Negotiable

Instruments
Act, 1881
Negotiable Instruments

 What is negotiable?
 Negotiable means transferable.
 The negotiation that goes on refers to the transfer of the
instrument between two people, or from one bank to another,
or even from one country to another.
 What is an instrument?
 In the broadest sense, almost any agreed-upon medium of
exchange could be considered a negotiable instrument.
 In day-to-day banking, a negotiable instrument usually refers
to checks, drafts, bills of exchange, and some types of
promissory notes.
Negotiable Instruments

 A negotiable instrument is a written order

promising to pay a sum of money.
 Unconditional written orders or promises to
pay money.
 Demand instrument (A substitute for money)
 NEGOTIABLE INSTRUMENTS: ESSENTIAL
ELEMENTS
A negotiable instrument must:
 Be in writing
 Be signed by the maker or drawer
 Be an unconditional promise or order to pay
 State a fixed amount of money
 Not require any undertaking in addition to
the payment of money
 Be payable on demand or at a definite time
 Be payable “to order” or “to bearer”
TYPES OF
NEGOTIABLE INSTRUMENTS
 Drafts
 Checks
 Honor and dishonor
 Stop-payment orders
 Precautions and care
 Promissory notes
 Certificates of deposit
 Bill of Exchange
Draft
 A draft is a three-party instrument that is an unconditional
written order by one party that orders the second party to pay
money to a third party.
 Drawer of a draft
 Drawee of a draft
 Payee of a draft
Check
 A distinct form of draft drawn on a financial institution and
payable on demand.
 Drawer of a check
 Drawee of a check
 Payee of a check
Parties to a Check
 Drawer
- Customer who maintains the checking account and writes
checks against the account
 Drawee
- Bank on which the check is drawn
 Payee
- Party to whom the check is written
Promissory Notes
 A two-party negotiable instrument that is an unconditional
written promise by one party to pay money to another party.
 Maker of a note
 Payee of a note
 Types of notes:
 Time note
 Demand note
 Installment notes
Promissory Notes (continued)
 Collateral required
 Some notes require posting security
 May be automobiles, homes, buildings, securities, or other
property
 If maker fails to repay note as due, lender can foreclose and take
collateral as payment
Certificates of Deposit (CD)
 A two-party negotiable instrument
 Special form of note created when a depositor deposits
money at a financial institution
 Institution promises to pay back the amount of the deposit plus
an agreed-upon rate of interest at set time.
Primary Liability
 Makers of promissory notes and certificates of deposit have
primary liability for the instrument.
 Maker unconditionally promises to pay the amount stipulated
in the note when due.
 Makers are absolutely liable to pay the instrument, subject
only to certain real defenses.
Secondary Liability
 Drawers of checks and drafts and unqualified indorsers of
negotiable instruments have secondary liability on the
instrument.
 This liability is similar to that of a guarantor of a simple
contract.
 It arises when the party primarily liable on the instrument
defaults and fails to pay the instrument.
Secondary Liability (continued)
 Unqualified indorsers have secondary liability.
 Qualified indorsers have no secondary liability.
 They have expressly disclaimed liability.
 Secondary liability arises from an instrument
being:
 Properly presented
 Dishonored.
 Notice being timely given to person who is
secondarily liable.
Bill of Exchange

A bill of exchange is a negotiable and

unconditional written order, such as a check,
draft, or trade agreement, addressed by one
party to another.
The receiver of the bill must pay the specified
sum or deliver specified goods on demand or at
a specified time.
Bills of exchange are a common form of
internationally negotiable instruments.
SPECIALIZED TYPES OF NEGOTIABLE
INSTRUMENTS
 Certified checks
 Teller’s check
 Cashier’s check
 Money orders
 Traveler’s checks
Special Types of Checks
 Certified Checks
 Bank agrees to accept check when presented
 Pays out of funds set aside in special account
 Drawer is discharged from liability on check
 Cashier’s Checks
 Two party check
 Bank is both drawer and drawee
 Holder is payee
 Traveler’s Checks
 Issued without named payee
 Requires purchaser’s signature at issuance and upon
use
HOW IS NEGOTIABLE INSTRUMENTS
TRANSFERRED?
 Indorsement
 Indorser
 Indorsee
 Holder
TYPES OF ENDORSEMENTS

 Blank endorsements
 Full / Special endorsements
 Partial endorsements
 Restrictive endorsements
 Conditional endorsements
HOW IS NEGOTIABLE INSTRUMENTS
DISCHARGED?

 By payment
 By cancellation
 By alteration
 By impairment of collateral
 As a contract
Holder Versus Holder In Due
Course
Holder
 A person who is in possession of
a negotiable instrument that is
drawn, issued, or indorsed to
him or his order, or to bearer, or
in blank.
Holder in Due Course (HDC)
 A person who takes a
negotiable instrument for
value, in good faith, and
without notice that it is
defective or is overdue.