NEGOTIABLE INSTRUMENTS

Negotiable Instruments are the devices to serve the credit needs of the
growing business. Where cash cannot be paid immediately on the
completion of a transaction, written promises or orders serve as its
substitute till the stipulated time. These written documents are called
instruments and if the title thereto can be transferred from one person to
another either by delivery or by endorsement and delivery they are called
. negotiable
Bills of exchange, Cheques, Promisory Notes, bank drafts are all examples
.of Negotiable Instruments

ESSENTIAL ELEMENTS
.A negotiable instrument must be in writing . 1
.It must be signed by the maker or Drawer . 2
.It must be a promise or an order to pay . 3
.The promise or order must be unconditional . 4
A negotiable instrument must call for payment in cash. If it is for anything else, the instrument is not ..5
. negotiable as per the definition
Money payable must be a certain sum. An instrument promising a reasonable sum is not an
. instrument. The instrument must be payable after fixed time or, time which is certain to arrive

.6

Sight and Demand Instruments

An instrument is payable on demand when no time has been specified. A promissory

.note or Bill of Exchange will become payable when presented for payment

When an instrument is payable at a fixed time or event or after happening of an event

.it is called time instrument

TYPES OF INSTRUMENTS

Promissory Note: - A promissory Note is an instrument in writing (not being a : 1

bank note or a currency note) containing an unconditional undertaking signed by
the maker, to pay a certain sum of money only to, or to the order of a certain
. person or to the bearer of the instrument


ESSENTIALS OF A PROMISSORY NOTE

. Must be in writing. An oral promise cannot be a promissory note

.Promise to pay. Acknowledge of debt is not promissory note

.Promise must be certain and unconditional .there should be no ambiguity

.Signed by the maker. There must be no tempering with the free consent of the signatory to sign

.Certain Sum of money. The amount promised must be specific

Payment in legal tender money only It will be invalid if promise to pay is payable in currency and goods
.or goods only

.Stamping the promissory note must be properly stamped as per the Stamp Act

.Consideration There is an implied consideration for a promissory note if it is not mentioned therein


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

ESSENTIALS OF A BILL OF EXCHANGE

:Writing. 1
.The Bill of Exchange must be in writing
:Order to Pay. 2
The bill must contain an order to pay, which may be in a request form but the
..
meaning should be
imperative. e.g
Mr. Nelson will be much obliged Mr. Webb by paying to J.Anderson or order, nine
.thousand rupees on his account
.Unconditional. 3
.Money and money only
:Three parties. 4
A Bill of Exchange requires three parties. First the person who makes the bill of
exchange, called the drawer, second the person to whom it is addressed,
called the drawee and thirdly the person to whom the money is to be given
.
called the payee

Rs 9000/00

Karachi, August 25,2002

Three months after due date pay to Saleh or bearer the sum of Rupees
Order
.Nine thousand, for the value received

To

Shehzad Roy
Karachi.

Suleman

CHEQUE

A cheque is a bill of exchange drawn on a specified banker and not expressed to be . 1

payable otherwise than demand. A cheque is essentially a bill of exchange however, it
is a peculiar sort of instrument differing in many respects to a bill of exchange and
. resembling too
.A cheque does not require acceptance . 2
.It is never meant for circulation in ordinary course but is given for immediate payment . 3
A cheque is presented for payment whereas a bill is in the first instance presented for . 4
. acceptance
A cheque is always made payable on demand whereas an ordinary bill of exchange
. can be made payable after a fixed time

.5

1. Three parties in Bill of Exchange

.Drawer, drawee and payee

Two parties in promissory note, i.e .1

.The maker and the Payee

2. Payee may be the same person.

Maker can not be the payee himself. 2

3. There is an order to pay.

3. There is a promise to pay.

4. The drawer stands in and

Immediate relation with the
acceptor and not payee.

4. The maker stands in an immediate

r

5. The bill must be accepted by the Drawee

before presented for
Payment.

relation with the payee.

