NEGOTIABLE INSTRUMENT

Negotiable means transferable by delivery, while instrument means a written document,

which creates a right in favour of some person. So, literally, negotiable instrument means
a written document transferable by delivery.

The law relating to negotiable instrument is contained in the Negotiable Instrument Act of
1881. It deals with three kinds of negotiable instruments, namely, promissory note, bill of
exchange and cheque. Section 13 (a) of the Negotiable Instrument Act of 1881 provides that
Negotiable Instrument means a promissory note, bill of exchange or cheque payable either to order
or to bearer.

The term payable to order means payable to a particular person or his order, e.g. (a) pay to A
or order, (b) pay to order of A, (c) pay A, B or order etc. On the other hand, the term payable
to bearer means payable to any person whosoever bears it. e.g. (a) pay to A or bearer, or (c)
pay to A, B or bearer etc.

PROMISSORY NOTE

Section 4 of the Negotiable Instrument Act 1881 provides that A promissory note is an
instrument in writing (not being a bank note or a currency note) containing an unconditional
undertaking signed by the maker, to pay a certain sum of money only to, or to the order of a
certain person or to the bearer of the instrument.
BILL OF EXCHANGE

Section 5 of the Negotiable Instrument Act 1881 provides that A bill of exchange is an
instrument in writing containing an unconditional order signed by the maker directing a
certain person to pay a certain sum of money only to, or to the order of, a certain person or to
the bearer of the instrument.
CHEQUE

Section 6 of the Negotiable Instrument Act 1881 provides that A cheque is a bill of exchange
drawn on a specified banker and not expressed to be payable otherwise than on demand.

ELEMENTS OF NEGOTIABLE INSTRUMENTS

a. An instrument must be in writing

No particular form of words is required for its validity. The only requirement is that it must
be in writing.

b. An instrument must contain a clear promise or order

An instrument must contain a clear promise to pay in the case of a promissory note or an
order to pay in the case of a bill of exchange or cheque.

It is not always necessary that the word promise should be used in the case of a promissory
note. For example, I acknowledge myself to be indebted to B in Tk. 1000 to be paid on

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demand for value received. This is a valid promissory note because the phrase payable on
demand necessarily implies a promise to pay at once. But, I am liable to pay B Taka 1000
or I have taken from B Tk. 1000 and I am accountable to him for the same with interests,
these two are not promissory notes, as there is no promise or undertaking to pay. These are
mere acknowledgements of debts.

c. Promise or order, must be unconditional

The promise or order to pay must not depend upon the happening of some uncertain event. It
must be payable absolutely. Although the uncertain event upon which the note is payable
happens, the happening of the event does not cure the defect. The rule is once void, always
void. For instance, I promise to pay when able, or when convenient, or as soon as possible, or
after Bs marriage with C, or on As death provided that he leaves me sufficient fund, etc. are
conditional. But a promise to pay after a specified time or on the happening of an event which
must happen although the time of happening may be uncertain (Section 5, paragraph 2), is not
conditional, e.g. I promise to pay B Tk. 1000 seven days after Cs death is not conditional;
since C is certain to die, though the exact time of his death is uncertain.

d. An instrument must be payable at a time which is certain to arrive

It does not mean that the instrument must specify a fixed date for payment. The instrument
may be payable at a fixed future time or at a determinable future time.

e. An instrument must call for payment in the legal tender of Bangladesh.

For instance, I promise to pay B US $ 300, is not a valid note under the Negotiable
Instrument Act, 1881.

f. An instrument must call for payment for a certain sum of money

The amount must not be capable of contingent additions or subtractions, e.g. I promise to pay
B Tk. 1000 and all other sums which shall become due to him or all fines according to the
rules, is not a valid note, since the exact amount to be paid is uncertain.

g. The maker and the drawee must be certain

In the case of a note, the maker, and in the case of a bill or cheque, the drawee must be named
or described with reasonable certainty. This enables the holder to know to whom he must go
to obtain payment.

h. An instrument must contain the signature of maker or drawer

In the case of a note, the maker, and in the case of a bill or cheque, the drawer must sign the
instrument. If they are illiterate the thumb mark is required.

