Negotiable InstrumentsNegotiable InstrumentsBy: Nimrah Saeed (5127)By: Nimrah Saeed (5127)

Jawad Hussain (5154)Jawad Hussain (5154) Imran Imtiaz (5809)Imran Imtiaz (5809)

Hassan-ul-HaqHassan-ul-Haq

Negotiable InstrumentsNegotiable Instruments

What Are Negotiable Instruments?What Are Negotiable Instruments? A specialized type of Contract for the payment of A specialized type of Contract for the payment of

money.money. It is Unconditional andIt is Unconditional and Capable of transfer by Negotiation.Capable of transfer by Negotiation. Negotiable instruments may be Negotiable instruments may be

transferred by delivery or by endorsement transferred by delivery or by endorsement and delivery.and delivery.

Common examples include checks and Common examples include checks and banknotes (paper money). banknotes (paper money). 

Negotiable InstrumentsNegotiable Instruments

Negotiable instruments are a special kind Negotiable instruments are a special kind of commercial paper.of commercial paper.

They can pass readily through any They can pass readily through any financial system and is accepted in place financial system and is accepted in place of money.of money.

Example :Searle, the owner of a clothing Example :Searle, the owner of a clothing store in New York, contracts with Almado, store in New York, contracts with Almado, a swimsuit manufacturer in Los Angeles, a swimsuit manufacturer in Los Angeles, for $10,000 worth of swimsuits. for $10,000 worth of swimsuits.

Negotiability confers absolute and good Negotiability confers absolute and good title on the transferee title on the transferee

Law on Negotiable Instruments Law on Negotiable Instruments 

The Negotiable Instruments Act, The Negotiable Instruments Act, 18811881

is the basic legislation which defines is the basic legislation which defines and amends the law relating to:and amends the law relating to:

Promissory Notes, Bills of Exchange Promissory Notes, Bills of Exchange and Checks and Checks

Types of Negotiable Instruments Types of Negotiable Instruments 

The two primary classes of negotiable The two primary classes of negotiable instruments are as follows:instruments are as follows:

Bills of Exchange orBills of Exchange or ‘orders to pay money’ ‘orders to pay money’ E.g Notes Payable and Certificates of E.g Notes Payable and Certificates of

Deposits issued by banks. Deposits issued by banks.  Promissory Notes or ‘Promissory Notes or ‘promises to pay promises to pay

money’money’. E.g Checks and Drafts. E.g Checks and Drafts

How is Negotiable Instrument How is Negotiable Instrument Different from a Contract?Different from a Contract?

Contract Formation requires an offer, Contract Formation requires an offer, acceptance, and consideration, none acceptance, and consideration, none of which are elements of a of which are elements of a negotiable instrument. negotiable instrument.

The rights of the payee are better The rights of the payee are better than those provided by an ordinary than those provided by an ordinary contractcontract

Parties to a Negotiable Parties to a Negotiable InstrumentInstrument  

Holders of Negotiable Instruments Holders of Negotiable Instruments  Definition of a holder (given in Definition of a holder (given in

section 8).section 8). Who are HoldersWho are Holders Persons who are not HoldersPersons who are not Holders Holder in Due CourseHolder in Due Course Rights of Holders In Due CourseRights of Holders In Due Course

Competence of Parties to a note, Competence of Parties to a note, check and bill of exchange check and bill of exchange 

The legal question arises that who The legal question arises that who are competent to be parties to notesare competent to be parties to notes

bills or checks as makersbills or checks as makers or drawers, acceptors, payees, or drawers, acceptors, payees,

endorsers and holders thereof.endorsers and holders thereof.

Competence of Parties to a note, Competence of Parties to a note, check and bill of exchange check and bill of exchange 

The following parties are The following parties are incompetent to qualify for negotiable incompetent to qualify for negotiable instruments :instruments :

MinorMinor LunaticLunatic CorporationsCorporations

Liabilities of the Parties Liabilities of the Parties 

By signing a bill as drawer, acceptor By signing a bill as drawer, acceptor or endorseror endorser

The signatory becomes a party to The signatory becomes a party to whom special liabilities and whom special liabilities and restrictions apply:restrictions apply:

DrawerDrawer AcceptorAcceptor EndorserEndorser

Discharge of Liabilities of Parties Discharge of Liabilities of Parties 

There are various modes in which parties’ There are various modes in which parties’ liability to a negotiable instrument is liability to a negotiable instrument is discharged. discharged. 

