Executive Summary

The Negotiable Instruments Act was passed in 1881. It is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. More specifically, it is a document contemplated by a contract, which (1) Warrants the payment of money, the promise of or order for conveyance of which is unconditional (2) Specifies or describes the payee, who is designated on and memorialized by the instrument and (3) Is capable of change through transfer by valid negotiation of the instrument The contracts of guarantee have special significance in the business of banking as a means to ensure safety of funds lent to the customers. An additional security (i.e. in addition to a charge over the tangible assets owned by the borrower) is sought by the banker in the
form of a guarantee given by a third party. This third person must command the confidence of the banker. In a contract of identity, the person who promises to make good the loss is called the indemnifier and the person whose loss is to be made good is called the indemnified. Further, a person may undertake to save the other from loss caused to him, by the conduct of a third person either at the request of the third person or without any request from such third person. In the first case there would be a contract of guarantee and in the latter case there would be a contract of indemnity and the third person (debtor) cannot be held responsible to the indemnifier as there is no privacy of contract between them. Indemnity holder is entitled to recover all damages which the promise to indemnity applies.

Background
The law relating to negotiable instruments in Bangladesh is contained in the Negotiable Instrument Act, 1881. This law was framed in British India and later adapted in Pakistan in the wake of partition of the sub-continent. Following the liberation of Bangladesh all the laws then in force including the Negotiable Instrument Act, 1881 were adapted in Bangladesh through an omnibus Presidential Order which, in the main, sought to replace the word Pakistan by Bangladesh in 1971 just as the former did by replacing the word by India in 1947. Although the good number of amendments have been made in the Act it continues to play an important part to dictate commercial transaction in Bangladesh especially the ones that involve a negotiable or even quasi-negotiable instrument. The provisions of the Act have been subject to innumerable scrutiny and interpretations at various forums and especially in the law of courts in the sub-continents for nearly 125 Years. Curiously most of the decisions quoted in the standard text Books pertain to the period before 1947 during the British regime. Cheques, bills of exchange, promissory notes etc. which can be transferred to third parties simply by transfer or endorsement called negotiable instruments. These instruments have gained prominence as the principal instruments for making payments, and discharging business obligations. A negotiable instrument is a transferable document that passes freely from hand to hand and forms an integral part of the modern business mechanism. In Bangladesh particularly, the legal decisions in respect of negotiable instruments is few and far between. It means that due to delay in the dispensation of justice and the hassles and the costs of litigation, the clients prefer to settle the disputes outside the court amicably. People often prefer settlement of disputes through physical violence than going to the court. It is evident from the fact although cheques issued in settlement of debts are quite often dishonored, mostly for want of funds; the payees hesitate to collect their dues through litigations.

Main Objective
The main object of the Negotiable Instruments Act is to legalize the system by which instruments contemplated by it could pass from hand to hand by negotiation like any other goods. The purpose of the Act was to present an orderly and authoritative statement of leading rules of law relating to the negotiable instruments. To achieve the objective the Act, the legislature thought it proper to make provision in the Act for conferring certain privileges to the mercantile instruments contemplated under it and provide special procedure in case the obligation under the instrument was discharged.

History
The history of the present Act is a long one. The Act was originally drafted in 1866 by the 3rd India Law Commission and introduced in December, 1867 in the Council and it was referred to a Select Committee. Objections were raised by the mercantile community to the numerous deviations from the English Law which it contained. The Bill had to be redrafted in 1877. After the lapse of a sufficient period for criticism by the Local Governments, the High Courts and the chambers of commerce, the Bill was revised by a Select Committee. In spite of this Bill could not reach the final stage. In 1880 by the Order of the Secretary of State, the Bill had to be referred to a new Law Commission. On the recommendation of the new Law Commission the Bill was re-drafted and again it was sent to a Select Committee which adopted most of the additions recommended by the new Law Commission. The draft thus prepared for the fourth time was introduced in the Council and was passed into law in 1881 being the Negotiable Instruments Act, 1881 (Act No.26 of 1881)

Definition of Negotiable Instruments:

The word negotiable means transferable by delivery, and the word instrument means a written document by which a right is created in favor of some person. Thus, the term negotiable instrument literally means a written document which creates a right in favor of somebody and is freely transferable by delivery. A negotiable instrument is 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. A document that promises payment to a specified person or the assignee; the payee (the person who receives the payment) must be named or otherwise indicated on the instrument. A check is considered a negotiable instrument. This type of instrument is a transferable, signed document that promises to pay the bearer a sum of money at a future date or on demand. Examples also include bills of exchange, promissory notes, drafts and certificates of deposit. A negotiable instrument is a written order or unconditional promise to pay a fixed sum of money on demand or at a certain time. A negotiable instrument can be transferred from one person to another. Once the instrument is transferred, the holder obtains full legal title to the instrument.

Characteristics of Negotiable Instruments

1. Free transferability or easy negotiability

Negotiable instrument is freely transferable from one person to another without any formality. The property (right of ownership) in these instruments passes by either endorsement & delivery (in case it is payable to order) or by delivery merely (in case it is payable to bearer) and no further evidence of transfer is needed.

2. 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.

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

A bill, note or a cheque represents a debt, i.e., an actionable claim and implies the right of the creditor to recover something from hid debtor The creditor can either recover this amount himself or can transfer his right to another person In case he transfers his right, the transferee of a negotiable instrument is entitled to sue on the instrument in his own name in case of dishonor, without giving notice to the debtor of the fact that he has become holder In case of transfer or assignment of an ordinary actionable claim (i.e., a book debt evidenced by an entry by the creditor in his account book, under the transfer of property act, notice to the debtor is necessary in order to make the transferee entitled to sue in his own name

4. Presumptions: Certain presumptions apply to all negotiable instruments. Section 118 and 119 lay down the following presumptions: (a) For consideration: that every negotiable instrument, was made, drawn, accepted, endorsed or transferred for consideration. (b) As to date: that every negotiable instrument bearing a date was made or drawn on such date. (c) As to time of acceptance: that every bill of exchange was accepted within a reasonable time after its date and before its maturity. (d) As to transfer: that every transfer of a negotiable instrument was made before its maturity (e) As to time of endorsements: that the endorsements appearing upon a negotiable instrument were made in the order in which they appear thereon. (f) As to stamps: that a lost promissory-note, bill of exchange or cheque was duly stamped. (g) As to a holder in due course: that every holder of a negotiable instrument is holder in due course (this presumption would not arise where it is proved that the holder has obtained the instrument from its lawful owner, or from any person in lawful custody thereof, by means of an offence, fraud or for unlawful consideration and in such a case the holder has to prove that he is a holder in due course (h) As to dishonor: that the instrument was dishonored, in case a suit upon a dishonored instrument is filed with the court and the fact of protest is proved

Promissory Note
Definition: According to Section 4, A promissory note is an instrument in writing (not being a banknote 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. Essentials of Promissory Note 1. It must be in writing: a) A promissory note has to be in writing b) An oral promise to pay does not become a promissory note c) The writing may be on any paper or book d) Illustrations: A signs the instruments in the following terms:
I promise to pay B or order 500 TK I acknowledge myself to be indebted to B in 1, 000 TK to be paid on

demand, for value received Both the above instruments are valid promissory notes. 2. It must contain a promise or undertaking to pay: There must be a promise or an undertaking to pay The undertaking to pay may be gathered either from express words or by necessary implication A mere acknowledgement of indebtedness is not a promissory note, although it is valid as an agreement and may be sued upon as such Illustrations: A signs the instruments in the following terms:

Mr. B I owe you 1,000 TK I am liable to pay to B 500 TK

The above instruments are not promissory notes as there is no undertaking or promise to pay. There is only an acknowledgement of indebtedness.