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CARACTERISTICS OF NEGOTIABLE INSTRUMENTS

a. Easy Negotiability

Negotiable instruments are transferred without any formality. It passes from one person to
another either by endorsement and delivery, in the case it is payable to order or by mere
delivery, in the case it is payable to bearer.

b. Transferee can sue in his own name without giving notice to the debtor

A negotiable instrument represents a debt, i.e. an actionable claim (meaning, a right, which
can be enforced by an action in court). It implies the right of a creditor to recover the debt
himself or he can transfer his right to another person. In the case of dishonor, the transferee of
a negotiable instrument can sue in his own name, without giving notice to the debtor of the
fact that he has become the holder of the instrument.

c. Better title to a holder in due course :

The maxim nemo dat quad non habet means that no one can give what he has not.
Generally, a transferee takes property subject to prior equities and is affected by any defect of
title of his transferor A bona fide transferee of a negotiable instrument for value, technically
called a holder in due course, gets a better title than that of the transferor, and the defenses on
the part of a person liable on a negotiable instrument that it has been lost, or obtained from
him by means of an offence of fraud or unlawful consideration, cannot be pleaded against a
holder in due course (Section 58). For instance, X obtains an instrument by fraud. He is not a
holder, and as such can not sue on it. X transfers it to Y under circumstances which makes Y a
holder in due course, e.g. a bearer check was transferred to Y, who for consideration, accepted
it without having sufficient cause to believe that any defect existed in the title of X. Y can
recover the amount from the drawee. If payment is refused, Y can sue the drawee. The
drawee can take, as against X, the defense of fraud, but not against Y. Thus the general
principle of law of transfer that nobody can transfer a better title than that of his own, does
not apply to negotiable instruments.

Further, a holder in due course serves as a channel to protect all subsequent holders. Once the
instrument passes through the hands of a holder in due course, it is purged of all defects, and
a subsequent holder takes it free from all defects, unless he himself was party to the fraud
(Section 53). It is important to note that a forged instrument, even if it passes through the
hands of a holder in due course, cannot be cured of its defect, because in this case there is no
defect of title, but there is a complete absence of title.

d. Presumption applicable to all negotiable instruments under Section 118 and 119

1. Every instrument was made, drawn accepted, indorsed or transferred for consideration.
2. Every instrument bearing a date was made or drawn on such date.
3. Every bill of exchange was accepted within a reasonable time after its date and before its
maturity.
4. Every transfer of instrument was made before maturity.
5. The endorsements appearing upon an instrument were made in the order in which they
appear thereon.
6. A lost or destroyed instrument was duly stamped and the stamp was duly cancelled.
7. The holder of an instrument is a holder in due course.

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DISTINCTIONS BETWEEN NOTE AND BILL

a. Promise or order
A note contains an unconditional promise by the maker to pay the payee. While, a bill
contains an unconditional order of the drawer to the drawee to pay the payee.
b. Number of parties
A note has two parties, the maker and the payee. Whereas, a bill has three parties, the drawer,
the drawee and the payee.
c. Whether maker, drawer can be payee?
In the case of a note, the maker cannot be the payee, since the same person cannot be both the
promisor and the promisee at the same time, while, in the case of a bill, the drawer can be the
payee, e.g. pay to me or order.
d. Position of payee
In the case of a note, the payee has immediate relation with the maker. Whereas, in the case
of a bill, the payee has immediate relation with the drawee.
e. Creation of liability
Making itself of a note creates liability of the maker. Whereas, acceptance of a bill creates
liability of the drawee.

f. Nature of liability
In the case of a note, the liability of the maker is primary and absolute. While, in the case of a
bill, the liability of the drawer is secondary and conditional. If the drawee does not accept the
bill, only then the liability of the drawer arises.

g. Whether operates as double secured

Note does not operate as a double secured instrument. Whereas, a bill operates as a double
secured instrument, since the drawee is primarily, and the drawer is secondarily responsible
for the bill.

h. Whether acceptance is required

A bill must be accepted by the drawee before payment, while a note does not require
acceptance.

i. Notice of dishonour
When acceptance of a bill is denied, notice of dishonour must be given to the drawer and to
the immediate indorsers. Whereas, a note does not require acceptance, and as such, the
question of notice of dishonour does not arise at all.