IncompleteIncomplete By cancellationBy cancellation By agreementBy agreement By ReleaseBy Release By Accord and SatisfactionBy Accord and Satisfaction By PaymentBy Payment

Kinds of Negotiable InstrumentsKinds of Negotiable Instruments  

Bills of Exchange Bills of Exchange  Essentials Features of a Bill of Essentials Features of a Bill of

ExchangeExchange : : An Unconditional order in WritingAn Unconditional order in Writing Addressed by one person to anotherAddressed by one person to another Signed by the person giving itSigned by the person giving it To pay a sum certain in moneyTo pay a sum certain in money Payable on Demand or Fixed, Payable on Demand or Fixed,

determinable Future Datedeterminable Future Date Payable to the order of a specified person Payable to the order of a specified person

or the beareror the bearer

Order Bills and Bearer Bills Order Bills and Bearer Bills 

Order BillsOrder Bills Bearer BillsBearer Bills

ConsiderationConsideration

Consideration under English law is Consideration under English law is anything of value (an item or service)anything of value (an item or service)

In which each party to a legally-In which each party to a legally-binding contract must agree to binding contract must agree to exchange if the contract is to be valid. exchange if the contract is to be valid.

If only one party offers consideration If only one party offers consideration then the agreement is not a contract. then the agreement is not a contract. 

ExceptionsExceptions

Acceptance of Bills of Exchange Acceptance of Bills of Exchange 

Acceptance may be General or Acceptance may be General or QualifiedQualified

Acceptor (section 1,para3)Acceptor (section 1,para3)    Acceptor for honor ( section 4,para 4)Acceptor for honor ( section 4,para 4) Essentials of Valid AcceptanceEssentials of Valid Acceptance

Specimen: Bills of exchange Specimen: Bills of exchange

Specimen: Bills of exchangeSpecimen: Bills of exchange

Promissory notesPromissory notes  

Is a contract detailing the terms of a Is a contract detailing the terms of a promise by one party (the maker) to promise by one party (the maker) to pay a sum of money to the other (the pay a sum of money to the other (the payee). payee).

The obligation may arise from the The obligation may arise from the repayment of a loan or from another repayment of a loan or from another form of debt.form of debt.

Promissory notesPromissory notes  

Illustration:Illustration:Mr. A signs instruments in the following terms: Mr. A signs instruments in the following terms:  ““I promise to pay B or order Rs 500.” I promise to pay B or order Rs 500.” ““I acknowledge myself to be indebted to B in Rs I acknowledge myself to be indebted to B in Rs

1000 to be paid on demand for value received.” 1000 to be paid on demand for value received.” ““Mr. B, I O U Rs 1000.” Mr. B, I O U Rs 1000.” ““I promise to pay B Rs 500 and all other sums I promise to pay B Rs 500 and all other sums

which shall be due to him.” which shall be due to him.”    The instruments marked a and b are promissory The instruments marked a and b are promissory

notes whereas instruments marked c, d are not notes whereas instruments marked c, d are not promissory notes promissory notes

Specimen: Promissory NoteSpecimen: Promissory Note

Essential elements of a Promissory Essential elements of a Promissory note note 

a)a) It must be in writing It must be in writing b)b) It must contain a promise to pay It must contain a promise to pay c)c) The promise to pay must be The promise to pay must be

unconditioned unconditioned d)d) It must be signed by the maker It must be signed by the maker e)e) The maker or the person signing must be The maker or the person signing must be

a certain person a certain person f)f) The promise must be to pay a certain sum The promise must be to pay a certain sum g)g) The amount payable should be in money The amount payable should be in money

and money aloneand money aloneh)h) The person to whom the promise is made The person to whom the promise is made

or the payee must be a certain person. or the payee must be a certain person.