Where A signs the instrument in the following terms:

I acknowledge myself to be indebted to B in 1, 000 TK, to be paid on

demand, for value received, there is a valid promissory note 3. The promise to pay must be unconditional: A promissory note must contain an unconditional promise to pay The promise to pay must not depend upon the happening of some uncertain event, i.e., a contingency or the fulfillment of a condition Illustrations: A signs the instruments in the following terms:
I promise to pay B 500 TK seven days after my marriage with C I promise to pay B 500 TK as soon as I can

The above instruments are not valid promissory notes as the payment is made depending upon the happening of an uncertain event which may never happen and as a result the sum may never become payable

4. It must be signed by the maker: It is imperative that the promissory note should be duly authenticated by the signature of the maker Signature means the writing or otherwise affixing a persons name or a mark to represent his name, by himself or by his authority with the intention of authenticating a document

5. The maker must be a certain person: The instrument must itself indicate with certainty who is the person or are the persons engaging himself or themselves to pay Alternative promisors are not permitted in law because of the general rule that where liability lies no ambiguity must lie

6. The payee must be certain: Like the maker the payee of a pronote must also be certain on the face of the instrument

A note in favour of fictitious person is illegal and void A pronote mad epayable to the maker himself is a nullity, the reason being the same person is both the promisor and the promisee

7. The sum payable must be certain:

For a valid pro note it is also essential that the sum of money promised to be payable must be certain and definite The amount payable must not be capable of contingent additions or subtractions Illustrations: A signs the instruments in the following terms:
I promise to pay B 500 TK and all other sums which shall be due to him I promise to pay B 500 TK, first deducting there out any money which he may

owe me The above instruments are invalid as promissory notes because the exact amount to be paid by A is not certain

8. The amount payable must be in legal tender money of Bangladesh:

A document containing a promise to pay a certain amount of foreign money or to deliver a certain quantity of goods is not a pro note

Bill of exchange
Definition: Section 5 of the Negotiable Instruments Act defines a Bill of Exchange as follows: 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.

Illustration: Mr. X purchases goods from Mr. Y for 1000/- TK Mr. Y buys goods from Mr. S for 1000/- TK Then Mr. Y may order Mr. X to pay 1000/- TK Mr. S which will be nothing but a bill of exchange.

Essentials of a bill of exchange 1. It must be in writing 2. It must contain an order to pay. A mere request to pay on account, will not amount to an order 3. The order to pay must be unconditional 4. It must be signed by the drawer 5. The drawer, drawee and payee must be certain. A bill cannot be drawn on two or more drawees but may be made payable in the alternative to one of two or more payees 6. The sum payable must be certain 7. The bill must contain an order to pay money only
8. It must comply with the formalities as regards date, consideration, stamps, etc.

Difference between Bill of exchange and Promissory Note:

A bill of exchange differs from a promissory note on the following points: Promissory Note 1. It is promise to pay 2. There are only two parties the drawer, and the payee. 3. There is no necessity of acceptance 4. The maker is primarily liable 5. It is never drawn in sets 6. Protesting is not necessary after dishonor 7. The drawer of a bill of exchange stands in immediate relationship with the acceptor and not the payee 8. Can never be conditional
9. The maker cannot pay to himself

Bill of Exchange 1. It is an order to pay 2. There are three parties, the drawer, the drawee, and the payee 3. It must be accepted 4. The drawer is not primarily liable. 5. Foreign bills are specially drawn in sets 6. A foreign bill must be protested upon dishonor 7. The maker stands in immediate relationship with the payee 8. Bill of exchange can be accepted conditionally
9. The drawer and the payee may be one

person

Cheques
Cheque is a very common form of negotiable instrument. If one has a savings bank account or current account in a bank, he can issue a cheque in his own name or in favour of others, thereby directing the bank to pay the specified amount to the person named in the cheque. Therefore, a cheque may be regarded as a bill of exchange; the only difference is that the bank is always the drawee in case of a cheque. The Negotiable Instruments Act -1881 defines A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. Actually, a cheque is an order by the account holder of the bank directing his banker to pay on demand, the specified amount, to or to the order of the person named therein or to the bearer. (a specimen copy of a cheque) City bank KA 2125879 Payable at any branch in Date: Bangladesh 2549875 .. Or Bearer .. Tk.

Pay to............................... The Sum of Taka Name of The Account 210115894221 2126050

22524895

Signature 10

Features of a Cheque Let us look into some important features of a cheque. i. A cheque must be in writing and duly signed by the drawer.

ii. It contains an unconditional order.

iii. It is issued on a specified banker only.

iv. The amount specified is always certain and must be clearly mentioned both in figures and words.

v. The payee is always certain. vi. It is always payable on demand. vii. The cheque must bear a date otherwise it is invalid and shall not be honoured by the bank.

Different Types of Cheques

Broadly speaking, cheques are of four types. a) b) c) d) Open cheque, and Crossed cheque. Bearer cheque Order cheque

Open cheque: A cheque is called Open when it is possible to get cash over the counter at the bank. The holder of an open cheque can do the following: i. Receive its payment over the counter at the bank, ii. Deposit the cheque in his own account

iii. Pass it to some one else by signing on the back of a cheque. Crossed cheque: Since open cheque is subject to risk of theft, it is dangerous to issue such cheques. This risk can be avoided by issuing other types of cheque called Crossed cheque. The payment of such cheque is not made over the counter at the bank. It is only credited to the bank account of the payee. A cheque can be crossed by drawing two transverse parallel lines across the cheque, with or without the writing Account payee or Not Negotiable. Bearer cheque: A cheque which is payable to any person who presents it for payment at the bank counter is called Bearer cheque. A bearer cheque can be transferred by mere delivery and requires no endorsement. Order cheque: An order cheque is one which is payable to a particular person. In such a cheque the word bearer may be cut out or cancelled and the word order may be written. The payee can transfer an order cheque to someone else by signing his or her name on the back of it. There are some another categorization of cheques which is discussed below: Ante-dated cheques: Cheque in which the drawer mentions the date earlier to the date of presenting if for payment. For example, a cheque issued on 20th May 2003 may bear a date 5th May 2003. Stale Cheque: A cheque which is issued today must be presented before at bank for payment within a stipulated period. After expiry of that period, no payment will be made and it is then called stale cheque. Find out from your nearest bank about the validity period of a cheque. Mutilated Cheque: In case a cheque is torn into two or more pieces and presented for payment, such a cheque is called a mutilated cheque. The bank will not make payment against such a cheque without getting confirmation of the drawer. But if a cheque is torn at the corners and no material fact is erased or cancelled, the bank may make payment against such a cheque. Post-dated Cheque: Cheque on which drawer mentions a date which is subsequent to the date on which it is presented, is called post-dated cheque. For example, if a cheque presented on 8th May 2003 bears a date of 25th May 2003, it is a postdated cheque. The bank will make payment only on or after 25th May 2003. Similarities & Dissimilarities between Cheque and Bill of Exchange

Similarities
1. Both are governed by the same act i.e. negotiable instruments Act, 1881.

Dissimilarities
1. By definition : Under section 6 of the Negotiable Instruments Act cheque has been defined as A cheque is a bill of Exchange drawn on a specified Banker and not expressed to be payable otherwise than on demand. Section 5 of the Negotiable Instruments Act defines a bill of exchange in the following way 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. 2. By a cheque only a bank is ordered to pay money. By a bill of exchange any person (including bank) may be given an order to pay money. 3. In case of cheque acceptance is not at all necessary. Except in special cases the bill of exchange does not always require acceptance. 4. A cheque is always payable in demand. Bill of exchange may be payable on demand or it may be payable after a certain period of time. 5. In case of a cheque no grace period is allowed. In case of bill of exchange the acceptor of bill of exchange is allowed a grace period of three days after the maturity of the bill to make the payment. 6. The drawer of a cheque is discharged from his liability only if he suffers damage owing to delay in presenting the cheque for payment. The drawer of a bill of exchange is discharged from liability if the bill is not presented to the acceptor for payment at the due time. 7. If a cheque is dishonoured by a Bank then it is necessary to give a notice of dishonor to the drawer for making him liable for paying compensation to the payee. In a bill of exchange, notice of such dishonor is not required to be given. But in certain special cases it is necessary.