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DISTINCTIONS BETWEEN BILL OF EXCHANGE AND CHEQUE

a. Whether drawn on a bank

A cheque is always drawn on a bank. While, a bill may be drawn on anyone, including a
bank.

b. Whether payable on demand

A cheque must be drawn payable on demand. Whereas, a bill drawn payable on demand is
absolutely void.

c. Whether acceptance is required

A bill must be accepted by the drawee before payment. While, a cheque does not require
acceptance, since it is intended for immediate payment.

d. Whether grace period is allowed

In the case of a bill payable after the expiry of a certain period, normally, a grace period of
three days is allowed in calculating the maturity date. A cheque is always payable on demand
and the question of grace period does not arise at all.

e. Whether any time limitation for payment

A bill remains in circulation so long it remains unpaid. A cheque becomes stale if it is not
presented within a reasonable time, normally six months.

f. Scope of activity

The scope of activity of a bill is wider than that of a cheque.

g. Special form

In the case of a bill, no special form is necessary. A cheque is always drawn on a paper
specially supplied by the bank.

h. Whether need to be stamped

A bill must be properly stamped. A cheque need not be stamped.

i. Whether countermanding is possible

A cheque can be countermanded by the drawer, but not a bill.

j. Whether crossing is possible

A cheque may be crossed, but not a bill;

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DISTINCTIONS BETWEEN NOTE AND CHEQUE
a. Promise or Order
A note contains an unconditional promise. While, a cheque contains an unconditional order.

b. Number of Parties
A note has two parties, maker and payee. Whereas, a cheque has three parties, drawer, drawee
and payee.
c. Whether any formality is required
In the case of a note, no formality is necessary, while a cheque is always drawn on paper
supplied by the banker.
d. Whether payable on demand
A note is payable on the expiry of a certain period or on demand. Whereas, a cheque is
always payable on demand.

e. Whether drawn on a Bank

A note can be drawn on any person, including a banker. While, a cheque is always drawn on a
specified banker.
f. Creation of Liability
In the case of a note making itself creates liability. Contractual relation between drawer and
drawee, i.e. banker creates liability.

KINDS OF CHEQUES

a. Open cheque
An open cheque is one which is payable in cash across the counter of the bank. Obviously,
such a cheque is exposed to great risk in the course of circulation, e.g. it may be stolen or
lost, and any person getting hold of it, can encash it, unless the drawer has already
countermanded the payment.
b. Crossed cheque
A crossed cheque is one which has two short parallel lines marked across its face. It is
payable only to another bank through which it is presented. Naturally, it will not be paid
across the counter. Crossed cheque affords great protection to the payee.

Section 123 defines general crossing:

.. ..

& Co Not Negotiable

.. . ..

Section 124 defines special crossing:

. .
Sonali Bank, Motijheel Branch Sonali Bank, Motijheel Bank, Not Negotiable
.. .
A cheque crossed specially will be paid when it is presented for collection by the bank named
between the parallel lines.

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Not negotiable

A cheque containing the words not negotiable loses its features of negotiability, i.e.
transferability free from defects and transferability by indorsement. It is like any goods. The
transferee will get the same rights as regards payment as the transferor (Section 130), but the
transferee will not get the rights of a holder in due course. So, the transferee takes it at his
own risk. The object of not negotiable crossing is to afford protection to the drawer or holder
against miscarriage or dishonesty in the course of transit.

Account payee or restrictive crossing

Restrictive crossing has been adopted by commercial and banking usage. The term account
payee only on a cheque is interpreted as a direction to the receiving or collecting banker to
credit the proceeds of the cheque only to the account of the payee. If the banker goes against
this order, i.e. if the collecting bank allows the proceeds of a cheque so crossed to be credited
to any other account, he will be guilty of negligence. Hence account payee only crossing is
practically not negotiable as the banker will collect it on behalf of no person, other than the
payee.

-------------------- -------------------- --------------------

A/C payee Mr. A/C payee only A. B. Bank A/C
Rahim only
-------------------- -------------------- --------------------
WHEN A BANKER MUST REFUSE PAYMENT OF A CHEQUE

a. When the drawer countermands payment, i.e. instructs the banker not to honour a cheque.
The effect of such a notice is the same as if no cheque has been issued.
b. When the banker receives notice of the drawers death, since such a notice determines
the authority of the banker to honour cheques issued by the drawer.
c. When the drawer becomes insolvent.
d. When the Court declares the drawer insolvent and the banker receives Courts order
attaching the money of the drawer in the custody of the banker.
e. When the banker receives notice of drawers insanity.
f. When the cheque is irregular ambiguous, or otherwise materially altered.
g. When the banker finds out that the holders title is defective.
h. When the banker receives notice of closing of account.

