Hundis, and the Rest of the Negotiable Instruments Act

In one line

The Act saves the indigenous hundi from its own rules, and its last chapter tells you which country's law governs an instrument that crosses a border.

In the wording a student can write in an exam: section 1 of the Negotiable Instruments Act, 1881 provides that nothing in the Act affects the provisions of sections 24 and 25 of the Reserve Bank of India Act, 1934, and that nothing in Chapter XIII applies to any hundi or other instrument in an oriental language, and affects any local usage relating to any instrument in such a language, unless the instrument states that the local usage shall not apply; and Chapter XVI, sections 134 to 137, sets out the rules of international law governing foreign instruments.

The saving for hundis

Chapter 20 explained the historical position: India had an organised indigenous banking system long before any European bank, and the hundi was its instrument, used to move money between distant towns without moving cash.

When Parliament codified the law of negotiable instruments in 1881, it faced a choice. It could impose the English-derived rules on the hundi, abolishing the customary variations that had grown up in different trading communities, or it could leave the hundi to its own usages.

It chose to leave it, and section 1 records the choice. Nothing in the Act affects any local usage relating to any instrument in an oriental language, unless the instrument itself states that the local usage shall not apply.

So a hundi is governed by custom, and by the Act only where custom is silent or where the parties have expressly opted into the Act by so stating on the instrument.

Two consequences follow, and both are examinable.

The usage must be proved as a fact. A party relying on a hundi usage must establish it in evidence, as with any custom: that it is ancient, certain, reasonable and consistently observed.

And the parties may contract out of the custom into the Act, by stating on the instrument that the local usage shall not apply, which is the reverse of the ordinary position where statute displaces custom.

What a hundi is, and its kinds

A hundi is an indigenous bill of exchange, written in an Indian language, by which one person directs another to pay a sum to a named person or to bearer.

The kinds are worth knowing by name, because MU has asked for them and because the names carry their meaning.

Darshani hundi, payable at sight, so the equivalent of a demand bill.

Muddati hundi, also called miadi, payable after a fixed period, so the equivalent of a time bill.