8. A cheque may be crossed. There is no system (provision) of crossing a bill of exchange. 9. In the case of a cheque the payment may be countermanded by the drawer. There is no system of countermanding of a bill of exchange. 10. Stamp is not necessary in the case of a cheque. In the case of a bill of Exchange stamp is required i.e. a bill of exchange must be stamped except in certain cases. Section 7 of Negotiable instruments Act 1881 Defines the following termos related to Cheques, Bill of Exchange and Negotiation: The maker of a bill of exchange or cheque is called the drawer; the person thereby directed to pay is called the drawee. When in the bill or in any endorsement thereon the name of any person is given in additional to the drawee to be resorted to in case of need, such person is called a drawee in case of need. After the drawee of a bill has signed his assent upon the bill, or, if there are more parts thereof than one, upon one of such parts, and delivered the same, or given notice of such signing to the holder or to some person on his behalf, he is called the acceptor. When a bill of exchange has been noted or protested for non-acceptance or for better security, and any person accepts it supra protest for honour of the drawer or of any one of the endorsers, such person is called an acceptor for honour. The person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid, is called the payee.

Holder
According to section 8 the Holder of a promissory note, bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. A person is called the holder of a negotiable instrument if the following conditions are satisfied: a. He must be entitled to the possession of the instrument in his own name and under a legal title. Actual possession of the instrument is not essential; the holder must have the legal right to possess the instrument in his own name. For example, a thief, or a finder on the road , or an indorse under a forged endorsement, although may be having the possession of the instrument, cannot be called its holder because he does not acquire the legal title thereto and hence is not entitled in his own name to the possession thereof.

b. He must be entitled to receive or recover the amount from the parties concerned in his own name. In order to be called a holder, besides being entitled to the possession of the instrument in his own name, the person must also have the right to receive or recover the amount of the instrument and give a valid discharge to the payer. It may, thus, be concluded that both of the above conditions must be satisfied by a person to be a holder.

Right of a holder The holder of a negotiable instrument has the following rights (Section 53A): An endorsement in blank may be converted by him into an endorsement in full. He is entitled to cross a cheque either generally or specially with the words Not negotiable. He can negotiate a cheque to a third person, if such negotiation is not prohibited by the direction given in the cheque. He can claim payment of the instrument and can sue in his own name on the instrument. A duplicate copy of a lost cheque may be obtained by a holder. Joint Holder Where in a bill there are several payees or endorsees, all of them are joint holders and none of them can alone negotiate or sue on it. Under section 45 of the Contract Act, all of them must join together to negotiate the instrument or sue on it. If one of them be dead, all the legal representatives of the deceased must join with the surviving payee or indorse to negotiate the instrument or sue on it. All the members of a joint family are holders of a note in the name of the joint family firm.

Holder in due course According to Section 9 of Negotiable Instruments Act 1881, the holder in due course means any person who for consideration became the possessor of a negotiable instrument if payable to bearer, or the payee or endorsee thereof if payable to order, before the amount mentioned in it became payable, and without sufficient cause to believe that any defect existed in the titled of the person from whom he derived his titled.

A person becomes a holder in due course of a negotiable instrument if the following conditions are satisfied: He must be entitled to the possession of the instrument in his own name and under a legal title and to recover the amount thereof from the parties liable thereto. The negotiable instrument must be regular and complete in all respects. Alterations, if any, must be confirmed by the drawee through his signature. Holder of an incomplete document cannot be its holder in due course. The instrument must have been obtained for valuable consideration, i.e., by paying its full value. A banker, who receives a cheque as a gift, will not be called holder in due course without consideration. The consideration must be legal and adequate. For example, if a cheque is given in respect of a debt incurred in gambling, the consideration for the cheque is unlawful. If the value of the of the consideration falls short of the amount of the instrument, the person will be deemed as holder in due course to the extent of the value of consideration. The instrument must have been obtained before the amount mentioned therein becomes payable. This condition is applicable to document payable otherwise than on demand and does not apply to a cheque which is always payable on demand. The holder in due course must obtain the instrument without having sufficient cause to believe that any effect existed in the title of the transferor. This is the most important condition to be satisfied. He must take the instrument without any negligence on his part. If there is something to arouse a suspicion and he take the negotiable instrument without making proper inquiries he cannot be said to be the holder in due course. Holder in due course for bearer instruments In the case of an instrument payable to bearer, holder in due course means any person who for consideration became its possessor before the amount mentioned in it becomes payable. Holder in due course for instruments payable to order In the case of an instrument payable to order, holder in due course means any person who become the payee or endorsee of the instrument before the amount mentioned in it became payable. Prerequisites for being holder in due course A person who claims to be holder in due course is required to prove: i. That he is a holder:

ii. iii. iv.

That he is a holder for consideration: Acquisition before maturity: That he has no knowledge of defective title:

The instrument was complete at the time of possession

Privileges of a holder in due course A holder in due course enjoys the following privileges under the negotiable instruments act: i. He gets a better title that that of the transferor: This is the greatest privilege of a holder in due course. He always possesses better title than that of his transferor. For example, if P transfers the instrument (being a bearer one) to R under circumstances (for value in good faith) which make R a holder in due course, r can sue on the instrument. The party liable to pay can take, as against P, the defense of theft or fraud, but as against R he will not be allowed to take such a defense. ii. Liability of prior parties to holder in due course: According to section 36 Every prior party to a negotiable instrument , i.e., its maker or drawee, acceptor or endorser, is liable thereon to a holder in due course until the instrument is duly satisfied. It means that a holder in due course can recover the amount of the negotiable instrument, from any or all of the previous parties to the instrument. iii. Right of the holder in due course in case of inchoate instrument: If a negotiable instrument was originally inchoate (incomplete) instrument and a subsequent transferor completed the instrument for a sum greater than what was the intention of the maker, the right of a holder in due course to recover the money of the instrument is not at all affected. iv. Right in case of fictitious bills: If a bill of exchange is drawn on behalf of a fictitious person and is payable to his order, the acceptor is not relieved of his liability to holder in due course because of such fictitious name. But it is essential that the holder in course proves that the document bears the endorsement with signature in the same hand as that of the drawer and pupating to be made by the drawer.

Example: X draws a bill on Y but signs in the fictitious name of Z. It is payable to the order of Z and is duly accepted by Y. X endorses it to A who becomes the holder in due course. Y, the acceptor of the bill, cannot deny his liability on the bill to the holder in due course on the ground that it was drawn on behalf of a fictitious person Z. It is, however, essential that the signature of Z as drawer, and as endorser must be in the same handwriting. v. Right in case the instrument is obtained by unlawful means or unlawful consideration: A person liable on a negotiable instrument cannot defend himself against a holder in due course on the ground that the instrument was lost or obtained from him by means of an offence or for an unlawful consideration (section 58). vi. Estoppels against denying original validity of the instrument: Section 120 provides that no maker of a promissory note and no drawer of bill of exchange or cheque and no acceptor of a bill of exchange for the honor of the drawer shall in a suit thereon by a holder in due course be permitted to deny the validity of the instrument as originally made or drawn. vii. Estoppels against denying capacity of payee to endorse: No maker of a promissory note and no acceptor of a bill of exchange payable to order shall, in a suit thereon by a holder in due course, be permitted to deny the payees capacity at the date of note or bill, to endorse the same (section 121). By virtue of the section 121, a holder in due course can claim payment in his own name despite the payees incapacity (being an insolvent) to endorse the instrument. viii. Estoppel against denying signature or capacity of prior party: No endorser of a negotiable instrument shall, in a suit thereon by a subsequent holder, be permitted to deny the signature or capacity of any prior party to the instrument (Section122).

