Other Kinds of Negotiable Instruments by Custom or Usage


Other Kinds of Negotiable Instruments by Custom or Usage


  • Introduction
  • Negotiable Instruments by Custom or Usage
  • Conclusion
  • Reference


There are certain types of negotiable instruments which are used and recognised by the principle of custom and usage. Custom and usage are important for our Indian system because there are a lot or practices which are being followed from time immemorial and such instruments form a part of the banking or transaction related industry.

Although the Negotiable Instruments Act, 1881 (hereinafter referred to as the Act) does not regulate the customary instruments; but still by virtue of sec 1 of the act such negotiable instruments are given accommodation.

Generally the negotiable instruments which are recognised by law are Promissory Notes, Bill of exchange and Cheques and negotiable instruments that are recognised by usage or custom are Hundis, bearer debentures, share warrants, bills in sets, accommodation bill, ambiguous instrument, inchoate instrument, inland and foreign instrument, forged instrument etc.

Negotiable Instruments by Custom or Usage


Negotiable instruments recognised by usage or custom are:

  1. Hundis


These are financial instruments which are used in the India for trade and credit transactions. They have been used for the purposes of:

  • transferring funds from one place to another as remittance instruments;
  • for borrowing money as credit instruments;
  • as bills of exchange for trade transactions.

A Hundi is an order which is in writing and it is unconditional. It is made by a person directing another person to pay the amount mentioned in the Hundi to the person whose name is specified in the Hundi.

Hundis are an informal mode of instrument or bill of exchange, thus it has no place in the legal system and the Negotiable Instruments Act does not regulate or cover them. They are a bill of exchange and were used in a manner in which cheques are used today in common parlance. They were issued by local or indigenous bankers in a city


  1. Share warrants:


This is a document that is issued by a company. The company does this under its seal. This document states that its bearer is supposed to be entitled to the shares or the stocks which are specified in the document. This is a type of negotiable instrument which is transferable by delivery.


  • These are similar to the concept of stock warrants issued in the United States and these are a common form of funding used by companies.


  1. Bearer debentures


These are negotiable instruments which are debentures that are to be paid to the bearer and whose name is not available in the register of debenture holders. Interest is paid to the holder of the debenture as coupons for interest are attached to the document. They are transferable by mere delivery.


  1. Bills in Sets


Sometimes a bill of exchange is drawn in three different sets. When a bill of exchange is divided in to three sets it is known as bills in set. This is generally done when the instrument is to be sent from one country to another. They are sent using different modes of courier so as to ensure that the instrument safely reaches to the drawee and is accepted by him even if one of the part reaches.


By using such a mean to divide the bill in sets helps to avoid delay and also inconvenience which may arise if the bill is lost while it is in transit. It is the option of the drawer as to whether he wants to make the bill in sets or not.


It is important that the bill is numbered must make reference to the other parts of the bill. All the bills together make one bill of exchange in the eyes of law.

All the parts must be sent to the payee and they must be signed. In case only one is sent then the others must also be delivered to the payee. The drawee has to accept only one part of the bill.


  1. Accommodation Bill


This is not supported by any type of consideration. It is a type of bill which is used to provide financial aid to a party. A person lends some amount or lends his name or mercantile credit to a friend. There is no concept of consideration involved in such type of bills since they are for obliging a friend.


Illustration: A is in need of money. He goes to B for help. B has no money but he wants to help his friend. He asks A to draw a bill on him which is payable after three months. Now A can negotiate this bill and claim the money from a third person.


  1. Fictitious Bill


Fictitious Bill is one in which the name of the drawer and the payee are fictitious. When such a bill is drawn in a fictitious name and is made payable to the drawer’s order, then the person who accepts the bill is supposed to pay the person who signed the bill as drawer. Such a bill is not enforceable by law and is not a good bill.


However, Sec 42 of the Act contemplates that if such a bill is accepted by a person then it becomes a good bill in the hands of the person who is holding it in due course, if the holder can show that the first endorsement on the bill and the signature of the person who had drawn the bill are same and acceptance is liable on the bill to him.


