A Contract has been defined in Section 2(h) of the Indian Contract Act as an agreement which is enforceable by law. An agreement can be said to have enforceability in the eyes of law only when it has the tendency to create legal rights and obligations upon the parties involved.
A Negotiable Instrument, on the other hand, is a document of title for consideration. This term is made up of two words, the first word ‘Negotiable’ denotes the transferable characteristic of the document and the latter pertains to a written document which creates rights and obligations in favour of certain persons. Therefore, a negotiable instrument is a written document which expresses the rights and obligations for payment of the parties involved in the transaction.
There are primarily two kinds of Negotiable Instruments, one being the promissory note and the other one being the bill of exchange. A promissory note can be considered to be an unconditional promise made in writing and signed by the maker to pay on demand or at a fixed pre-determined time in the future, a certain sum of money, to the bearer of such a note. On the other hand, a bill of exchange or “draft” is a written order by the drawer to the drawee to pay money to the payee. A common type of bill of exchange is the cheque. Moreover, In India, the procedure for transfer of these instruments is
governed by Negotiable Instruments Act, 1881.
1.2 Drawing comparisons between Contracts and Negotiable Instruments
From the above discussion, it can be gathered that both, contracts and negotiable instruments possess the ability to create certain rights and obligations and are therefore, similar in nature. Further, let’s delve into certain other characteristics of negotiable Instruments which indicate that these instruments have an inherent contractual character. In American Express Bank Ltd. vs Calcutta Steel Co. And Ors., it was observed that a party that undertakes a negotiable instrument makes it contract with all the parties who appear on its face to be bound for its payment.
A Negotiable Instrument is not obvious in formation in comparison to a contract as it lacks an expressed offer but acceptance of the document is necessary for it to become legally enforceable. In the commercial parlance, the drawee's signed engagement to honour the draft will be considered as acceptance. Moreover, the right pertaining to the performance of a negotiable instrument is linked to the possession of the written document itself. However, certain exceptions do exist, such as situations where loss or theft of the instrument has taken place and the possessor does not necessarily a hold the instrument in due course. The negotiation facet empowers the endorsee to become a party to the contract, and gives him a right to enforce it in his own name. For effecting a negotiation, endorsement and delivery are important. Moreover, such a negotiation is subject to the rule of derivative title according to which the prior holder or endorser cannot transfer rights to the subsequent holder which are greater than his own. It was held in Pt. Sidh Nath Shukla vs Punjab National Bank Of India Ltd., that the contract on a negotiable instrument is without delivery, incomplete and revocable.
The Consideration aspect of the negotiable instrument is fulfilled by the value given up to acquire it (benefit to the endorsee) and the simultaneous loss of value in the prior holder (detriment to the endorser). Therefore, no consideration is to be payed separately in pursuance of an accompanying contract assignment. A Negotiable instrument itself is understood as dignifying the right and power to demand payment along with an obligation with respect to payment evidenced by the instrument itself with the holder having possession of it in due course which acts as a touchstone for the endorsee’s power ad right to demand payment.
One area of distinction between a contract and a negotiable Instrument would be that the right to payment of the transferee is not subject to a set off in case of a negotiable instrument. The instrument is also not reliant upon the underlying contract which has given rise to the debt. For instance, if a cheque is drawn for the payment of a certain goods but the goods delivered are defective, the drawer would still have to effect the endorsement and complete the payment. The position regarding such an instance would have been different in case of a contract.
In conclusion, it can be enunciated that owing to their similar nature to contracts, negotiable instruments are often studied alongside contracts to draw comparisons between the two.
Shivam Goel, “ The Negotiable Instruments Act, 1881: Critical Analysis”, SSRN Electronic Journal (2016).
Negotiable Instrument, Corporate Finance Institute, available at: https://corporatefinanceinstitute.com/resources/knowledge/finance/negotiable-instrument (last visited on January 11, 2021).
Negotiable Instruments- Special Type of Contract to Pay, Peck Law Group, available at: https://www.premierlegal.org/negotiable-instruments-special-type-of-contract-to-pay-money (last visited on January 11, 2021).