Difference between holder and holder in due course

The difference between holder and holder in due course are: 1. Meaning: Holder means any person entitled in his own name to the possession of the negotiable instrument and to recover or receive the amount due thereon from the parties thereto. A holder in due course on the other hand, means a holder who takes the instrument in good faith for consideration before it is overdue and without any notice of defect in the title of the person who transferred it to him. 2. Consideration:

A person who claims to be a holder in due course must show that he acquired the instrument for consideration. However consideration may not pass from a holder of the instrument.

3. Title: Holder of negotiable instrument does not acquire a better title than that of the person from whom he acquired the instrument. Thus a holder does not acquire a good title if the title of any of the prior parties is defective. But a holder in due course gets a good title even though there was a defect in the title of any prior parties to the instrument.

4. Liability: A holder in due course can sue all prior parties to a negotiable instrument until the instrument is duly satisfied. Whereas a holder of the instrument can enforce it against the person who has signed it and also against the transferor from whom he obtained it. 5. Maturity: A person will be a holder in due course only if he acquires the instrument before the amount mentioned in it become payable. But a holder may acquire the instrument even after it has become due for payment.

Endorsement
Endorsement has different meanings, but in the law of negotiable instruments such as checks and securities, it is the act of the owner or payee his/her name to the back of a check, bill of exchange or other negotiable instrument so as to make it payable to another or cashable by any person. An accommodation endorsement is the guarantee given by one person (or legal entity) to induce a bank or other lender to grant a loan to a different person (or legal entity). It is also the banking practice whereby one bank endorses the acceptances of another bank, for a fee, making them appropriate for purchase in the acceptance market. Section 15 defined Endorsement as follows: When a maker or holder of a negotiable instrument signs the same, otherwise then as such maker, for the purpose of negotiable, on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper

intended to be completed as a negotiable instrument, he is said to indorse the same and is called endorser Endorser: The person who sings the instrument for the purpose of negotiation is called the endorser. The endorser may sign either on the face or on the back of the negotiable instrument but according to the common usage endorsements are usually made on the back of the instrument. Endorsee: The person in whose favor instrument is transferred is called the endorsee.

Different Types of Endorsement

There are five kinds of endorsements recognized in the Uniform Commercial Code:

1. Endorsement in blank If the endorser signs his name only, the endorsement is said to be in blank (Section 16). The endorser does not specify the name of endorsee with effect that an instrument endorsed in blank becomes payable to the bearer (subject to the provisions as regards crossed cheques) even though originally payable to order (Section 54) and no further endorsement is required for its negotiation. For Example, If a cheque is payable to X or order and X merely signs on its back, such endorsement is called endorsement in blank. Such endorsement makes it a bearer cheque which may be further negotiable by mere delivery. But if such a cheque is a crossed one, its payment cannot be made at the counter of the bank, even if it is endorsed in blank. If the endorsement in blank is followed by endorsement in full, it becomes payable to or to the order of the person mentioned in the last endorsement. 2. Endorsement in Full If in addition to his signature, the endorser adds a direction to pay the amount mentioned in the instrument to or to the order of, a specified person, the endorsement is said to be endorsement in full (Section 16). If in the above illustration X adds the words Pay to Y or Pay to Y or order, such endorsement is called endorsement in full. The instrument will then be payable to Y or his order and will necessitate endorsement by Y for its further negotiation. 3. Conditional Endorsement

If the endorser of a negotiable instrument, by express words in the endorsement, makes his liability or the right of the endorsee to receive the amount due thereon, dependent on the happening of a specified event, although such even may never happen, such endorsement is called a conditional endorsement (Section 52). Such an endorser gets the following rights: a. He may make his liability on the instrument condition on the happening of a particular event. He will not be liable to the subsequent holder if the specified event does not take place. The endorsee in such a case can sue other parties to the instrument even before the particular event takes place. b. He may make the right of the endorsee of the instrument conditional on the happening of a particular event. For example, pay C if he returns from London. Thus C gets the right to receive payment only on the happening of a particular event i.e., if he returns from London. If the event does not take place, the endorsee cannot sue any of the parties. Conditional endorsements do not make the instruments nontransferable. However, such endorsements are generally not used. 4. Restrictive Endorsement Generally, an endorsee of a negotiable instrument is fully competent to negotiate it further but Section 50 permits restrictive endorsements which take away the negotiability of such instruments. The endorsement may, by express words, restrict or exclude the right to negotiate or may merely constitute the endorsee an agent to endorse the instrument or to receive its contents for the endorser or for some other specified person. Such an endorsement, prohibits further endorsement and is called Restrictive endorsement. For example, if B endorses an instrument payable to bearer as follows, the right of C to further negotiates is excluded a. b. c. d. Pay the contents to C only Pay C for my use Pay C or order for the account of B The within must be credited to C

5. Facultative Endorsement The endorsement must give notice of dishonor of the instrument to the endorser, but the latter may waive this duty of the endorsee by writing in the endorsement Notice of dishonor waived. The endorser remains liable to the endorsee for the non-payment of the instrument.

Negotiation

According to Section 14 of Negotiable Instruments Act 1881, when a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated.

Negotiation by Delivery
Section 47 describes, subject to the provisions of section 58, a promissory note, bill of exchange or cheque payable to bearer is negotiable by delivery thereof. Exception - A promissory note, bill of exchange or cheque delivered on condition that it is not to take effect except in a certain event is not negotiable (except in the hands of a holder for value without notice of the condition) unless such event happens.

Illustrations (a) A, the holder of a negotiable instrument payable to bearer, delivers it to B's agent to keep for B. The instrument has been negotiated. (b) A, the holder of a negotiable instrument payable to bearer, which is in the hands of A's banker, who is at the time the banker of B, directs the banker to transfer the instrument to B's credit in the banker's account with B. The banker does so, and accordingly now possesses the instrument as B's agent. The instrument has been negotiated, and B has become the holder of it. Negotiation by Endorsement Section 48 describes: subject to the provisions of section 58, a promissory note, bill if exchange or cheque payable to order is negotiable by the holder by endorsement and delivery thereof.

Maturity of Negotiable Instruments

A promissory note or bill of exchange is said mature on the day on which it falls payable. Instruments which are payable on demand mature on the very day of their execution. Those that are payable at sight or on presentment mature when presented and payment is demanded. Promissory notes or bills of exchange which are not expressed to be payable on demand, at sight or on presentment are at maturity on the third day after the day on which they are expressed to be payable. The three days allowed after the date on which a bill of exchange or promissory note is payable are called the days of grace. Instruments payable at sight or on presentment are not entitled to days of grace and become payable at once. Where a note is payable by installments, days of grace are allowed after each installment falls due in Spite of the use of the word 'punctually'. No days of grace are allowed for cheques which are always payable on demand.

Parties to Negotiable Instruments

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. In the above specimen, Shaju is the maker or drawer. (ii) The Payee the person to whom the amount is payable. In the above specimen it is Rahim.

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 favor of another person. In the above specimen if Ramesh endorses it in favor of Polash and Polash also endorses it in favor of Kamal, then Rahul and Polash both are endorsers. (b) The Endorsee the person in whose favor the note is negotiated by endorsement. In the above, it is Polash and then Kamal.

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, Rajiv is the drawer. (ii) The Drawee The person to whom the order to pay is made. He is generally a debtor of the drawer. It is Sameer in this case. (iii) The Payee The person to whom the payment is to be made. In this case it is Tarun. 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.

Parties to a Cheque (i) The drawer: He is the person who draws the cheque. (ii) The drawee: The bank is always the drawee of a cheque. (iii) The payee: He is the person to whom the cheque is payable. (iv) The holder: He is either the payee himself or someone to whom the cheque has been

indorsed by toe payee. (v) The endorser and the endorsee: When the holder indorses the cheque to someone he becomes the endorser and the person to whom it is indorsed becomes the endorsee.

