Negotiable Instruments

By: Nimrah Saeed (5127)

Jawad Hussain (5154)
Imran Imtiaz (5809)
Hassan-ul-Haq
 Negotiable Instruments
 What Are Negotiable Instruments?
 A specialized type of Contract for the payment of money.
 It is Unconditional and
 Capable of transfer by Negotiation.
 Negotiable instruments may be transferred by
delivery or by endorsement and delivery.
 Common examples include checks and
banknotes (paper money). 
 Negotiable Instruments
 Negotiable instruments are a special kind of
commercial paper.
 They can pass readily through any financial
system and is accepted in place of money.
 Example :Searle, the owner of a clothing store in
New York, contracts with Almado, a swimsuit
manufacturer in Los Angeles, for $10,000 worth
of swimsuits.
 Negotiability confers absolute and good title on
the transferee
Law on Negotiable Instruments 
 The Negotiable Instruments Act, 1881
 is the basic legislation which defines and
amends the law relating to:
 Promissory Notes, Bills of Exchange and
Checks
 Types of Negotiable Instruments 
 The two primary classes of negotiable
instruments are as follows:

 Bills of Exchange or ‘orders to pay money’

 E.g Notes Payable and Certificates of Deposits
issued by banks. 
 Promissory Notes or ‘promises to pay money’.
E.g Checks and Drafts
 How is Negotiable Instrument
Different from a Contract?
 Contract Formation requires an offer,
acceptance, and consideration, none of
which are elements of a negotiable
instrument.
 The rights of the payee are better than
those provided by an ordinary contract
 Parties to a Negotiable
Instrument 
 Holders of Negotiable Instruments 
 Definition of a holder (given in section 8).
 Who are Holders
 Persons who are not Holders
 Holder in Due Course
 Rights of Holders In Due Course
 Competence of Parties to a note,
check and bill of exchange 
 The legal question arises that who are
competent to be parties to notes
 bills or checks as makers
 or drawers, acceptors, payees, endorsers
and holders thereof.
 Competence of Parties to a note,
check and bill of exchange 
 The following parties are incompetent to
qualify for negotiable instruments :
 Minor
 Lunatic
 Corporations
 Liabilities of the Parties 
 By signing a bill as drawer, acceptor or
endorser
 The signatory becomes a party to whom
special liabilities and restrictions apply:
 Drawer
 Acceptor
 Endorser
 Discharge of Liabilities of Parties 
 There are various modes in which parties’
liability to a negotiable instrument is
discharged. 
 Incomplete
 By cancellation
 By agreement
 By Release
 By Accord and Satisfaction
 By Payment
Kinds of Negotiable Instruments 

 Bills of Exchange 
 Essentials Features of a Bill of Exchange :
 An Unconditional order in Writing
 Addressed by one person to another
 Signed by the person giving it
 To pay a sum certain in money
 Payable on Demand or Fixed, determinable
Future Date
 Payable to the order of a specified person or the
bearer
 Order Bills and Bearer Bills 
 Order Bills
 Bearer Bills
 Consideration
 Consideration under English law is
anything of value (an item or service)
 In which each party to a legally-binding
contract must agree to exchange if the
contract is to be valid.
 If only one party offers consideration then
the agreement is not a contract. 
 Exceptions
 Acceptance of Bills of Exchange 
 Acceptance may be General or Qualified
 Acceptor (section 1,para3)  
 Acceptor for honor ( section 4,para 4)
 Essentials of Valid Acceptance
Specimen: Bills of exchange
Specimen: Bills of exchange
 Promissory notes 
 Is a contract detailing the terms of a
promise by one party (the maker) to pay a
sum of money to the other (the payee).
 The obligation may arise from the
repayment of a loan or from another form
of debt.
 Promissory notes 
Illustration:
Mr. A signs instruments in the following terms: 
 “I promise to pay B or order Rs 500.”
 “I acknowledge myself to be indebted to B in Rs 1000
to be paid on demand for value received.”
 “Mr. B, I O U Rs 1000.”
 “I promise to pay B Rs 500 and all other sums which
shall be due to him.”
  
 The instruments marked a and b are promissory notes
whereas instruments marked c, d are not promissory
notes
Specimen: Promissory Note
Essential elements of a Promissory
note 
a) It must be in writing
b) It must contain a promise to pay
c) The promise to pay must be unconditioned
d) It must be signed by the maker
e) The maker or the person signing must be a
certain person
f) The promise must be to pay a certain sum
g) The amount payable should be in money and
money alone
h) The person to whom the promise is made or
the payee must be a certain person.
Specimen: Promissory Note
Specimen: Promissory Note
 Difference between Bills of
Exchange and Promissory note 
 Promissory Note  Bills Of Exchange
 Two Parties  Three Parties
 the maker undertakes  the maker gives an
to pay unconditionally unconditional order
 The liability of the to a certain person.
maker is absolute  Is only conditioned
because he because he become
unconditionally binds a surety for the
himself to pay payment by the
drawee.
 Difference between Bills of
Exchange and Promissory note
 Promissory note  Bills of Exchange
 Checks 
 The nature of a Check 
 Parties to a Check transaction 
 Types of Checks 
 a) Open checks
 b) Crossed checks
 c) Bearer checks
 d) Order checks 
Specimen: Checks
 Checks
 There is another categorization of checks
which is discussed below: 
 Ante-dated checks
 Stale check
 Mutilated check
 Post-dated check
 Crossing of Checks 
 There are four types of crossing in
checks: 
 General Crossing
 Special Crossing
 Not negotiable
 Account payee
Differences between Checks and
Bills of Exchange 
Checks differ from other bills of exchange in a number of
respects: 
 check cannot require payment at a future time (it must
be payable on demand)
 Although a check is a negotiable instrument, checks
are not often negotiated
 As a check must be drawn on a bank, it is subject to
terms implied by banking practice as part of the
contract between banks and customer.
 Checks maybe crossed. An ordinary bill of exchange is
never crossed
 The effect of delay in presenting checks for payment is
different from other bills of exchange
 Negotiation of a Negotiable
Instrument 
 Under Section 14
 Essential Features of Negotiability 
 Negotiation by Delivery 
 Section 46 lays down
 Section 47 states
 EXCEPTIONS:
 A promissory note, bill of exchange or check
delivered on condition that is not to take effect
except in a certain event is not negotiable
(except in the hand of a holder for value without
notice of the condition) unless such event
happens 
 Illustration
 Negotiation by Endorsement 
 Endorsement (According to section 15)
 There are two main types of
endorsements according to Section 16 
1. An Endorsement in Blank
2. Special Endorsement
 Negotiation By Endorsement
 Endorsement
 Endorsement of Bill
 General Effect
 Three distinct effect Produced by the
Endorsement of Bill
 Negotiation by Endorsement 
 Illustration
 Negotiability and Transferability 
 Delivery
 Dishonoring of a Negotiable
Instrument  
 By non-acceptance  
 By non-payment