Law 3

Law on
Negotiable
Instruments

COURSE OUTLINE
1.1 Negotiability of instrument
1.2 Functions and kinds of negotiable
instruments
1.3 Construction of ambiguous instrument
1.4 Parties and their liabilities
1.5 Indorsements
1.6 Accommodation party
1.7 Consideration
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COURSE OUTLINE
1.7 Consideration
1.8 Manner and consequence of transfer of
instruments
1.9 Dishonored instruments and its effects (including
clearing house rules and BP 22)
1.10 Requisites of holder in due course
1.11 Defense of parties
1.12 Forgery and its effects
1.13 Discharge of negotiable instruments and the
parties secondarily liable
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ACT NO. 2031

February 03, 1911

The law relating to

negotiable instruments is
contained in the Negotiable
Instruments Act. 2031

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What is Negotiable Instrument?

A piece of paper which entitles a person to a certain sum
of money and which is transferable from one to
another person by a delivery or by endorsement and
delivery.
Thus, the term negotiable instrument literally means a
written document which creates a right in favor of
somebody and is freely transferable by delivery.
The word instrument means a written document by
which a right is created in favor of some person. The
word negotiable means transferable by delivery
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Characteristics of negotiable
Instruments

Free transferability or easy negotiability

Negotiable instrument is freely
transferable.
Title of holder is free from all defects A
person who takes negotiable instrument
bona-fide and for value gets the instrument
free from all defects in the title. The holder
in due course is not affected by defective
title of the transferor or of any other party.
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Promissory Note :

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 the bearer of
the instrument.
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Specimen of a promissory note

Php. 5000/-

Mla November 25, 2008

Three moths after the date, I promise to pay Mr. X of

Mumbai or order a sum of Php Fifty Thousand for value
received.
To
Mr.
Address..

Sorsogon

Signature of Mr Y
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Parties to a Promissory Note

There are primarily two parties involved in a promissory note. They are:
(i) The Maker or Drawer: The person who makes the note and
promises to pay the amount stated therein.
.(ii) The Payee the person to whom the amount is payable.
In course of transfer of a promissory note by payee and others, the
parties involved may be
(a) The Endorser the person who endorses the note in favour of
another person.
(b) The Endorsee the person in whose favour the note is negotiated by
endorsement

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Bill of Exchange

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.
Eg - Mr. X purchases goods from Mr. Y for Php.
1000/Mr. Y buys goods from Mr. S for Php. 1000/Then Mr. Y may order Mr. X to pay Php. 1000/Mr. S.
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Parties to a Bill of Exchange

There are three parties involved in a bill of exchange
(i) The Drawer The person who makes the order for
making payment. In the above specimen
(ii)The Drawee The person to whom the order to pay is
made. He is generally a debtor of the drawer.
(iii)The Payee The person to whom the payment is to be
made..The drawer can also draw a bill in his own name
thereby he himself becomes the payee.
Here the words in the bill would be Pay to us or order.In a
bill where a time period is mentioned, just like the above
specimen, is called a Time Bill.
But a bill may be made payable on demand also. This is
called a Demand Bill.
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 Once the bill is drawn, it is sent to the Drawee for

acceptance who would
write accepted across the face of the bill, sign and
date it and return it to the
Drawer.
the Drawee is under no obligation to accept the bill
If it is accepted, the Drawee at this point becomes
the Acceptor
The acceptor promises at that point to pay the bill in
accordance with its terms
If the Drawee refuses to accept, the bill is said to be
dishonoured

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Section 1. Form of negotiable

instruments
. - An instrument to be negotiable must conform to the
following requirements:
(a) It must be in writing and signed by the maker or
drawer;
(b) Must contain an unconditional promise or order to
pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein with
reasonable certainty

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Essential characteristics of a
Promissory Note

Promissory note is a negotiable instrument

It must be in writing
It is a promise to pay money only.
It must be definite. The promise to pay
must be definite.
It must be unconditional. Undertaking to
pay must be unconditional.
It must be signed by the maker.
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 Maker of the promissory note must be a certain

person and the payee must also be certain.
Amount of the promissory note must be certain.
Other formalities like number, date,
consideration, place etc. are generally found in
the promissory notes but they are not essential
in law.

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Cheque
A cheque is a bill of exchange drawn on
a specified banker and expressed to be
payable otherwise than on demand.
The maker of a bill of exchange or Cheque
is called the Drawer"; the person thereby
directed to pay is called the "Drawee".
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Essential characteristics of a
Cheque

A cheque is a negotiable instrument.

It is a bill of exchange.
It is always drawn on a specified banker.
It is always payable on demand.
A cheque can be bearer, order or crossed

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 A cheque requires no acceptance in the ordinary

course of business as it is intended for immediate
payment.
In case of a cheque, a drawee is always a
specified bank, a drawer is a person who draws a
cheque and who has an account in the bank ad
payee is a person to whom the amount of cheque
is made payable.

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Negotiation
It is a process of transferring the
ownership, right, title, interest of a person
in a negotiable instrument to another
person so as to give a good title to the
transferee and make a transferee a holder of
such instrument.

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Negotiation does not mean a simple transfer.

Simple transfer may not necessarily involve
the transfer of property in the negotiable
instrument but negotiation implies the transfer
of property or ownership.
Eg -X hands over a cheque to Mr. Y here Mr.
X has negotiates the instrument.
But if he hands over a cheque to Mr. Y asking
him to keep the same in his safe, the cheque is
not negotiated to Mr. Y, Mr. Y does not
become its holder but only a bailee.
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Essentials of negotiation

There must be transfer of a negotiable

instrument to another person.
As a result of such transfer, the transferee
must become the holder of the instrument.

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Modes of negotiation:

Negotiation by delivery The negotiable

Instrument is transferred by delivery, actual or
constructive. It is physical act of delivering the
instrument or handing over the delivery, actual
possession of the instrument is not passed.
Negotiation by endorsement and delivery The
negotiable Instrument payable to order is
negotiable by the holder by endorsement and
delivery thereof.
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Endorsement
Literal meaning of the term endorsement is
writing on an instrument.
Endorser - The person who signs on the back
or on the face of the instrument or on the
slip is an endorser.
Endorsee - The person to whom the
instrument is endorsed is called the
endorsee.
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Types of Endorsement

General or blank endorsement - Endorser

signs his name either on the back or face
of the instrument.
Full or special endorsement - It specifies
the name of the person to whom or to
whose order the payment must be made.

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 Partial endorsement Endorsement is made

for remaining balance of payment.
Conditional endorsement The liability of
the endorser is limited or negative.

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Dishonour of negotiable
instrument

Negotiable instruments, Promissory notes

and Cheques may be dishonored by non
payment
Bills of exchange may be dishonored by
non payment or by non-acceptance as they
require acceptance from drawees.

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THE END
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