Person competent to be parties to Negotiable Instruments

Section 26 of the Act lays down that every person capable of contracting according to the law, to which he is subject, may bind himself and be bound by the making, drawing, acceptance, endorsement, delivery and negotiation of a promissory note, bill of exchange or cheque. Section 11 of the Contract Act provides that every person is competent to contract who is of the age of majority according to the law to which he is subject and who is of sound mind and is not disqualified from contracting by any law to which he is subject in Pakistan therefore, the disqualified persons are: (i) minors, (ii) persons of unsound mind by reason of lunacy, idiocy intoxication etc., (iii) alien enemies, (iv) persons disqualified by statute law, such as proprietors debarred by the Court of Wards Act or insolvents disqualified by the Insolvency Laws, Corporations are disqualified to be party to an instrument by Section 26 of the Negotiable Instrument Act, "except in cases in which under the law for the time being in force, they are so empowered". The disqualification of all persons noted above is not of the same degree or nature. It is, therefore, necessary to state their respective disqualification as done below:

(i)

Minors

A minor can bind all parties except himself. That is, he is not prohibited from being a party to a negotiable instrument but he cannot be made liable thereon. It is not clear as to whether any promissory notes or bill made or drawn by a minor for necessaries supplied to him is binding on him. The better opinion is that the payee of the note or the bill can sue the minor for the money

on the original consideration which the minor received from him for necessaries, but he cannot recover from the minor on the instrument executed by him.

(ii)

Persons of unsound mind

A lunatic or drunken person or any other person who is incapable of forming a rational judgment as to the effects of a contract or any other commitment at the time of making it stands on the same footing as a minor and hence a bill or promissory note executed by such a person is not binding on him. He differs with a minor in the while a minor can bind all parties except himself. he can bind neither himself nor others.

(iii)

Alien enemy

A contract with an alien enemy being contrary to law or public policy, a person cannot draw a bill of exchange upon another with whose country, the country of the drawer is at war, nor can he accept a bill drawn by an enemy or indorse a bill or note to such an enemy or be an endorsee from him. An alien, who is not an enemy, is, however, exempt from such restrictions.

(iv)

Insolvent

When a person is declared insolvent, any negotiable instrument of which he may be a holder vests in his assignee. But if the insolvent has no beneficial interest in the instrument, the title to such an instrument remains with him and he may indorse a negotiable instrument accepted for his accommodation so as to make the acceptor liable to the endorsee. An insolvent cannot, however, sue on a negotiable instrument nor can he pass title to such instrument by endorsement or otherwise. But if he indorses an instrument to any bona fide holder without notice, such bona fide holder acquires a valid title to the instrument so indorsed to him.

Corporation
A Corporation is not competent to make, indorse, or accept a promissory note or a bill of exchange unless specific authority for the same has been given to it by the Article of Association or, in the absence of specific authority, such power can be found to be necessary and incidental to the purpose for which it has been created. In the absence of such express or implied authority, a corporation will not be bound by a note or a bill drawn by a managing agent of the company even to a holder in due course. When such specific or implied authority exists, it must be exercised by the officers duly authorized in this behalf and in the name of the company. The liability of the company should be made plain on the face of the instrument; otherwise it will not be liable with regard to third persons. In this connection, it is material to consider whether the corporation is a trading company or a non-trading company. A trading company may exercise such power, but a non-trading company cannot, unless such power is expressly conferred by the Articles of Association. If a corporation exceeds its power and executes an instrument, such an instrument is void and even a bona fide holder for value cannot make the corporation liable; for, all persons dealing with a corporation are bound to ascertain its capacity to execute such instruments. But where such authority exists in the Memorandum of Association, a person dealing with the company is not bound to enquire whether it has been exercised in accordance with the prescribed procedure. Thus, where the Articles of Association empowered the directors to authorize on of themselves to draw a bill of exchange for the company and the managing director drew a bill without express authorization, it was held that the company was nevertheless liable to the holder of the bill as the holder was entitled to presume that the managing director has been authorized in due course.

In a trading partnership one partner has an implied authority to bind the others by signing or indorsing notes and bills.

Agency
Every person capable of binding himself or of being bound as mentioned in Section 26 may so bind him or be bound by a duly authorized agent acting in his name. A general authority to transact business and to receive and discharge debts does not confer upon an agent the power of accepting or endorsing bills of exchange so as to bind his principal an authority to draw bills of exchange does not of itself import an authority to indorse.

Liability of
1. An agent. An agent who signs his name to a promissory note, a bill of exchange or a cheque without indicating thereon that he signs as agent, or that he does not intend thereby to incur personal responsibility, is liable personally on the instrument, except to those who induced him to sign upon the belief that the principal only would be held liable. 2. A legal representative. A legal representative of a deceased person who signs his name to a promissory note, a bill of exchange or a cheque is liable personally thereon unless he expressly limits his liability to the extent of the assets received by him as such.

3. The drawer. The drawer of a bill of exchange or a cheque is bound, in case of dishonor by the drawee or the acceptor thereof to compensate the holder, provided that the holder gives the drawer due notice of such dishonor.

4. The drawee. The drawee of a bill of exchange is liable to tie drawer or any endorsee from the drawer for the amount mentioned in the bill. But, unless payable on demand or at sight or on presentment, a bill of exchange must be presented to the drawee for acceptance by the drawer or any other holder within a reasonable time after it is drawn. The drawee is not liable to pay unless the bill is presented to him for acceptance.

The drawee of a cheque having sufficient funds of the drawer in his hands, properly applicable to the payment of such cheque, must pay the cheque when duly required to do so, and in default of such payment, must compensate the drawer for any loss or damage caused by such default (section, 31). The drawee of a cheque is always the banker. Besides the conditions stated above, a bank will be justified in refusing payment if: (i) There is a countermand order, i.e., an order to stop payment (ii) There is notice of customers, death which vests the fund in his legal representatives (ii) The customer becomes a bankrupt and the bank has notice of such bankruptcy (iv) The customer becomes insane and the bank has notice of it (v) There is an order from any court prohibiting payment (vi) A post-dated cheque is presented before due date (vii) The cheque is irregular as unstamped, ambiguous or materially altered (viii) In case of joint account only one draws the cheque (ix) The drawer limits the right of drawing cheques by an agreement with the drawee (x) The drawer is a trustee in charge of a trust fund but he draws the cheque for any purpose other than that of the trust.

5. The maker of promissory note. Ordinarily, the liability of a maker of a note is absolute and
unconditional from the time of the making of the note. By executing a note in favor of a certain person and delivering the same to him the maker becomes a debtor and binds himself absolutely to make the payment to him according to the apparent tenor of the document. Thus the maker of a promissory note must pay the money to the bearer at maturity if the note is payable to the bearer. If the note is payable to a specific person or his order, he must pay at maturity to the specific person or to his order. 6. The acceptor of a bill. The acceptor of a bill of exchange who accepts before maturity is liable to pay the amount of the bill at maturity according to the apparent tenor of the acceptance. This means that payment should be made to the person whose name appears on the face of the bill. The acceptor who accepts at or after maturity must also pay according to the apparent tenor of the acceptance. 7. The endorser. In the absence of a contract to the contrary, whoever indorses and delivers a negotiable instrument before maturity, without expressly excluding or making conditional his own liability is bound thereby to every subsequent holder, in case of dishonor by the drawee, acceptor or maker to compensate such holder for any loss or damage caused to him by such dishonor, provided due notice of dishonor has been given by, or received by, such endorser. When a person guarantees the payment in a promissory note

as a surety and not as an endorser, he is liable therefore when default in payment is made by the maker of the promissory note. 8. Prior parties. When a negotiable instrument has passed some hands by delivery or endorsement, all the previous holders or endorsers are liable to pay the holder for the time being in case the drawee dishonors the bill either by refusing to accept or by refusing to pay after acceptance.

