NATURE OF NEGOTIABLE INSTRUMENTS

The Negotiable Instruments Act, 1881 came into force on March 1, 1882. It extends to the whole of
Pakistan. It deals with the law relating to promissory note, bill of exchange and cheque. This law does
not affect the provisions of Sections 24 and 35 of the State Bank of Pakistan Act, 1956. [Sec. 1(A)]

Introduction

Meaning & Definition

The word ‘negotiable’ means transferable by delivery and the word ‘instrument’ means a written
document which creates a right in favor of some person. According to Sec. 13(1), negotiable instrument
means a promissory note, bill of exchange or cheque payable either to order or the bearer. In other
words, it is a piece of paper which entitles a person to a sum of money mentioned in it and which is
freely transferable from one person to another..

Following are the types of negotiable instruments:

PROMISSORY NOTE

The term promissory note may be defined as a promise in writing by a person to pay a certain sum of
money to a specified person. Section 4 defines it as follows:

“A promissory note is an instrument in writing (not being a bank note or a currency note) containing an
unconditional undertaking, signed by the maker, to pay on demand or at a fixed or determinable future
time a certain sum of money only to, or to the order of, a certain person or to the bearer of the
instrument.”

1. Maker: It is a person who makes the promissory note and promises to pay the amount state
therein.
2. Payee: It is a person to whom the amount of promissory note is payable, i.e. to whom the
promise to pay is made.
 3. Holder: It is a person who is either the payee or endorsee of the promissory note.

4. Endorser: It is person who endorses (i.e. transfers) the negotiable instrument (in this case,
promissory note) to another person. In other words, he is the transferor of the promissory note.

5. Endorsee: It is a person to whom the negotiable instrument (in this case, promissory note) is
endorsed (i.e. transferred). In simple words, he is the transferee of the promissory note.

Essentials

The following essentials of promissory note:

1.In writing

Promissory note must be writing. Verbal promise to pay is not promissory note. Writing may be on
paper book. It may written pen pencil. It may printed typed.

EXAMPLES:

Signs instruments in following terms:

a. I promise to pay B or order RS.500.

b. acknowledge myself to indebted to B in 1,000 to paid demand for value received.

The above instruments are valid promissory notes.

2.Promise to pay

There must be promise undertaking pay. Mere acknowledgement debt without clear promise to pay is
not promissory note.

EXAMPLES

Signs instruments in following

a. am liable to pay Rs. 500 toB

b.I have taken Rs. 500 from B and am accountable to him for same with interest.

3.Unconditional Promise

Must contain unconditional promise to pay. The promise must not depend upon happening some
uncertain event. Must be absolute. If contains conditional promise, it is not valid promissory note.

EXAMPLES

A signs instruments in following terms:

a.a promise to pay Rs. 500 to B seven days after my marriage with C

b. Promise to pay 7000 to B soon as can.

c.promise to pay Rs. 500 to B on death provided leaves me enough to pay that sum.

The above instruments are not valid notes.

4.Signed by marker

It is necessary that maker signs promissory note. The signature may be on part of instrument and not
necessarily the bottom. When the maker illiterate, thumb mark sufficient.

EXAMPLE

A writes the Instrument but not sign thereon: promise pay Rs. 5,000.” The note is not valid
promissory note.

5.Certain Maker

The instrument must indicate who is liable to pay. When there are more than one maker, they may be
liable jointly or jointly and individually. But alternative promisors are not allowed.

EXAMPLES

1.A note in the form “1, X. Promise to pay Rs. 500 to Z” and signed by X or also Y is a good note as
against X only.

6.Certain Payee

The payee of a promissory note must be a certain person. The payee’s name can be indicated by his
official designation. It may be made payable to two or more payees jointly. It can be made payable in
the alternative to one of the two, or some of the several payees. [Sec. 13(2)]

EXAMPLE

A.A promissory note payable to the manager of bank or the principal of a college is regarded as payable
to a certain person.

b. Z signs the note as “I promise to pay a sum of Rs. 5000 to X or Y is a vad note because payee is
considered a certain person.

