What Is the Negotiable Instrument Act?

Jo Dunaway

The Negotiable Instrument Act is an act of specific financial definitions that was passed in India in 1881. It differentiates chiefly with the three types of negotiable instruments: check, promissory note and bill of exchange. It is the basis and reference for both civil and criminal law with respect to obligations of all parties to an implied or actual contract for the exchange of monetary consideration for goods and/or services. Passed when India was a colony of the British monarchy, the act took nearly two decades of law commissions to finally become a passed bill and make its way into common law.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

In 1988, the responsibilities of all parties were added in an amendment to The Negotiable Instrument Act to cover penalties for dishonored checks, and it leaned heavily in favor of the holder of the check. In 2002, The Negotiable Instrument Act was once again amended to include not only the definitions for acceptance of electronic checks and truncated electronic checks but also to close a few loopholes. The holder of a bad check had been left with no option to collect other than to go through a claim in civil court, which is a lengthy process, but the 2002 amendment moved recourse to the criminal courts. The provisions of penalties per check of as much as two years' imprisonment, a fine of double the amount of the check or both led to a sharp drop in the necessity to apply the law.

The Negotiable Instrument Act regulates transactions that affect the lives of people and companies around the globe whenever they engage in any kind of monetary transaction having to do with issuing and acceptance of checks. It defines that a check is a type of bill of exchange. Checks under this act also have free transferability and bear the title to the transferee, and the holder has certain presumptions upon which a lawsuit can be filed if the check is dishonored, except when the check has been obtained from the lawful owner by means of any kind of offense or fraud. The issuing bank’s responsibilities and liabilities also are defined within the act.

A promissory note also is defined within The Negotiable Instrument Act, as well as how it is differentiated from a bill of exchange. The essential difference is that a promissory note is a promise to pay rather than a demand to pay. Further definitions are of negotiable instrument liability capacities, the essentials of a valid acceptance, how to calculate maturity and what to do in the instance of loss of the negotiable instrument. The effects of forgery and discharge of liability of forged instruments are also covered. As a bearer of title, negotiable instruments are a method by which payment is made and discharged in any business obligation.

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