WHEN A BANKER MAY REFUSE PAYMENT OF A CHEQUE

a. When the banker has insufficient funds of the drawer with him.
b. When a cheque is of doubtful legality.
c. When a cheque is not duly presented, e.g. presented after banking hour.
d. (In the case of joint account) where the cheque has not been signed jointly.
e. Where a cheque has become stale, i.e. has not been presented within a reasonable period
from the date of payment. Such period is normally six months.

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DISTINCTIONS BETWEEN NOTE AND BILL

c. Promise or order
A note contains an unconditional promise by the maker to pay the payee. While, a bill
contains an unconditional order of the drawer to the drawee to pay the payee.
d. Number of parties
A note has two parties, the maker and the payee. Whereas, a bill has three parties, the drawer,
the drawee and the payee.
c. Whether maker, drawer can be payee?
In the case of a note, the maker cannot be the payee, since the same person cannot be both the
promisor and the promisee at the same time, while, in the case of a bill, the drawer can be the
payee, e.g. pay to me or order.
j. Position of payee
In the case of a note, the payee has immediate relation with the maker. Whereas, in the case
of a bill, the payee has immediate relation with the drawee.
k. Creation of liability
Making itself of a note creates liability of the maker. Whereas, acceptance of a bill creates
liability of the drawee.

l. Nature of liability
In the case of a note, the liability of the maker is primary and absolute. While, in the case of a
bill, the liability of the drawer is secondary and conditional. If the drawee does not accept the
bill, only then the liability of the drawer arises.

m. Whether operates as double secured

Note does not operate as a double secured instrument. Whereas, a bill operates as a double
secured instrument, since the drawee is primarily, and the drawer is secondarily responsible
for the bill.

n. Whether acceptance is required

A bill must be accepted by the drawee before payment, while a note does not require
acceptance.

o. Notice of dishonour
When acceptance of a bill is denied, notice of dishonour must be given to the drawer and to
the immediate indorsers. Whereas, a note does not require acceptance, and as such, the
question of notice of dishonour does not arise at all.

8
DISTINCTIONS BETWEEN BILL OF EXCHANGE AND CHEQUE

k. Whether drawn on a bank

A cheque is always drawn on a bank. While, a bill may be drawn on anyone, including a
bank.

l. Whether payable on demand

A cheque must be drawn payable on demand. Whereas, a bill drawn payable on demand is
absolutely void.

m. Whether acceptance is required

A bill must be accepted by the drawee before payment. While, a cheque does not require
acceptance, since it is intended for immediate payment.

n. Whether grace period is allowed

In the case of a bill payable after the expiry of a certain period, normally, a grace period of
three days is allowed in calculating the maturity date. A cheque is always payable on demand
and the question of grace period does not arise at all.

o. Whether any time limitation for payment

A bill remains in circulation so long it remains unpaid. A cheque becomes stale if it is not
presented within a reasonable time, normally six months.

p. Scope of activity

The scope of activity of a bill is wider than that of a cheque.

q. Special form

In the case of a bill, no special form is necessary. A cheque is always drawn on a paper
specially supplied by the bank.

r. Whether need to be stamped

A bill must be properly stamped. A cheque need not be stamped.

s. Whether countermanding is possible

A cheque can be countermanded by the drawer, but not a bill.

t. Whether crossing is possible

A cheque may be crossed, but not a bill;

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DISTINCTIONS BETWEEN NOTE AND CHEQUE
g. Promise or Order
A note contains an unconditional promise. While, a cheque contains an unconditional order.

h. Number of Parties
A note has two parties, maker and payee. Whereas, a cheque has three parties, drawer, drawee
and payee.
i. Whether any formality is required
In the case of a note, no formality is necessary, while a cheque is always drawn on paper
supplied by the banker.
j. Whether payable on demand
A note is payable on the expiry of a certain period or on demand. Whereas, a cheque is
always payable on demand.

k. Whether drawn on a Bank

A note can be drawn on any person, including a banker. While, a cheque is always drawn on a
specified banker.
l. Creation of Liability
In the case of a note making itself creates liability. Contractual relation between drawer and
drawee, i.e. banker creates liability.