Does not require acceptance as it is. 5

.signed by the person who is liable to pay

PARTIES TO NEGOTIABLE INSTRUMENT

HOLDER

The holder of a promissory note, bill of exchange or Cheque means any person
entitled to the possession thereof and to receive or recover the amount due from
.the parties therefrom

HOLDER IN DUE COURSE

A person is a HOLDER IN DUE COURSE who for some consideration became the
possessor of a negotiable instrument before the amount mentioned in the
instrument became due; without sufficient notice that any defect existed in the title
.of the person from whom he derived his own title

NEGOTIATION OF NEGOTIABLE INSTRUMENT

The process of transferring the title or ownership of the instrument is called

negotiation. As a result of negotiation the owner acquires a right to sue for the
recovery of the amount mentioned in the instrument. Mere handing over the
.instrument for safe custody does not amount to negotiation

MODES OF NEGOTIATION

Negotiation by delivery:- A negotiable instrument can be transferred by delivery

. only, it does not require the signature of the transferor

.1

Negotiation by Endorsement and delivery:- A negotiable instrument payable to . 2

.order can be negotiated or transferred by the holder by endorsement and delivery

ENDORSEMENT
When the maker, or holder of a negotiable instrument
signs the same, otherwise than as maker, for the purpose
of negotiation, on the back or face thereof or on a slip of
paper annexed thereto he is said to endorse the same
.and is called the endorser

KINDS OF ENDORSEMENTS

:Blank Endorsement . 1
Where the indorser signs only his name on the back of the instrument for the
purpose of negotiating it, that is a negotiating in blank. The effect of blank
endorsement is that it turns an order instrument into bearer instrument. It may be
.negotiated by simple delivery and the bearer is entitled to payment

:Full Endorsement . 2
Where the indorser adds to his signature the name of a person to whose order
he wants the instrument to be paid, that is an instrument in full. The effect of an
endorsement in full is that the instrument can be paid only to the indorsee and can
be further negotiated only by his endorsement. The instrument retains its order
.character

3. Restrictive Endorsement:
An endorsement constitutes the indorsee the owner of the instrument and also
confers upon him the right of further negotiation. But the right of further negotiation
.is by express words in the endorsement restricted
E.g. B signs Pay the contents to C only
Pay C for my use
The within must be credited to C

:Partial Endorsement . 4
AN instrument can not be indorsed for a part of its amount only. If for example an
instrument is for Rs 100, it can not be indorsed for Rs 50. But if the amount due
has already been paid partly, a note to that effect may be endorsed and it may be
.then negotiated for the balance

TYPES AND CROSSING OF CHEQUES

OPEN CHEQUES. 1

a. Bearer Cheques: - The paying banker does not need to see the authenticity of the
.
holder of the cheque
b. Order Cheques: - These are also payable at the counter but paid after verifying
.
the identity of the holder

CROSSED CHEQUES
Crossing effects the mode of payment of the cheque. The cheque is no more
payable to the payee or holder at the counter of the bank. The payment of a crossed
cheque can be obtained only through a banker. Thus crossing is a mode assuring
that only rightful holder gets payment. Even if some wrongful person gets payment
he can be easily traced, as he has to open a bank account and then deposit the
.cheque to get the payment

TYPES OF CROSSING

General Crossing:- A cheque is said to have general crossing when it bears across its
face, two parallel lines either with or without the words Not Negotiable or and company
.without the name of the banker
Special Crossing:- Where a Cheque bears the name of a banker across its face with or
without the words Not Negotiable it is said to have special crossing. The effect is that it
spayment can be obtained through the nominated banker only

Account Payee only Crossing :- In this type of Crossing the words account payee or
.payees account only are endorsed

Not negotiable crossing: A person taking a cheque crossed generally or specially,

bearing in either case the words not Negotiable, shall not have and shall not be
.capable of giving a better title to the cheuqe than that which the person himself has

LIABILITY OF DRAWER

The drawer of a cheque gives a guarantee to the holder that it shall

be paid by the banker when it is presented for payment. If the
cheque is dishonored, the drawer is liable to compensate the
holder provided that he has received notice of dishonor. The
liability of a drawer of cheque is primary in contravention to that of
.a bill when it is secondary

LIABILITY OF DRAWEE

The relationship between the banker and his customer is

contractual. The bankers contractual duty to pay Cheques is
owned only to its customer and not to the payee or holder of the
cheque. Thus if the banker refuses to pay the cheque the holder
has no remedy against the banker

LIABILTIY FOR UNJUSTIFIED DISHONOR

An unjustified dishonor is not merely a breach of contractual

obligation but a tort as it can damage customers reputation. The
banker should be careful in choice of words that he uses in
returning the cheques. The words not sufficient has been held to
be defamatory the words though consistent with truth yet should be
.expressed in least defamatory way

WHEN JUSTIFIED IN REFUSING

.When cheque postdated . 1

.When cheuqe outdated . 2
.When funds insufficient . 3
.When customer countermands payment . 4
.When cheque mutilated . 5
.When cheque is of doubtful validity . 6
.When customers signature does not agree . 7
.When customer has died . 8
.When customer has become insolvent . 9
.Where GARNISHEE order has been issued . 10

CRIMINAL LIABILITY FOR ISSUING CHEQUES WITHOUT FUNDS