Acceptance
Acceptance means acknowledgement of the sum mentioned in a bill by the drawee or any person on his behalf. This drawee is not liable on the bill unless the bill is presented to him for acceptance and he actually accepts it. Who can accept? The maker of a bill of exchange or cheque is called the drawer; the person thereby directed to pay is called the drawee. When in the bill or in any endorsement thereon the name of any person is given in additional to the drawee to be resorted to in case of need, such person is called a drawee in case of need. After the drawee of a bill has signed his assent upon the bill, or, if here are more parts thereof than one, upon one of such parts, and delivered the same, or given notice of such signing to the holder or to some person on his behalf, he is called the acceptor. When a bill of exchange has been noted or protested for nonacceptance or for better security, and any person accepts it supra protest for honor of the drawer or of any one of the indorsers, such person is called an acceptor for honor. Acceptor for honor The person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid, is called the payee. No person except the drawee of a bill of exchange, or all or some of several drawees, or a person named therein as a drawee in case of need, or an acceptor for honor, can bind himself by an acceptance.

Where there are several drawees of a bill of exchange who are not partners, each of them can accept it for himself, but none of them can accept it for another without his authority. But when the several drawees of a bill of exchange are partners, any of them can accept it on behalf of others, because in a partnership there is an implied authority of every partner to act for everyone else. Two types of Acceptance 1. General Acceptance: When drawee or any other person on behalf of drawee signs his name across the bill, without stipulating any condition regarding payment, the acceptance is general. 2. Conditional or Qualified Acceptance: A conditional or qualified acceptance means that the drawee or any one on behalf the drawee accepts the bill subject to a condition or qualification. The condition may relate to: a) The amount to be paid b) The time within the payment is to be made c) The place where the payment is to be made Presentment for acceptance A bill of exchange payable after sight must, if no time or place is specified therein for presentment, be presented to the drawee thereof for acceptance, if he can, after reasonable search, be found, by a person entitled to demand acceptance, within a reasonable time after it is drawn, and in business hours on a business day. In default of such presentment, no party thereto is liable thereon to the person making such default. If the drawee cannot, after reasonable search, be found, the bill is dishonored. If the bill is directed to the drawee at a particular place, it must be presented at that place; and if at the due date for presentment he cannot, after reasonable search, be found there, the bill is dishonored. Where authorized by agreement or usage, a presentment through the post office by means of a registered letter is sufficient. A promissory note, payable at a certain period after sight, must be presented to the maker thereof for sight (if he can, after reasonable search, be found) by a person entitled to demand payment, within a reasonable time after it is made and in business hours on a business day. In default of such presentment, no party thereto is liable thereon to the person making such default. The holder must, if so required by the drawee of a bill of exchange presented to him for acceptance, allow the drawee forty-eight hours (exclusive of public holidays) to consider whether he will accept it. Presentment for Payment

Promissory notes, bills of exchange and cheques must be presented for payment to the maker, acceptor or drawee thereof respectively, by or on behalf of the holder as hereinafter provided. In default of such presentment, the other parties thereto are not liable thereon to such holder. Exception - Where a promissory note is payable on demand and is not payable at a specified place, no presentment is necessary in order to charge the maker thereof nor is presentment necessary to charge the acceptor of a bill of exchange. The provisions of this section are without prejudice to the provisions relating to presentment or acceptance in the case of a bill of exchange. Explanation - Where there are several persons, not being partners liable on the negotiable instrument, as makers, acceptors or drawees, as the case may be, and no place of payment is specified, presentment must be made to them all. Presentment for payment must be made during the usual hours of business, and, if at a banker's within banking hours. A promissory note or bill of exchange, made payable at a specified period after date or sight thereof, must be presented for payment at maturity. A Promissory note payable by installments must be presented for payment on the third day after the date fixed for payment of each installment; and non-payment on such presentment has the same effect as non-payment of a note at maturity. A promissory note, bill of exchange or cheque made drawn or accepted payable at a specified place and not elsewhere must, in order to charge any party thereto, be presented for payment at that place. A promissory note or bill of exchange made, drawn or accepted payable at a specified place must, in order to charge the maker or drawer thereof, be presented for payment at that place. Presentment of Cheque A cheque must, in order to charge the drawer, be presented at the bank upon which it is drawn before the relation between the drawer and his banker has been altered to the prejudice of the drawer. A cheque must, in order to charge any person except the drawer, be presented within a reasonable time after delivery thereof by such person. When cheque not duly presented and drawer damaged thereby 1) Where a cheque is not presented for payment within a reasonable time of its issue, and the drawer or person on whose account it is drawn had the right, at the time when presentment ought to have been made, as between himself and the banker, to have the

cheque paid and suffers actual damage through the delay, he is discharged to the extent of such damage, that is to say, to the extent to which such drawer or person is a creditor of the banker to a larger amount than he would have been if such cheque had been paid. 2) In determining what a reasonable time is, regard shall be had to the nature of the instrument, the usage of trade and of bankers, and the facts of the particular case. The holder of the cheque as to which such drawer or person is so discharged shall be a creditor, in lieu of such drawer or person, of such banker to the extent of such discharge and entitled to recover the amount from him. Illustrations a) A draws a cheque for Taka 1,000, and when the cheque ought to be presented, has funds at the bank to meet it. The bank fails before the cheque is presented. The drawer is discharged, but the holder can prove against the bank for the amount of the cheque. b) A draws a cheque at Dinajpur on a bank in Chittagong. The bank fails before the cheque could be presented in ordinary course. A is on discharged, for he has not suffered actual damage through any delay in presenting the cheque.

When presentment unnecessary

No presentment for payment is necessary, and the instrument shall be deemed to be dishonored at the due date for presentment, in any of the following cases:(a) If the maker, drawee or acceptor intentionally prevents the presentment of the instrument,

or, If the instrument being payable at his place of business, he closes such place on a business day during the usual business hours, or, If the instrument being payable at some other specified place, neither he nor any person authorized to pay it attends at such place during the usual business hours, or, If the instrument not being payable at any specified place, he cannot after due search be found; (b) as against any party sought to be charged therewith, if he has engaged to pay notwithstanding non-presentment; (c) as against any party if, after maturity, with knowledge that the instrument has not been presentedHe makes a part payment on account of the amount due on the instrument, or promises to pay the amount due thereon in whole or in part,

Or otherwise waives his right to take advantage of any default in presentment for payment; (d) as against the drawer, if the drawer could not suffer damage from the want of such presentment; (e) where the drawee is a fictitious person;
(f) as regards an endorser, where the negotiable instrument was made, drawn or accepted for

the accommodation of that endorser and he had reason to expect that the instrument would not be paid if presented; and
(g) where, after the exercise of reasonable diligence, presentment as required by this Act

cannot be effected Explanation - The fact that holder has reason to believe that the negotiable instrument will, on presentment, be dishonored does not dispense with the necessity for presentment.

Dishonor
A negotiable instrument is said to be dishonored when the drawee either refuses to accept it or to make payment upon it. Dishonor gives rise to cause of action for suit against the drawer or previous holders. But notice of dishonored must be served on the drawer or previous holders if they are sought to be made liable on the dishonored instrument. In certain cases, however, notice of dishonor is not necessary to be given. Dishonored by non-acceptance A bill of exchange is said to be dishonored by non-acceptance when the drawee, or one of several drawees not being partners, makes default in acceptance upon being duly required to accept the bill, or where presentment is excused and the bill is not accepted. Where the drawee is incompetent to contract, or the acceptance is qualified, the bill may be treated as dishonored. Dishonored by non-payment A promissory note, bill of exchange or cheque is said to be dishonored by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same.

Notice of Dishonor

When a promissory note, a bill of exchange or a cheque is dishonored by non-acceptance or non-payment, the holder of the instrument must give notice of dishonored to all the other parties whom the holder of the instrument seeks to liable, except the maker, the acceptor or the drawee. (Section 93) Any party receiving notice of dishonored must give notice of dishonored to any prior party liable to himself within a reasonable time. For example: A draws a bill on B for 50,000 A endorses it to X X endorses it to Y Y endorses it to Z Z presents the bill to B B refuses Z must notify A, X and Y, if he wants to make them all liable.

Z must notify Y alone, if he wants to make only Y liable. Y must notify A and X, if he wants to make both of them liable and so on So, liability flows toward predecessors.