KINDS OF CHEQUES

c. Open cheque
An open cheque is one which is payable in cash across the counter of the bank. Obviously,
such a cheque is exposed to great risk in the course of circulation, e.g. it may be stolen or
lost, and any person getting hold of it, can encash it, unless the drawer has already
countermanded the payment.
d. Crossed cheque
A crossed cheque is one which has two short parallel lines marked across its face. It is
payable only to another bank through which it is presented. Naturally, it will not be paid
across the counter. Crossed cheque affords great protection to the payee.

Section 123 defines general crossing:

.. ..

& Co Not Negotiable

.. . ..

Section 124 defines special crossing:

. .
Sonali Bank, Motijheel Branch Sonali Bank, Motijheel Bank, Not Negotiable
.. .
A cheque crossed specially will be paid when it is presented for collection by the bank named
between the parallel lines.

10
Not negotiable

A cheque containing the words not negotiable loses its features of negotiability, i.e.
transferability free from defects and transferability by indorsement. It is like any goods. The
transferee will get the same rights as regards payment as the transferor (Section 130), but the
transferee will not get the rights of a holder in due course. So, the transferee takes it at his
own risk. The object of not negotiable crossing is to afford protection to the drawer or holder
against miscarriage or dishonesty in the course of transit.

Account payee or restrictive crossing

Restrictive crossing has been adopted by commercial and banking usage. The term account
payee only on a cheque is interpreted as a direction to the receiving or collecting banker to
credit the proceeds of the cheque only to the account of the payee. If the banker goes against
this order, i.e. if the collecting bank allows the proceeds of a cheque so crossed to be credited
to any other account, he will be guilty of negligence. Hence account payee only crossing is
practically not negotiable as the banker will collect it on behalf of no person, other than the
payee.

-------------------- -------------------- --------------------

A/C payee Mr. A/C payee only A. B. Bank A/C
Rahim only
-------------------- -------------------- --------------------
WHEN A BANKER MUST REFUSE PAYMENT OF A CHEQUE

i. When the drawer countermands payment, i.e. instructs the banker not to honour a cheque.
The effect of such a notice is the same as if no cheque has been issued.
j. When the banker receives notice of the drawers death, since such a notice determines
the authority of the banker to honour cheques issued by the drawer.
k. When the drawer becomes insolvent.
l. When the Court declares the drawer insolvent and the banker receives Courts order
attaching the money of the drawer in the custody of the banker.
m. When the banker receives notice of drawers insanity.
n. When the cheque is irregular ambiguous, or otherwise materially altered.
o. When the banker finds out that the holders title is defective.
p. When the banker receives notice of closing of account.

WHEN A BANKER MAY REFUSE PAYMENT OF A CHEQUE

f. When the banker has insufficient funds of the drawer with him.
g. When a cheque is of doubtful legality.
h. When a cheque is not duly presented, e.g. presented after banking hour.
i. (In the case of joint account) where the cheque has not been signed jointly.
j. Where a cheque has become stale, i.e. has not been presented within a reasonable period
from the date of payment. Such period is normally six months.

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Negotiation back
Where an indorser negotiates an instrument and again becomes its holder, the instrument is
said to be negotiated back.

The holder by negotiation back, i.e. A cannot sue the intermediate indorsers, i.e. B, C and D,

a) because to make them liable would involve a circuitry of actions, he

having ultimately to sue himself. If A was allowed to sue D, D could sue C, C could
sue B and B could sue A and the law prohibits this circuitry of suits.
b) because the holder by negotiation back, being a prior party, is liable
to all the intermediate indorsers, i.e. to B, C and D.

This rule, i.e. the holder by negotiation back cannot sue intermediate indorsers, is an
exception to the general rule that the holder in due course may sue all prior parties.
Section 52, however, provides that where an indorser excludes his liability by sans recourse
indorsement and afterwards becomes the holder of the instrument, all intermediate indorsers
are liable to him and he is liable to none. In that case, A can sue and recover the amount from
D, C or B.

