NEGOTIABLE INSTRUMENT ACT – 1881

(Significance, Types, Crossing, Endorsement & Implication)

Md Masudur Rahman
Senior Executive Officer
Shahjalal Islami Bank Ltd.
Investment Division
Head Office, Dhaka
Introduction:
The Negotiable Instrument Act -1881 was mainly derived from the English Common law. A
draft for the act was first formulated in the year 1866 and having undergone several subsequent
amendments, the act was finally formulated in the year 1881. The law of contracts, the law of
torts, law related to carriage of goods by sea, judge made laws and other commercial & civil
laws helped formulate the Negotiable Instrument Act. Besides, contemporary law relating to
religion, customs and practice of the land and procedure were taken into consideration for
formulation of the act. It came into effect from March 01, 1882. It contains 17 chapters and 141
sections. The Act defines and amends the law relating to Negotiable Instrument e.g. Promissory
Notes, Bill of Exchange, Cheque and Demand Drafts. This Act has been enacted in our country
vide PO No. 127 of 1972. Since inception several amendments have been made to this Act.

Significance & evolution of NI :

Negotiable instruments occupy an important place in our modern business world and have been
an integral part of our business. It represents money and used for setting debts just as money,
providing some extra advantages.
Differences in resource endowments have necessitated the people to go for cross border
transactions, i.e. exchange of resources, which are hardly possible to be met through only
transactions in cash form. Also arrival of goods from the point of production to the place of
consumption involves a good number of transactions and executing these transactions by cash is
a real handicap. Thus there was a need of a method, which would facilitate transaction and
eliminate the actual movement of money in the form of cash. There should be something to
symbolize the amount of money involved in a transaction and responsibility of the person who
has to pay it. Merchants solved this problem by creating documents, which subsequently came
to be known as negotiable instruments. The transfer of this document from hand to hand
symbolized actual payment. This crated the need for special law dealing with the documents
evolved by merchants as a substitute for money.

Kinds of NI:
Section 13 of the Act speaks of only of the following three negotiable instruments:
 Promissory note
 Bill of exchange
 Cheque
However, it does not limit the negotiable instruments to these three only. The following
instruments also come under the purview of NIA:
Demand Draft Treasury Bill Debenture
Travelers’ Cheque Bank Note
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Kinds of NNI:
Postal Order Share Certificate Payment Order
Govt. Notes Money Order

Purview of NIA
The purview of NIA extends from drawing/making of an instrument to its encashment. It covers
the matters with drawing, acceptance, endorsement, crossing, transfer, delivery, payment,
maturity, grace period to maturity, parties to NI, responsibility the parties thereto, punishment of
the parties for violation, protection for the banker and so on.
CROSSING:
Crossing is a direction to the paying banker that the cheque should be paid only to a banker on
whose favor the cheque is crossed or to some other bank and not to the holder at the counter. So
to prevent any one but the payee from cashing, cheques are crossed. Crossing may be in written,
stamped, printed or purported.
Purpose of Crossing:
Crossing provides security and protection to the true owner, since payment of such cheque has
to be made through a banker. Cheques are crossed in order to avoid losses resulting from open
cheques falling into the hand of undue persons. Crossing of a cheque does not affect its
negotiability. Crossed cheques are negotiable by delivery in case they are payable to bearer and
endorsement and delivery when they are payable to order. Holder of a crossed cheque, who has
no account in the bank, can obtain payment by endorsing in favor of some persons who has got
an account with a bank.
Types:
a. General Crossing
As per Section 123 of NI Act, where a cheque bears across its face an addition of the words “and
company” or any abbreviation thereof, between two parallel transverse lines, or of two parallel
transverse lines simply, either with or without the words “not negotiable” that addition shall be
deemed a crossing and the cheque shall be deemed crossed generally.

An account payee cheque also falls under the type of general crossing.