Mode in which notice may be given

Notice of dishonored may be given to the person to: Whom it is required to be given His duly authorized agent His legal representative in case of his death His assignee where he has been declared as insolvent

The notice may be oral or written. If written, it may be sent by post and if it is duly addressed and directed, it will operate as a valid notice even if it lost or miscarried. The notice must inform the party:
The way in which it has been dishonored

The receiving party will be held liable thereon The notice must be given within a reasonable time at: The place of business The residence of the party (in case, such party has no place business)

When notice of dishonored is not necessary

When it is dispensed with the party entitled thereto. As an example, when an endorser writes at the line of endorsement no notice of dishonored required, the endorsee can make him liable without giving him notice of dishonored In order to charge the drawer when he has countermanded payment

When party entitle to notice cannot be found When party bound to give a notice is unable without any fault of his own to give it When acceptor is the drawer himself When the party entitled to notice promises unconditionally to pay the amount due on the instrument

Noting

When a promissory note or a bill of exchange is dishonored, the holder, besides giving a notice of dishonored to the entitles party, may cause such dishonored to be noted by a notary public Noting means authentication of the fact of a bill having been dishonored It consists:
The fact of dishonored The date of dishonored The reasons assigned for dishonored Why the holder treats it as dishonored

The notary charges

Protest

When a promissory note or a bill of exchange is dishonored, the holder, besides giving a notice of dishonored to the entitle party, may cause such dishonored to be noted and certified by a notary public. Such certificate is called a protest A protest must contain (section 100): Either the instrument itself or the literal transcript of the instrument The name of the public for whom and against whom the instrument has been protested A statement that payment or acceptance or better security has been demanded of such person by the notary
The place and time of dishonored

The subscription of the notary public In the event of acceptance or payment for honor, the names of the person by whom, for whom and the manner in which such acceptance or payment was offered and effected

Notice of Protest
When the law requires that a pro-note or a bill should be protested, it is the notice of such protest and not the notice of dishonored that should be given by the holder to fix the liabilities of the antecedent parties to the note or the bill, as the case may be. Such a notice can be given either by the holder or by the notary who makes the protest. The rules that govern notice of dishonored also govern notice of protest. It, therefore, follows that conditions under which notice of dishonored is excused will also excuse a notice of protest.

Discharge of parties from liability

1. Under Section 82 of the Act, the maker, acceptor or the endorser respectively of a negotiable instrument is discharged from liability thereon in the following ways.

a) By cancellation. An endorser or an acceptor is discharged from liability to holder. or any

one claiming under him who cancels such endorser's or acceptor's name the intention of discharging him.

b) By release. A maker or an endorser or an acceptor is discharged' from liability to a holder

who discharges such maker, acceptor or endorser otherwise than by cancellation and to all parties deriving title under such holder after notice of such discharge

c) By payment. All parties to a negotiable instrument are discharged when the acceptor, the
drawee or the maker pays the amount due, on the maturity of the instrument, to the holder. In case of an instrument payable to bearer, payment to an), one in possession discharges all parties. 2. By default of holder. (i) Under Section 83 of the Act, if the holder of a bill allows the drawee more than fortyeight hours, exclusive of public holidays, to consider whether he will accept the same, ail previous parties not consenting to such allowance are thereby discharged from liability to such holder. (ii) Under Section 84, if the holder of a cheque fails to present it before the relation between the drawer and the banker is altered to the prejudice of the drawer and the drawer suffers damage due to such delay, the drawer is discharged of all liabilities to the holder. (iii) Under Section 86, if the holder of a bill agrees to a qualified acceptance, all previous parties whose consent is not obtained to such acceptance are discharged as against the holder and those claiming under him.

(iv) Under Section 93, if the holder fails to give notice of dishonored to such parties as are
antecedent to him such parties are discharged as against holder and those claiming under him. This rule does not, however, apply to the maker, acceptor or the drawee of a note, bill or cheque respectively, their liability being fixed by the last clause of this section. 3. By material alteration.

Under Section 87 of the Act, any material alteration of a negotiable instrument. while in the possession of the holder, discharges the liability of all parties prior to or at the time of such alteration who do not consent to such alteration, unless it was made to carry out the common intention of the original parties. Alteration in: (i) date, (ii) the time of payment, (iii)the place of payment, (iv) the amount payable, (v) the medium and method of payment and (vi) of parties, 'have been regarded as material alterations.

In some cases, however, even material alterations do not discharge the liabilities of the parties. These may be stated as, follows: (i) Alteration made before its completion, i.e. before the issue, delivery or negotiation of the instrument. (ii) Alteration made in order to correct a bonafide error. (iii) Alteration made with the consent of the parties to the instrument (iv) Alteration made by way of converting an endorsement in blank into an endorsement in full.
(v) Alteration made by way of crossing a bearer cheque. Acceptance for honor;

When a bill of exchange has been noted or protested for non-acceptance or for better security, any person not being a party already' liable thereon may, with the consent of the holder, by writing on the bill, accept the same for the honor of any party thereto.50 The purpose of such acceptance is to save the honor of any party liable on the bill and most usually to save the prestige of the drawer. A person desiring to accept for honor must, by writing on the bill under his hand, declare that he accepts under protest the protested bill for the honor of the drawer or of a particular endorser whom laid names or generally honors.

Where the acceptance does not express for whose honor it is made, it shall be deemed to be made for the honor of the drawer. There is no form of such acceptance. If the formalities noted above are complied with. The acceptance is valid. Such acceptance may be written across the bill or on an), part of the bill. 'Accepted supra protest', accepted S. P.' or 'Accepted Supra Protest for the honor of A for TV are sufficient. But in each case, the acceptance must bear the signature of the acceptor. Liability of an acceptor for honor:

An acceptor for honor is liable to all parties subsequent to the party for whose honor lie accepts to pay the amount of the bill if the drawee makes default in payment. For example, A draws a bill on B. A endorses it to C and C to D and D to E and E to F. B refuses to accept the bill. Then X steps in to accept it to accept it for the honor of D. X is liable to E and F, and lie can sue A and C for pa) meat in case B refuses to pay. The liability of an acceptor for honor is. however. a qualified one. His liability will arise if: (i) the hill is presented to the drawee for payment at its maturity, (ii) the drawee refuses payment hereupon the bill is duly noted and protested for non-payment. and (iii) the bill is presented to acceptor for honor. If these conditions are not fulfilled, the acceptor for honor will not be made liable.

Payment for honor

When a bill of exchange has been noted or protested for nonpayment, any person may pay the same for the honor of any party liable to pay thereon, provided that the person so paying or his agent in that behalf has previously declared before a notary public the party for whose honor he is paying and also that such declaration has been recorded by such notary public.

Any party paying for honor is entitled to all the rights, in respect of the bill. of the holder at the time of such payment and may recover from the party for whose honor he pays all sums so paid, with interest thereon and with all expenses properly incurred in making such payment.

Instruments obtained by unlawful means or for unlawful consideration

When an instrument has been lost or has been obtained from any maker. acceptor or holder thereof by means of an offence or fraud or for unlawful consideration, no possessor or endorsee who claims through the person who is found or so obtained the instrument is entitled to receive the amount due thereon from such maker, acceptor or holder or from any party prior to such holder, unless such possessor or endorsee is, or some person through whom he claims, was a holder thereof in due Course. From ail analysis of the law laid down above it is clear that the legal position of a possessor or an endorsee of a negotiable instrument which has been lost or has been obtained by means of ail offence or fraud or unlawful consideration is different from that of a holder in due course under similar circumstances. Let us now examine each of the above conditions separately.

