Inchoate instrument

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Inchoate instrument is "an incomplete or blank negotiable instrument properly stamped and signed" [1]. Another definition says that it is "an unrecorded instrument that must, by law, be recorded to serve as an effective notice to third parties" [2]. This instrument is written in part and signed by the draftsman or producer and acceptor. If, for example, a check is involved, data such as the amount / date of receipt / recipient are empty [3].

Inchoate instrument is not a negotiable instrument. It can only happen after completing the amount on it. Also, only after filling the amount, the owner can sue [4].

Types of inchoate instruments

In order for an inchoate instrument to be legally binding, the following conditions must be met:

  • Offer: One party must make an offer, which is an expression of an intent to enter into a contract, that contains all the relevant and necessary details.
  • Acceptance: The offer must be accepted by the other party, either explicitly or implicitly.
  • Consideration: There must be consideration, which is an exchange of something of value, between both parties.
  • Capacity: Both parties must be capable of entering into a contract, meaning they must have the legal capacity and be of sound mind.
  • Legality: The contract must be legal and not violate any laws or regulations.

Example of Inchoate instrument

A promissory note is an example of an inchoate instrument. It is a document that outlines one party's promise to pay another party a certain amount of money by a certain date. It is an incomplete document, as it is not legally binding until the promise is fulfilled and the money is paid.

When to use Inchoate instrument

It is important to use an inchoate instrument when entering into a contract. An inchoate instrument is useful for setting the terms for the contract, such as the party’s rights and obligations, the price, and any other details. This document can also be used to note any potential changes to the contract before it is finalized.

In addition, an inchoate instrument can help protect the parties involved in the contract. It serves as evidence of the intent of the parties to enter into a contract, and can be used in the event of a dispute.

Features and effects of the inchoate instrument

Going further along with Act 20, we can list the features and effects of the new instrument. From this act we distinguish features such as [5]:

  • Signed by one person and delivered to another
  • It is a paper containing a stamp, in accordance with the law of the Negotiable Instruments Act
  • It is in a completely empty or partially empty form
  • The holder of this incomplete instrument is entitled to fill in the fields for any amount, which, however, may not exceed the amount covered by the seal on the instrument.

In turn, the inchoate instrument effects will be [6]:

  • Responsibility for a new instrument rests with the person signing the instrument
  • However, this responsibility is only temporary and applies to having it in a timely manner, because the person can recover the amount from the person who provides it.

Principles related to the inchoate instrument

The following rules are outlined below [7]:

  1. When filling in the blank or filling an incomplete instrument, the responsibility of the person signing and delivering the instrument is created.
  2. The principle of estoppel applies here.
  3. The person holding the instrument must complete it in due time.
  4. If it is not delivered, the signer will not be responsible for the person who owns it.
  5. The signer can not give up his responsibility under any circumstances or under any pretext to ask the holder for a smaller amount for a complex instrument.
  6. If any instrument does not require stamps, it is not subject to the above rules.

Advantages of Inchoate instrument

Inchoate instruments have several advantages, including:

  • Flexibility: Inchoate instruments provide flexibility for parties to negotiate terms and conditions and make changes as needed.
  • Speed: Inchoate instruments can be drafted quickly and can be formed without a lengthy process.
  • Cost: Inchoate instruments can be more cost-efficient than creating a fully-formed contract, as they can be used as a placeholder until both parties are ready to enter into a legally binding agreement.

Limitations of Inchoate instrument

Inchoate instruments have certain limitations, including:

  • Ambiguity: Inchoate instruments can be ambiguous, which can lead to confusion and disputes between parties.
  • Lack of Formalities: Since inchoate instruments do not have to adhere to any formalities, parties may not be aware of the full extent of their obligations under the contract.
  • Unenforceability: Inchoate instruments are not legally enforceable until all conditions are met and the contract is completed, meaning parties may not be able to seek remedies if the other party fails to fulfill their obligations.

Other approaches related to Inchoate instrument

In addition to the conditions outlined above, there are other approaches related to inchoate instruments that can be implemented to ensure a legally binding agreement.

  • Mutual Assent: Both parties must have mutual assent, meaning that they must both agree to the terms of the contract and not be under any duress or coercion.
  • Formalities: There must be certain formalities met, such as having a written agreement or having the agreement properly witnessed.
  • Legitimate Purpose: The contract must have a legitimate purpose and not be for an illegal or immoral purpose.
  • Adequate Disclosure: Both parties must have adequate disclosure of any relevant information that may affect their decision to enter into the contract.

In summary, in addition to the conditions outlined for an inchoate instrument to be legally binding, there must be mutual assent, certain formalities met, a legitimate purpose, and adequate disclosure of any relevant information.

Footnotes

  1. R.S.N. Pillai 2013, pg. 340
  2. P.M. Rao 2013, pg. 469
  3. P.M. Rao 2013, pg. 320
  4. T. Sheth 2012, pg. 350
  5. P.M. Rao 2013, pg. 320
  6. P.M. Rao 2013, pg. 320
  7. R.S.N. Pillai 2013, pg. 340-341


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References

Author: Angelika Guzik