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b. Special Crossing:
As per Section 124 of NI Act, where a cheque bears across its face an addition of the name of a
bank, either with or without the words “not negotiable” that addition shall be deemed a crossing
and the cheque shall be deemed crossed specially, and to be crossed to that banker.

Cheque crossed Account Payee:

As per Section 123(A) of NI Act, when a cheque crossed generally, bears across its face an
addition of words “Account Payee”.
When a cheque is crossed “Account Payee”-
• It shall cease to be negotiable, and
• It shall be the duty of the collecting bank to credit the proceeds
only to the account of the payee named in the cheque.
Opening of Crossed cheque:
The drawer or maker of a cheque only has the right to open a crossed cheque by adding his
signature.
Some NI Act Interpretations on Crossing:

a. Crossing after Issue: As per Section 125:-

Where a cheque is uncrossed, the holder may cross it generally or specially.
Where a cheque is crossed generally, the holder may cross it specially.
Where a cheque is crossed generally or specially, the holder may add the words “Not
Negotiable”.
Where a cheque is crossed specially, the banker to whom it is crossed may again cross it
specially to another, his collection agent, for collection.
When an uncrossed cheque or a cheque crossed generally, is sent to a banker for collection,
he may cross it specially to himself.
b. Crossing is a material part of cheque: As per Section 125(A):-
A crossing authorized by this Act is a material part of the cheque, it shall not be lawful for
any person to obliterate or except as authorized by this Act, to add to or alter the crossing.
c. Payment of cheque crossed generally or specially: As per Section 126:-
Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it
otherwise than to a banker.
Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it
otherwise than to a banker to whom it is crossed or his agent for collection.
d. Payment of cheque crossed specially more than once: As per Section 127:-

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Where a cheque is crossed specially to more than one Banker, except with crossed to an
agent for the purpose of collection, the banker on whom it is drawn shall refuse payment
thereof.
e. Cheque crossed “Not Negotiable”: As per Section 130:-
A person taking a cheque crossed generally or specially, bearing in either case “Not
Negotiable” shall not be capable of giving a better title to the cheque than that which the
person from whom he had took it.

ENDORSEMENT:
A negotiable instrument may be transferred by negotiation or assignment. Negotiation can be
effected by mere delivery if the instrument is a bearer one and by endorsement and delivery in
case it is an order instrument. An order instrument means instrument payable to a specified
person or to the order or to the order of that specified person. If an instrument payable to order is
transferred without endorsement, it is merely assigned and the holder thereof is not entitled to
the rights of holder in due course.

Meaning of Endorsement:
An endorsement is the mode of negotiating a negotiable instrument. A negotiable instrument,
payable otherwise than to a bearer, can be negotiated only by endorsement and delivery.
According to section 15 of NI Act, an endorsement is “when the holder of a negotiable
instrument signs the same, otherwise than such as maker, for the purpose of negotiation, on the
back or face thereof or on a slip of paper annexed thereto, he is said to endorse the same and is
called the “endorser”. The person to whom the instrument is endorsed is called the “endorsee”.

The word “Endorsement” is said to have been derived from Latin “en” means “upon” and
“dorsum” meaning the “back”. Thus usually the endorsement is done on the back of the
instrument though it may be made on the face of it. Where no space is left on the instrument, the
endorsement may be made on a slip of paper attached to it which is called “Allonge”.

Essentials of a valid endorsement:

An endorsement in order to operate as a mode of negotiation must comply with the followings:
i. It must be written on the instrument itself and be signed by the endorser. The simple
signature of the endorser, without additional words, is sufficient. An endorsement written
on an allonge is deemed to be written on the instrument itself.
ii. The endorsement must be of the entire instrument. Partial endorsement is not valid.
iii. Where a negotiable instrument is payable to more payees or endorsees who are not
partners, all must endorse unless the one endorsing has the authority to endorse for
others.