  1. Ambiguous Instrument


An instrument which can be treated as a bill of exchange and as a promissory note is called an ambiguous bill since there is no clarity and it has the features of both the instruments. A person who is holding such a bill has the option of exercising his will


He can either treat it as a bill of exchange or a promissory note. However, such a person will be bound by his decision. Once he treats it as a particular instrument then he cannot go back on his decision and choice. Such kinds of instruments find mention in Sec 17 and Sec 18 of the Act.


A bill is treated as ambiguous when the drawer and drawee are the same or when the drawer is a fictitious person or is not having a capacity to contract. In cases where the amount mentioned is different in the figures and words then the amount which is stated in words will be taken as the amount of instrument and such a bill is also treated as a fictitious bill.


Eg. When the amount mentioned in words is one thousand but in figure it is mentioned 500. In such a situation the amount written in words i.e., one thousand will be taken as the amount of the bill.


  1. Inchoate Instrument


Sec 20 of the Act deals with an inchoate instrument. An instrument which is incomplete or blank in certain form and has been stamped and signed is called an inchoate instrument.


In cases where the debtor does not know the exact amount which needs to be paid to the creditor may give a blank paper by signing it and affixing a stamp on it as per the provisions of the Act.


In this way the debtor provides an authority to the creditor to write the name of the payee and the specific amount which is to be paid by the debtor which shall make the instrument complete. The amount which is to be mentioned in the instrument shall not be more than the amount which is covered by the stamp.


Once the details are filled in the instrument it becomes complete thereby making the signatory of the instrument liable. This liability is restricted to the amount which is covered by the stamp.


No person who is not a holder in due course can recover from the person delivering the instrument the amount intended by him to be paid thereafter. The essential requirement of Sec 20 is that the delivery of a paper which is stamped. If the paper is not stamped then the maker or acceptor will not be liable to a subsequent holder in due course.


The section intends to make the person who signs and delivers the instrument liable to the holder and the holder in due course as well. A holder can only recover what the person who signed intended to be paid whereas the holder in due course can recover the entire amount mentioned in the instrument but subject to the amount of stamp.


  1. Inland and foreign Instrument


Sec 11 discusses the scope of inland instrument. A promissory note, bill of exchange or a cheque which is drawn and made payable in India or drawn in India upon any person residing in India and payable in a foreign country is called an inland instrument. Eg.


  • A bill which is drawn in Delhi on a merchant in Mumbai but endorsed in England.


  • A bill which is drawn in Chennai upon a Trader in Singapore and payable at Lucknow.


Since a promissory note can be made upon any person, it is required that an inland note be made and be payable in India.


Sec 12 of the Act talks about foreign instruments. Any instrument which is not drawn and made or made payable in India is a foreign instrument. Eg:


  • A promissory note made in India but made payable in Egypt;


  • An instrument which is drawn in India but for a individual residing in England and made payable in England;


  • A bill drawn in Portugal but made payable in India;


  • A bill drawn in Dubai but on a person who resides in India.


  1. Forged Instrument


Sec 58 of the Act discusses about instruments that are forged. Forged instruments are those which are altered fraudulently prejudicing the right of another person. It would be forgery if the name of an existing person is written without him knowing or without his consent.


It would also be forgery if the signatures of another person are executed without his knowledge or consent or the signatures of a fictitious person are made on an instrument to show or make it believe that the signature are actually of that person whose signature is being made or is a signature of a real person.


A person’s real signature will be considered as fraud if it is made with the intention of passing off as someone else’s signature. If the signature on an instrument is forged the signature becomes inoperative and the ownership of the instrument lies with the person who was holding the instrument when the alleged forgery took place.


If someone receives an amount of money by forging signature or forging some other details then the true owner can file a case and initiate proceedings for recovery of the amount.



Thus it can be concluded that Negotiable instruments are of many kinds apart from the three types mentioned in the Act. Some negotiable instruments are being used since a long time and are a part of custom and usage. Although the law will not apply to them in the strict technical sense but if it is mentioned in the instrument that it be governed by the negotiable instrument’s act then the act will apply on them eg; hundis.

Some instruments although are not used as a customary instrument they are prevalent and such instruments if they fill the necessary requirements of a negotiable instrument can be considered to be a negotiable instrument.


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