Negotiable Instruments Act, Section 13

Negotiable Instruments Act, Section 13

Section 13 of the Negotiable Instruments Act, 1881 defines the term “negotiable instrument” and clarifies its essential characteristics. 

This provision is fundamental because it explains which instruments are legally recognized as negotiable and how they may be transferred.

1. Meaning of Negotiable Instrument (Section 13(1))

Section 13(1) states that a negotiable instrument means a promissory note, bill of exchange, or cheque that is payable either to order or to bearer.

This means that not every written payment instrument qualifies as negotiable. Only the above three instruments, when made payable in the prescribed manner, fall within the statutory definition.

2. Essential Features of a Negotiable Instrument

For an instrument to qualify under Section 13, it must be one of the three specified instruments, be payable either to order or to bearer, and be transferable in accordance with the law.

The concept of negotiability means that the instrument can be freely transferred from one person to another, thereby passing the right to receive payment.

i) Instrument Payable to Order

An instrument is said to be payable to order when it is expressly stated to be “payable to order” or is made payable to a specified person. 

However, it must not contain any words prohibiting transfer or indicate an intention that it shall not be transferable.

Even if the words “to order” are not expressly stated, an instrument payable to a specific person is treated as payable to order. 

However, if it contains phrases such as “not transferable” or “not negotiable,” it may lose its negotiable character. 

The transfer of an order instrument requires endorsement and delivery.

If a cheque is payable to “Rohit Sharma,” and there is no restriction on transfer, it is considered payable to order.

ii) Instrument Payable to Bearer

An instrument is payable to bearer when it is expressly stated to be “payable to bearer” or when the only endorsement or the last endorsement on it is in blank. 

In such cases, the instrument is transferable by mere delivery without the need for further endorsement.

A bearer instrument can be transferred merely by delivery, and no endorsement is required once it becomes payable to bearer. 

The holder of such an instrument is entitled to receive payment upon presentation.

For example, if a cheque states “Pay to bearer,” anyone holding it may present it for payment, and if a cheque originally payable to order is endorsed in blank, it becomes payable to bearer.

iii) Payable to a Specified Person

Where an instrument is expressed to be payable to the order of a specified person but contains wording such as “not to him or his order,” it is nevertheless payable to him or his order at his option. 

Even if restrictive language is used, the payee retains the right to treat the instrument as payable to order, and the law thereby protects its negotiability. 

This ensures that technical wording does not defeat the negotiable character of the instrument.