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iv. Wherein a negotiable instrument payable to order, the payee or endorsee is wrongly
designated, or his name is mis-spelt, he should sign the instrument in the same manner as
given in the instrument. Though, he may add, if he thinks fit, his proper signature.
v. Where there are two or more endorsements on an instrument, each endorsement is
deemed to have been made in the order in which it appears on the instrument, until
contrary is proved.
vi. An endorsement may be made in blank or special. It may also be restrictive.

Types of Endorsements:
According to NI Act, endorsement may take any of the following forms:
i. Endorsement in Blank or General Endorsement:
As per Section – 16 of NI Act when the endorser signs his name only, the endorsement is said to
be “Blank Endorsement”. That is the endorsee does not specify an endorsee. An instrument so
endorsed becomes payable to the bearer thereof even though originally payable to order
(Section- 54).
ii. Endorsement in Full or Special Endorsement:
As per Section – 16 of NI Act when the endorser signs his name and adds direction to pay a
certain person or his order, the endorsement is said to be “Full Endorsement”. That is the
endorsee specifies an endorsee. The holder of an instrument endorsed in blank can convert the
blank endorsement into an endorsement in full by simply writing the name of any person in the
space above the endorser’s signature.
iii. Restrictive Endorsement:
An endorsement is restrictive when it prohibits further negotiation of a negotiable instrument.
Section – 50 of NI Act states: “The endorsement may, by express words, restricts or exclude the
right to negotiate or may constitute the endorsee an agent to endorse the instrument or to receive
its contents for the endorser or for some other specified person. For example- if a cheque is
endorsed as “Pay to X only”, it cannot be negotiated.
iv. Partial Endorsement:
If only a part of the amount of the instrument is endorsed, it is a case of partial endorsement.
According to Section- 56 of NI Act “ No writing on a negotiable instrument is valid for the
purpose of negotiability, if such a writing purports to transfer only a part of the amount
appearing to be due on the instrument. Thus partial endorsement is invalid.
v. Conditional Endorsement:
This is not a common form of endorsement. It may take many forms. It may either limit the
liability of the endorser or create some liability on the endorsee to receive payment of the
instrument. That is, an endorsement may be preceded by certain condition, which should have
been fulfilled by the endorsee, for obtaining payment. For example, a cheque payable to Mr.
Haider may be endorsed as follows:
“Pay to Raihan if he reaches Rajshahi”--- Haider

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He will receive payment only if he reached Rajshahi.

a. Sans Recourse Endorsement: It limits the liability of the endorser to all
subsequent holder (s). Sans means without.
“ Pay to Rahim or order, Sans (without) Recourse to me”------ Haider

b. Sans Frais Endorsement: Sans Frais means without expense. Here the
endorser is not liable for any subsequent expenses like noting, protesting etc.
other than amount of the instrument.
“ Pay to Rahim or order, Sans Frais (without recourse) to me”------ Haider

c. Facultative Endorsement: It is an endorsement whereby the endorser

waives some of his rights on the isntrument.
“ Pay to Rahim or order. Notice of dishonor is waived”------ Haider

Endorsement by legal representative:

The legal representative of a deceased person cannot negotiate by delivery only a negotiable
instrument payable to order and endorsed by the deceased but not delivered. He will have to
reendorse the instrument and deliver it (Section- 57).

Liability of endorser:
a. Every endorser is liable to every subsequent holder, in case, the instrument is
dishonored.
b. The endorser is liable, only he is served with a notice of dishonor.
c. This liability of the endorser can be excluded by a separate contract to the contrary.
d. The endorser can get rid of his liability by making such endorsement like “Sans
Recourse”.

Implication:
The implication of the NI Act for the bankers is lying with knowing the Act, obeying it and
carrying out the banking activities accordingly with a view to minimize the risks in dealing with
negotiable instruments.

References:
i. The Negotiable Instrument Act – 1881
ii. Banking Law & Practice by SN Masheshwari
iii. BIBM reading materials.
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