7.Certain Sum

It is necessary that the sum of money promised to be payable must be certain and definite. If the
amount to be paid is uncertain, the instruments will not be a valid promissory note.
EXAMPLE∷ A note in the form, “I promise to pay Rs. 500 to B and all fines according to rules” is not a
valid promissory note.

7.Pakistani Currency

A promissory note containing a promise to pay a certain amount in foreign currency is not a valid
promissory note. For a valid note, it must contain a promise to pay a certain amount in Pakistani
currency.

EXAMPLE

A note signed by A, “I promise to pay Rs. 500 to B on 1st January next a valid note

8.Other Formalities

Some other formalities are as follows:

1.The place should be mentioned where it is made

2.Date should be mentioned on which it is made.

3.The promise to pay must be for lawful consideration.

4.it must be properly stamped under the Stamp Act.

5.It is necessary to cancel all the stamps affixed on the note.

Important Points

The following points regarding promissory note are important

1. A note payable “only to a particular person” is valid even though it is not a Negotiable instrument as it
restricts its transferability.

2 A promissory note cannot be originally made “payable to bearer”, because State Bank of Pakistan
prohibits the issue of such promissory note.

3. can be drawn “payable to order” originally

4.On endorsement in blank, it can become “payable to bearer” bearer on demand” subsequently.

5.A bank note or a currency note is not a pronote as it is money itself.

BILL OF EXCHANGE

Meaning & Definition

The term bill of exchange is as an order, in writing, by a creditor upon his debtor requiring him to pay a
certain sum of money to a specified person.

Section 5 defines the bill of exchange as bill of exchange is an instrument in writing containing an
unconditional order, signed by the maker, directing a certain person to pay on demand or at a fixed or
determinable future time a certain sum of money only to, or to the order of, a certain person or to the
bearer of the instrument.”

1. Drawer: it is a person who makes the bill of exchange. In other words, he is the maker of the bill
of exchange.
2. Drawee: It is a person who is directed (i.e. ordered) to pay the amount of the bill of exchange
i.e. on whom a bill of exchange is drawn.
3. Acceptor: It is a person who accepts the bill of exchange. Generally, the drawee accepts the bill
of exchange and on acceptance he becomes the acceptor.
4. Payee: It is a person to whom the amount of bill of exchange is payable.

ESSENTIALS

The following are essentials of a bill of exchange.

1. In Writing

A bill of exchange must be in writing. A verbal, order to pay cannot be called a bill of exchange. The law
does not explain about writing. In practice, the bill of exchange is written on stamped paper or on form.
It is written in ink. It may be printed or typed. 15. AD Stvas to SAT 29.

EXAMPLE

A draws a bill on B as: “Pay Rs.5000 to X or order”. It is a valid bill.

2. Unconditional order

The language used in a bill should convey an order to pay. The order to pay must not depend upon the
happening of an event. It must be unconditional.

EXAMPLES

a. A draws a bill on B as “Pay Rs. 5000 to C as early as possible.” It is not a valid bill.
b. A draws a bill on B as “Pay Rs.5000 to C or order.” It is a valid bill as it is unconditional.
c. A draws a bill on B as “Mr. X, please let the bearer have Rs.500 and oblige.” It is not a valid bill as
it contains a request and not an order.
3. Signed by Drawer

It must be signed by the drawer. The signature may be on any part of the instrument and not necessarily
at the bottom. If the drawer is illiterate his thurre impression is sufficient
EXAMPLE

A draws a bill on B. “Pay Rs.10000 to X or order” but does not sp thereon. It is not a valid bill

4. Certain Drawee

The drawee of a bill of exchange must be a certain person. The name d the drawee must be mentioned
in the bill. If the bill does not mention the named the drawee, it is not a valid bill.

EXAMPLE

X draws a bill, “Pay Rs. 10000 or order.” It does not mention the name of the drawee so it is not a valid
bill.