MATURITY OF NEGOTIABLE INSTRUMENT (SECTIN 22-25)

Maturity means the date on which the payment of an instrument falls due. An instrument
payable on demand or at sight, e.g. a cheque, becomes payable immediately on the date of its
execution, the question of its maturity does not arise at all. Its payment falls due at once on
the date of issue. The question of maturity, therefore, arises only in the case of a bill of
exchange or a promissory note which is expressed to be payable otherwise than on demand.

Section 22 of the Negotiable Instrument Act, 1881 provides that every promissory note or bill
of exchange expressed to be payable on a specified day, or at a certain period after date or
after sight or at a certain period after happening of an event which is certain to happen is at
maturity on the third day after the day on which it is expressed to be payable.

Time bill or note is as such entitled to three days of grace and matures or falls due on the last
day of the grace, and not on the date on which it is expressed to be payable. For example, a
bill dated 1st January 07 is made payable one month after date, i.e. 1st February07. The bill is
at maturity on. 1st February + 3 days grace = 4th February 07. Such bill must be presented for
payment on or after the last day of grace. Any presentment for payment earlier to the third
day of grace is invalid.
Where an instrument is made payable a stated number of months after date or after sight, or
after a certain event, it matures three days after the corresponding date of the month after the
stated number of months. The term month means Gregorian calendar month. For instance, a
bill dated 30th January 07 is made payable three months after date, i.e. 30 th April. The bill is at
maturity on, 30th April + 3 days grace = 3rd May 07.
Where the month in which the period would terminate has no corresponding date, the period
shall be held to terminate on the last day of such month. For instance, a bill dated 30 th

12
January 07 is made payable one month after date, i.e. 28 th February since that is the last day
of that month. The bill is at maturity on, 28th February + 3 days grace = 3rd March 07.
Where an instrument is payable a certain number of days after date or after sight, or after a
certain event, the maturity is calculated by excluding the days on which the instrument is
drawn or presented for acceptance or sight or on which the event happens. For instance, a bill
dated 1st March is made payable twenty days after date. The period of twenty days will be
counted from 2nd March and twenty days expires on 21st March. So the bill is at maturity on,
21st March + 3 days grace = 24th March.

Again, a bill dated 1st March 07 is made payable twenty days after sight. The bill is
presented for acceptance on 5th March. The period of twenty days will be counted from 6th
March and twenty days expires on 25th March. So the bill is at maturity on 25 th March + 3
days grace =28th March.

Where the date on which an instrument is at maturity is a public holiday, the instrument shall
be deemed to be due on the next preceding business day. The expression public holiday
includes Fridays and any other day declared by the government by the notification in the
official Gazette to be a public holiday. Thus where maturity of an instrument falls on 16 th
December, it shall be declared to be due on 15th December.

Where an instrument is payable by installments, three days are to be allowed on each

installment (Section-67).

CAPACITY TO MAKE, DRAW, ACCEPT, NEGOTIATE OR INDORSE AN INSTRUMENT

The capacity to make, draw, accept, negotiate or indorse an instrument depends on the
capacity to enter into contract. But a minor or a person of unsoundmind , though can not enter
into a contract, can make, draw, accept, negotiate or indorse an instrument, so as to bind all
parties except himself: (section-26)

But an insolvent cannot make, draw, accept, negotiate or indorse an instrument after
adjudication. An instrument executed by a person before his insolvency may be presented
after adjudication to the official assignee. While, an instrument executed after insolvency in
favour of the insolvent vest in the official assignee.

An agent can make, draw, accept, negotiate or indorse an instrument on behalf of the
principal, provided that he has authority to that effect. The agent must indicate that he is
signing as agent by using the words for and on behalf of.

The legal representatives, heirs or executor can make, draw, accept, negotiate or indorse an
instrument. He must indicate in the instrument that he is signing as legal representative, heir,
or executor.
LIABILITY OF THE PARTIES
a. Maker, acceptor or drawee
The maker of a note or drawee of a bill or cheque is primarily responsible for payment under
the instrument (Section-32)

b. Drawer

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The drawer is secondarily responsible for payment under the instrument, i.e. he is liable to
when the instrument has been dishonoured by the drawee (Section 30)

14