Specimen: Promissory NoteSpecimen: Promissory Note

Specimen: Promissory NoteSpecimen: Promissory Note

Difference between Bills of Difference between Bills of Exchange and Promissory note Exchange and Promissory note 

Promissory NotePromissory Note Two PartiesTwo Parties the maker the maker

undertakes to pay undertakes to pay unconditionallyunconditionally

The liability of the The liability of the maker is absolute maker is absolute because he because he unconditionally unconditionally binds himself to binds himself to pay pay

Bills Of ExchangeBills Of Exchange Three PartiesThree Parties the maker gives an the maker gives an

unconditional order unconditional order to a certain person. to a certain person.

Is only conditioned Is only conditioned because he because he become a surety become a surety for the payment by for the payment by the drawee. the drawee.

Difference between Bills of Difference between Bills of Exchange and Promissory noteExchange and Promissory note

Promissory notePromissory note Bills of ExchangeBills of Exchange

ChecksChecks  

The nature of a Check The nature of a Check  Parties to a Check transaction Parties to a Check transaction  Types of Checks Types of Checks  a) Open checksa) Open checks b) Crossed checksb) Crossed checks c) Bearer checksc) Bearer checks d) Order checks  d) Order checks 

Specimen: ChecksSpecimen: Checks

ChecksChecks

There is another categorization of There is another categorization of checks which is discussed below: checks which is discussed below: 

Ante-dated checksAnte-dated checks Stale checkStale check Mutilated checkMutilated check Post-dated checkPost-dated check

Crossing of Checks Crossing of Checks 

There are four types of crossing in There are four types of crossing in checks: checks: 

General CrossingGeneral Crossing Special CrossingSpecial Crossing Not negotiableNot negotiable Account payee Account payee

Differences between Checks and Differences between Checks and Bills of ExchangeBills of Exchange  

Checks differ from other bills of exchange in a number Checks differ from other bills of exchange in a number of respects: of respects: 

check cannot require payment at a future time (it check cannot require payment at a future time (it must be payable on demand) must be payable on demand)

Although a check is a negotiable instrument, Although a check is a negotiable instrument, checks are not often negotiated checks are not often negotiated

As a check must be drawn on a bank, it is subject As a check must be drawn on a bank, it is subject to terms implied by banking practice as part of to terms implied by banking practice as part of the contract between banks and customer. the contract between banks and customer.

Checks maybe crossed. An ordinary bill of Checks maybe crossed. An ordinary bill of exchange is never crossedexchange is never crossed

The effect of delay in presenting checks for The effect of delay in presenting checks for payment is different from other bills of exchange payment is different from other bills of exchange

Negotiation of a Negotiable Negotiation of a Negotiable InstrumentInstrument  

Under Section 14Under Section 14 Essential Features of Negotiability Essential Features of Negotiability 

Negotiation by Delivery  Negotiation by Delivery 

Section 46 lays downSection 46 lays down Section 47 states Section 47 states EXCEPTIONS:EXCEPTIONS: A promissory note, bill of exchange or A promissory note, bill of exchange or

check delivered on condition that is not to check delivered on condition that is not to take effect except in a certain event is not take effect except in a certain event is not negotiable (except in the hand of a holder negotiable (except in the hand of a holder for value without notice of the condition) for value without notice of the condition) unless such event happens  unless such event happens 

IllustrationIllustration

Negotiation by Endorsement Negotiation by Endorsement 

Endorsement (According to section Endorsement (According to section 15)15)

There are two main types of There are two main types of endorsements according to Section endorsements according to Section 16 16 

1.1. An Endorsement in BlankAn Endorsement in Blank

2.2. Special EndorsementSpecial Endorsement

Negotiation By EndorsementNegotiation By Endorsement

EndorsementEndorsement Endorsement of BillEndorsement of Bill General EffectGeneral Effect Three distinct effect Produced by the Three distinct effect Produced by the

Endorsement of BillEndorsement of Bill Negotiation by EndorsementNegotiation by Endorsement   IllustrationIllustration Negotiability and TransferabilityNegotiability and Transferability   DeliveryDelivery

Dishonoring of a Negotiable Dishonoring of a Negotiable InstrumentInstrument    

By non-acceptance  By non-acceptance   By non-payment By non-payment