5. Certain Payee

The payee of a bill must also be a certain person. The payee’s name car be indicated by his official
designation only A bill may be made payable to two f more payees jointly or it may be made payable in
the alternative to one of two o one or some of several payees. [Sec. 13(2)]

EXAMPLES

a.A draws the bill as under Pay Rs.50000 to principal of Halley College of Commerce.

b.Pay Rs.60000 to X or Y c. Pay Rs.50000 to M and N.

The above bills are valid

6.Certain Sum

It is essential that the sum payable must be certain and definite the amount ordered to be paid is
uncertain, the instrument cannot be called a valid bill of exchange

EXAMPLES

M draws a bill on N as “Pay to X Rs 20,000 and all the other sums due to him.” It is not a valid bill b. M
draws a bill on N as “Pay Rs 30000 to X on 1st June 2001” It is a valid bill

7.Pakistani Currency

It is necessary that the payments are made in Pakistani currency and not in foreign currency, notes or
other articles. If the bill contains an order to pay money and something in addition to money, it cannot
be called a bill

EXAMPLE

A draws a bill on B as, “Pay Rs 50000 and deliver 100 bags of wheat to X’ It is not a valid bill.
 8.Other formalities:

Other formalities like date, place, attestation, consideration, etc. areUsually mentioned in the bill
but they are not essential in law However, it isNecessary that a bill should be affixed with the
necessary stamp.

Important Points

The following points regarding bill must be noted

A A bill of exchange directing to pay “only to a particular person is valid. But it is not negotiable
instrument according to the definition because its Transferability is restricted.

B. A bill can be originally drawn “payable to bearer” but it must be payable Otherwise than on demand
(say, three months after date) In other words, a bill cannot be drawn “payable to bearer on demand” A
bill drawn “payable on demand” must be made “payable to order”

CHEQUE

Meaning and Definition

The term cheque may be defined as a bill of exchange drawn upon a banker and is always payable on
demand. Section 6 defines cheque as follows.

“A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise
than on demand.”

The definition shows t hat, a cheque is a bill of exchange with the following two additional
requirements:

1 A cheque is always drawn on a specified banker 2. A cheque is always payable on demand.

A cheque must satisfy all the requirements of a bill.

1 Drawer: It is a person who makes the cheque. In other words, he is the maker of the cheque.

2 Drawee: It is a banker who is directed to pay the amount of the cheque i.e. on whom the cheque is
drawn. In other words, the drawee is always a banker

3.Payee: It is a person to whom the amount of a cheque is payable

Essentials

The following are essentials of a cheque.

1.In Writing

The cheque must be in writing, Cheques which are printed or made out on a typewriter are also valid.
Banks discourage printed and typed cheques Because such they can be easily altered. Customers should
be encouraged draw cheques in ink. Cheques written in lead pencil are returned unpaid

EXAMPLES

A draws a cheque in the following terms:

a. Pay X or bearer Rs. 500.

b. Pay X Rs. 500.

The above cheques are valid.

2. Unconditional Order

The cheque must contain an order to pay unconditionally. If the bank is ordered to pay upon the
condition of payee’s signing the receipt, then the instrument is a conditional order and thus not a
cheque.

EXAMPLES

A A draws a cheque “Pay C Rs 300.” It is a valid cheque. B A draws a cheque “Pay C Rs. 400, if you can.” It
is not a valid cheque as Conditional

3. Signed by Drawer

A cheque will be valid only if it is signed by the account holder or by someone who is authorized to sign
on his behalf.

EXAMPLE

A draws a cheque but does not sign thereon. “Pay M, Rs. 500.” It is not a valid cheque

4.Payable on Demand

A cheque is always drawn payable on demand. The demand should be made within a reasonable time.
In Pakistan, the cheque must be presented within Six month from the date of issue

EXAMPLE

Y draws a cheque on 1st June. 2012 as “Pay Rs. 500 to X” It is valid for Six months

. 5. Certain Sum

The amount mentioned in the cheque should be certain. There should be no element of doubt. In
practice, banks return the cheque if the amount in words and figures differs from each other

EXAMPLE∷:M draws a cheque as, “Pay Rs. 500 to N and some amount according to his needs. It is not a
valid cheque.