Negotiable Instruments

BILLS OF EXCHANGE

PROMISSORY NOTES

CHEQUES

ASANKA KARUNARATNA
ATTORNEY AT LAW, LL.B., M.A.(HON’S),
M.SC. (KDU), LL.M. (IMLI-MALTA), M.P.A.
NOTARY PUBLIC, COMPANY SECRETARY,
COMMISSIONER FOR 0ATHS, DIP. IN BS,
ICDL, E-CITIZEN, JNSC
 “where an instrument is by the custom of trade
transferable like cash, by delivery, and is also
capable of being sued upon by the person holding
it, it is entitled to the name of a negotiable
instrument, and the property in it passes (=
ownership) to a transferee who has taken it for
value and in good faith.”
(Crouch v Credit Foncier of England Ltd (1873) LR 8 QB 374)
 FEATURES

i. The property and rights in the negotiable

instrument passes by delivery alone, or by
delivery and endorsement. No further evidence of
transfer is required.
ii. The holder of the instrument can sue on it in his
own name.
iii. No notice need to be given to the debtor (that is
the person who is liable to pay) in respect of the
instrument.
iv. Valuable consideration is presumed to have been given
for the instrument. Since English law applies, “Valuable
consideration” which is not a requirement in Roman Dutch
Law, is a requirement in negotiable instruments. However,
the law presumes it in the case of a negotiable instrument.
v. A negotiable instrument is transferred “free of
equities”. This means that a transferee obtains a good title to
the instrument although the transferor’s title may have been
defective. For example, the transferee is not affected by
defenses such as fraud. However, it is only a transferee who
has received the instrument in good faith for value who enjoys
this privilege
 Examples

1. Bills of Exchange

2. Cheques
3. Promissory notes
4. Bank Drafts
5. Dividend Warrants
6. Bearer Debentures
7. Treasury Bills
 Example of Non-negotiable Instruments

1. Money Orders

2. Postal orders
3. Fixed Deposit Receipts issued by Banks
4. Certificates of Deposit
5. Share Certificates
6. Letter of Credit
7. IOUs
8. Bills of Lading
 PROMISSORY NOTES
Similar to bills of exchange in that they, too, are
a financial instruments that is a written promise by
one party to pay another party.
They are debt notes that provide financing for either a
company or an individual from a source other than a
traditional lender, most commonly one of the parties in a
sales transaction.
Promissory notes are retained by the payee (= seller)
and, once payment has been completed, must be canceled
and returned to the issuer (= buyer).
In terms of legal enforceability, a promissory note is more
formal than an IOU (=I owe You), but less so than a
standard bank loan.
 CHEQUES/CHECKS

 The cheque is the most popular and common negotiable

instrument known today.

 “A cheque is a bill of exchange drawn on a banker payable on

demand”.

 Accordingly, the same requirements that are essential to

constitute a bill of exchange are required to constitute a cheque.

There is one major difference. To constitute a cheque, the

instrument must be drawn on a banker. Thus no commercial
or financial institution other than a bank can pay or collect
cheque. This is a major advantage and privilege that banks
enjoy.
 Advantages of a cheque

i. The cheque dispenses with the need to keep cash

with the attendant risks of theft and loss.

ii. It can be drawn for the exact amount required.

iii. It can be dispatched by the debtor to the creditor

cheaply and safely without the risks of loss and
inconvenience which can occur when settling debts
in cash.
iv. Payment by cheque also provides a simple and authentic
record of the payment of the debt. Banks retain paid cheques
for over six years so that you can always get the bank to produce
a cheque to prove your payment.

v. Payment by cheque is generally equated to payment by cash.

The cheque, when given, is a conditional payment, when
honoured (by the bank) it is actual payment. D & C Builders v
Rees [1966] 2 QB 617.

vi. English common law also treats a cheque as an item of

property.
 Open cheque / Cash Cheque

An open cheque is a cheque that is not crossed on

the left corner and payable at the counter of the
drawee bank on presentation of the cheque
Blank Cheque
 “Crossings” on cheques

 Crossings on cheques originated by the practice of

bankers. Crossings were originally placed on cheques
only by bankers in the process of clearing.

This tradition was continued in the English Bills of

Exchange Act of 1882 and is also found in the Sri
Lanka Bills of Exchange Ordinance of 1927 (sections
76 and 77)
 General Crossing

A cheque crossed generally is a cheque that bears

two parallel transverse lines across its face,
optionally with the words 'and company' (or any
abbreviation thereof) or 'not negotiable' between the
lines.
Such a cheque can be credited to any account
without endorsement but through a banking
account, so that the beneficiary can be traced.
Crossed Cheque
 “Account Payee” Crossing

This crossing operates as notice to the banker that

only the account of the payee is to be credited. The
Bills of Exchange Ordinance does not refer to this
type of crossing. It is a practice recognized by the
banking community but any payee of a cheque who
has no bank account will not accept such a cheque
A/C Payee