The negotiable instruments are simply transferable from person to person and the ownership of the property in the instrument may be passed on. A negotiable instrument confers absolute and good title on the transferee, who takes it in good faith, for value and without notice of the fact that the transferor had defective title thereto. The holder in due course, possesses the right to sue upon the instrument in his own name. Thus, he can recover the amount of the instrument from the party liable to pay thereon.

Types of Negotiable Instruments:

Though the negotiable instruments possess the above mentioned features, the types of negotiable instruments fall under two categories. These are explained below.

(i) Negotiable Instruments by Statute.

As already stated the Negotiable Instruments Act states three instruments—cheque, bill of exchange and promissory notes—as negotiable instruments. They are, therefore, called negotiable instruments by statute.

(ii) Negotiable Instruments by Custom or Usage.

Some other instruments have acquired the character of negotiability by custom or usage of trade. Section 137 of the Transfer of Property Act, 1882 also recognized that an instrument may be negotiable by law or custom. Thus in India, Government promissory notes, shah jog hundis, delivery orders and railway receipts have been held to be negotiable by usage or custom of the trade.

Exceptional Cases of Negotiable Instruments: Generally the negotiable instruments possess all the essential features discussed above. But sometimes the drawer or the holder may take away the essential characteristic of negotiability and thus the instrument ceases to be a transferable or negotiable instrument.

Examples : (i) if a cheque is payable to a specified person only and not to his order or the bearer, it cannot be transferred to any other person and hence it loses its negotiability,

(ii) if a cheque is crossed ‘Not Negotiable’ it can be transferred but without conferring on the transferee absolute and good title in all cases. The transferee of such a cheque will stand at par with the transferee of any other commodity and shall not possess title better than that of his transferor.