions between the court and merchants for about

three years before its collapse. This failure was caused by the court only allowing "cha"

with tiered discounts. Such documents were then used for money transfers by Middle

Eastern mercharas who used the prototype of the bill of exchange ('suftaja' or 'softa') from

the 8th century to the present day. Such prototypes were later used by Iberian and Italian

merchants in his 12th century. In Italy, bills of exchange and promissory notes were issued

9
SANDHYA KAFLE, supra note 1, at 164.
10
Id.
11
Negotiable Instrument, Wikipedia, https://en.wikipedia.org/wiki/Negotiable_instrument (last visited May
1, 2025).

4
from the 13th to the 15th century. Its main feature is his 10th century, but further stages of

its development were associated with France (16th-18th centuries, support appeared) and

Germany (19th century, formalization of stock exchange laws).12

The first mention of the use of bills of exchange in English law dates back to 1381, during

the reign of Richard II. The Act requires the use of such means in the UK and prohibits any

future export of gold and silver in any form for the purpose of carrying on foreign

commerce. Foreign exchange laws in the UK differ from those in continental Europe due

to different legal systems. The British system was later adopted in the United States. There

are two main reasons why the use of securities has become so popular in the UK.

Transporting large amounts of coins from one place to another was considered unsafe, so

the use of securities was intended to prevent traders from doing things like. Coins stolen

on land or at sea. Due to the increased use of "counterfeit British money" in the 13th

century, the objective of the British Crown was to eliminate the exchange of genuine

British money with "foreign and inferior coins". Thus, the Coinage Act of 1335 (9 Edw, 3

Stat. 2) and 1379 were introduced to prevent the importation of coins deemed counterfeit

and to prevent the exportation of valuables such as permission. Gold and silver without

special permission. 13

12
SANDHYA KAFLE, SUPRA NOTE 1, AT 164.
13
Id.

5
 Chapter Four: Features of Negotiable Instrument

Negotiable instruments have certain features that make them easy to transfer from one party

to another and that establish the legal rights and obligations of the parties involved.

1. Written form: Negotiable instruments must be made in writing, either on paper or

electronically, signed by the issuer (also known as the maker or drawer), and

contain an unconditional promise or order to pay a specific sum of money and they

clearly contain the parties of negotiable instruments and amount of money, payment

date etc.

2. Unconditional promise or order: A negotiable instrument's promise or order to pay

must be unqualified. This indicates that there shouldn't be any restrictions or limits

on the payment. It must be a firm promise to pay the sum mentioned.

3. Fixed amount: The amount of money that must be paid must be stated in a

negotiable instrument and must be fixed and determinable.

4. Fixed time: the time on which the negotiable instrument has to be paid shall be

fixed and certain

5. Negotiable instruments are made to be easily transferred and are typically payable

to Bearer or to Order. They might be made payable to a specified person or order,

or they can be made payable to the bearer, who is the person who really holds the

document. By delivery and endorsement, instruments payable to a particular person

or order can be transferred.

6. Negotiability: This refers to the fact that a negotiable instrument may be transferred

from one party to another more than once while maintaining the same legal status.

The holder now has the ability to further negotiate the instrument as the owner.

6
7. Transferability: Negotiable instruments are made to make it easier for parties to

transfer money or obligations. They are used as a means of trade, enabling quick

and secure payments in a variety of business dealings. The ownership of an

instrument can transfer simply by delivery or by a valid endorsement.

7
 Chapter Five: Conclusion

Negotiable instruments play a crucial role in modern commerce by facilitating

secure and efficient financial transactions. They serve as a substitute for cash, allowing

businesses and individuals to transfer large sums of money without the risks associated

with physical currency. The key characteristics of negotiable instruments such as written

form, unconditional promise, fixed amount, negotiability, and transferability ensure their

reliability and enforceability in legal and commercial contexts. The evolution of negotiable

instruments dates back centuries, with early forms emerging in ancient India, Rome, China,

and medieval Europe. Over time, these instruments were refined and formalized through

legal systems, leading to the structured frameworks seen today under laws such as the

Negotiable Instruments Act, 1881 (India) and the Negotiable Instruments Act, 2034

(Nepal). In essence, negotiable instruments provide a foundation for trust and liquidity in

trade and finance. Their ability to be freely transferred while protecting the rights of holders

in due course makes them indispensable in both domestic and international business

transactions. As commerce continues to evolve, negotiable instruments will remain a vital

tool for ensuring smooth and legally binding financial exchanges.