Lost instruments
1. Negotiable instruments payable to the bearer are transferable by mare delivery and no endorsement is necessary. When the finder of such an instrument passes it to another who takes it bonafide for value and without notice of the loss, he becomes a holder in due course. He thus acquires a valid title to it and can retain the instrument as against the rightful owner and is also entitled to payment from parties liable thereon. 2. When a bill or note not payable to the bearer is lost, the finder acquires no title to it as against the rightful owner, nor can he claim payment from the acceptor or the maker. The lawful owner is entitled to recover the instrument from the finder. 3. When the finder of a lost bill or note gets payment from the maker of the acceptor, who pays it in due course, such acceptor or maker is discharged from all liabilities, to the rightful owner. But the rightful owner can always proceed against the finder for recovery of the money so paid with him. 4. when the finder of a lost bill or note which is payable to order and is, therefore transferable by endorsement and delivery, forges the instruments and endorse it to the bonafide transferee for value, the letter will not acquire any title to it, for, the endorse himself had no title which he could transfer, and forgery can confer no title. 5. When a holder losses a bill, he should notify the loss to all parties liable thereon.

6. When a holder loss a bill, he must apply to the drawee for the payment at maturity and if the drawee refuses, he must give notice of dishonor to all the parties liable thereon. Otherwise he will forfeit his remedy against the drawer and the prior parties.

Holders right to duplicate of lost bill Where a bill of exchange has been lost before it is overdue, the person who was the holder of it may apply to the drawer to give him another bill of the same tenor, giving security to the drawer, if required, to indemnify him against all persons whatever, in case the bill alleged to have been lost shall be found again and the drawer is liable to give such duplicate bill.

A case study: this is a case that shows the how lost or destroyed Negotiable Instruments/Commercial Paper can remain enforceable is Atlantic National Trust, LLC v. Mcnamee, 2007. The High court in Alabama held that a destroyed promissory note is still enforceable both the maker of the note, or an assignee could enforce it so long as its existence could be proven. In this case a bank (Wachovia) made a loan in 2003 to the debtor, McNamee, in the amount of $150,000. For this he signed a promissory note. At some point, Wachovia inadvertently misplaced, lost or destroyed the original note. The note matured in 2005 and after the loan matured Wachovia assigned its rights in and to the note to the plaintiff Atlantic National Trust., which then sued for recovery. Atlantic demanded McNamee repay the remaining principal balance of $138,620 plus interest. The plaintiff moved for summary judgment based on an affidavit affirming that the instrument had been lost by the assignor. Now Atlantic could not produce the original note, but had a copy, so the debtor defended on the grounds that the plaintiff assignee had no right to enforce the note since it was never in possession of the original document, and that the assignee of a lost note has no standing to sue the maker. Thus McNamee contended that because the original note was destroyed, the note could not be enforced. The federal court certified a question to the Alabama high court to clarify Alabama common law on that issue.

It was concluded that an assignee has all of the same rights, benefits, and remedies that the assignor has to enforce contracts to the extent the assignor was able to do so, hence the plaintiff assignee was entitled to enforce the note whether it was lost, destroyed, or stolen. Ultimately the evidence was clear that the note was genuine, the fact of the destruction of the original did not make it unenforceable either by the maker of the note, Wachovia, or by the assignee, Atlantic.

Stolen instrument
The position of stolen instruments in the hand of the thief and subsequent holders is exactly similar to that if the lost instruments. If the instrument is a completed one, payable to bearer and it passes front he custody of the thief to the holder in due course, the latter can retain it and endorse payment against all prior parties; but if it is payable to order and there is no endorsement on it, or if the document is not complete when it is stolen, no title will pass.

When instrument obtains by fraud, fraud vitiates all contracts. When the issue or any subsequent negotiation of a bill is obtained by fraud or in breach of faith, the bill is said to be vitiated by fraud. In such case, the holder subsequent to the fraud cannot enforce payment against any party thereto, nor can he retain the bill against the true owner. When an instrument is obtained by fraud even for the purpose of defrauding a third party, the person who thus obtain it, has a defective title and cannot enforce it, but if subsequently the instrument passes to a holder in due course, he can enforce it and the plea of fraud will not avail against him.

It should be noted that the party who alleges fraud against the holder must prove it, as the presumption of law is that a holder is a holder instruments obtained for an unlawful consideration.

Consideration may be unlawful whether because it is immoral or oppose to public policy or because it is expressly or impliedly forbidden by law or is fraudulent. An instrument given for unlawful consideration is void except in the hands of a holder in due course who, therefore, can enforce to against all prior parties. Unlike other contracts, a negotiable instrument is thus not absolutely void for unlawful consideration.

Forged instrument
A person who forges an instrument cannot confer a valid title even on a bonafide transferee for value without notice of the forgery. If the holder obtains payment on the forged instrument, the rightful owner can recover the money from him. When endorsement on the instrument is forged, a bonafide transferee for value acquires no valid title if the instrument is payable to order and hence negotiable only by endorsement and delivery. But where the instrument is payable to the bearer and as such negotiable by mare delivery, a bonafide transferee for value acquires a valid title though the instrument is forged. He can retain the instrument as against the rightful owner and can enforce payment from any party liable thereon.

Crossed cheques
A cheque is said to be crossed when two parallel transverse tines are drawn across the face of the cheque, with or without words like "& Co" or "not negotiable" inserted between them.

The purpose of crossing a cheque is to prevent any one but the payee from cashing it. a cheque is crossed in order to give a direction to the banker on whom it is drawn not to make the payment across the counter but to pay it only to a banker, the obvious advantage of this system of payment is to ensure against the risk of loss or theft of the cheque in the course of circulation, for, it may always be found out to whose use the proceeds of the cheque has gone. Crossing done by the mean of drwaing two parallel lines as above is called general crossing. but when the crossing prescribe a partivular bank to which alone the payment is to be maid, the crossing is known as special crossing. A special crossing need not to have the two parallel lines drawn across its face and it may or may not contain the word "nonnegotiable" A cheque can be crossed at the time of issue or any time thereafter before presentment to the banker. It may be crossed by the drawer or any holder subsequent to him. If a cheque is crossed generally, the holder may cross it specially. Where a cheque is crossed generally or specially, the holder may add the words "nonnegotiable". Where a cheque is crossed specially, the banker to whom it is crossed may again cross it especially to another banker, his agent, for collection. Where a cheque is crossed specially to more than one banker, except when crossed to an agent for the purpose of collection, the banker whom it is drawn must refuse payment thereof.

Liability of Banker Where a cheque is crossed generally the banker on whom it is drawn must not pay it to anyone except to a banker and where a cheque is crossed specially, the banker to whom it is drawn must not pay it to anyone except to the baker to whom it is crossed or his agent for collection. If the banker on whom a crossed cheque is drawn has paid the same in due course, i.e. that is in the way specified by section 126of the Act, the banker is not liable anymore to the drawer, no matter whether the payment has been received by the true owner or not. But if the banker pays the cheque otherwise than according to the provision of section 126, he will be liable to the drawer if the latter sustains any loss on account of such payment.

Effect of crossing with the words "not negotiable"

A person taking a cheque crossed generally or specially, bearing in either case the word "not negotiable" shall not have and shall not be capable of giving a better title to the cheque than that which the person from whom he took it had.

The phrase "not negotiable" doesn't make the cheque nontransferable. It only takes away the negotiable character of the instrument, that is, a holder with a defective title cannot confer a good title on a holder in due course.

Bibliography
Prof. Mafizul Islam, Principle of Commercial Law, July 1963 The Negotiable Instrument Act, 1881 Cates, Bill. "Get It In Writing" On Wall Street. April 2001. "InsightCelebrity Endorsements: The benefits of keeping it real." Marketing Week. 16 March 2006. Hillstrom, Northern Lights updated by Magee, ECDI Syed Ashraf Ali & R A Howlader, Banking Law and Practice, November 2005 Raphel, Murray. "Realizing the Strength of Testimonials and How to Utilize Them in Your Business" Direct Marketing. June 1997. Stark, Phyllis. "Redneck Radio: Jeff Foxworthy Style." Billboard Radio Monitor. 8 July 2005.

"Wall-Mart Ads Tout Surprises" Promo. 16 February 2006.