NEGOTIABLE INSTRUMENTS

OBJECTIVE
To provide the candidate with a broad understanding of the following principles
pertaining to Negotiable Instruments;
 Nature and characteristics.
 Negotiability and transferability.
 Types: Cheques, promisory notes, bills of exchange.
 Rights and obligations of the parties

LECTURE 9: NEGOTIABLE INSTRUMENTS

Meaning of Negotiable Instrument:

 The word negotiable means “transferable by delivery,’ and the word

instrument means a written document by which a right is created in favour of
some person. Thus, the term “negotiable instrument” literally means a
written document transferable by delivery. Such instrument confers certain
rights, which are incapable of physical possession and which can only be
enforced by legal action, not by physically taking possession of anything.
For example, If a cheque is written in the name of a specific person, the
cheque gives him a right to this sum of money without giving him the
money itself in physical terms.
 A negotiable instrument is a specialized type of “contract” for the payment
of money that is unconditional and capable of transfer by negotiation.
 A document that promises payment to a specified person or the assignee.
 Negotiable instruments are written documents that promise or order the
payment of an exact amount of money.
 A document that promises payment to a specified person or the assignee.
The payee (the person who receives the payment) must be named or
otherwise indicated on the instrument. A check is considered a negotiable
instrument.
 This type of instrument is a transferable, signed document that promises to
pay the bearer a sum of money at a future date or on demand. Examples also
include bills of exchange, promissory notes, drafts and certificates of
deposit.
 A negotiable instrument is a document guaranteeing the payment of a
specific amount of money, either on demand, or at a set time with the payer
named on the negotiable instrument. More specifically, it is a document
contemplated by a contract, which warrants the payment of money without
condition which may be paid on demand or at a future date.
9.2 Characteristics of negotiable instruments
The main characteristics of negotiable instruments are as under:
Easy negotiability:
They are transferable from one person to another without any formality. In other,
words, the property or right of ownership) in case it is payable to order) or by
delivery merely (in case it is payable to bearer), and no further evidence of transfer
is needed.
Transferee can sue in his own name without giving notice to the debtor.
A bill, note or a cheque represents a debt, ie. An “actionable claim” and implies the
right of the creditor to recover something from his debtor. The creditor can either
recover this amount himself or can transfer of a negotiable instrument is entitle to
sue on the instrument in his own name in case of dishonour, without giving notice
to the debtor of the fact that he has become holder.
Better title to a bonafide transferee for value
A bonafide transferee of a negotiable instrument for value (technically called as a
holder in due course) gets the instrument “free from all defects.” He is not affected
by any defect of title of the transferor or any prior party. Thus, the general rule of
the law of transfer applicable in the case of ordinary chattels that “nobody can
transfer a better title than that of his own’ does not apply to negotiable instrument.
1. Writing and Signature:

Negotiable Instruments must be written and signed by the parties according to the
rules relating to Promissory Notes,

2. Money:

Negotiable instruments are payable by legal tender money

3. Negotiability:

Negotiable Instruments can be transferred from one person to another by a simple

process. In the case of bearer instruments, delivery to the transferee is sufficient. In
the case of order instruments two things are required for a valid transfer:
endorsement (i.e., signature of the holder) and delivery. Any instrument may be
made non-transferable by using suitable words, e.g., “pay to X only.”
4. Title:

The transferee of a negotiable instrument, when he fulfils certain conditions, is

called the holder in due course. The holder in due course gets a good title to the
instrument even in cases where the title of the transferrer is defective.

5. Notice:

It is not necessary to give notice of transfer of a negotiable instrument to the party

liable to pay. The transferee can sue in his own name.

6. Rights

The transferee of the negotiable instrument can sue in his own name, in case of
dishonor.

A negotiable instrument can be transferred any number of times till it is at

maturity. The holder of the instrument need not give notice of transfer to the party
liable on the instrument to pay.

7. Presumptions
Certain presumptions apply to all negotiable instruments e.g. a presumption that
consideration has been paid under it
. i. Was made, drawn or accepted for consideration;
ii. Was made or drawn on a date preparing on the instrument;
iiiWas transferred before its maturity date; and so on.

8. Prompt Payment

A negotiable instrument enables the holder to expect prompt payment because a

dishonor means the ruin of the credit of all persons who are parties to the
instrument.

Generally, in order for a written instrument to be considered a negotiable

instrument
i. the promise, or order, to pay must be unconditional,
ii. must be for a sum certain,
iii. payment must be made on demand or at a time certain, and
iv. nothing else may be required of the parties other than the transfer of money.

CONDITIONS OF NEGOTIATION

Negotiation means the transfer of negotiable instrument from one person to another
in such a way that the transferee must become the holder of the instrument.

When we analyze this definition we find that following conditions must be

fulfilled for the negotiations of the instrument;

1. There must be transfer of the promissory note, bill of exchange or cheque from
one person to another.
2. The person to whom an instrument is transferred must constitute as the holder of
the instrument.
3. He must have all the rights of the holder of the instrument.

9.3 Negotiable Instruments Recognized By Statute

The following instruments have been recognized as negotiable instruments by
statute, usage or custom:
i. Bills of Exchange
ii. Cheques
iii. Promissory Notes
iv. Treasury Bills
v. Bearer debentures
vi. Divided warrants
vii. Share warrants

The following are not negotiable instruments:

Money Orders

Postal Orders

Share certificates

Letters of Credit
Fixed Deposit Receipts

The Bills of Exchange Act (cap.27) recognizes the following negotiable

instruments ;
• Bills of Exchange
• Cheques
• Promissory Notes
These three negotiable instruments are discussed below :

9.4 Bills of exchange

Definition:
Section 3(1) of the Bills of Exchange Act defines the bills as:
“ A bill of exchange is an unconditional order in writing, addressed by one person
to another, signed by the person giving it, requiring the person to whom it is
addressed to pay on demand or at a fixed or determinable future time a sum certain
in money to or to the order of a specified person or to bearer”.

Section 3(2) of the Act states that any instrument which does not comply with
these conditions, or which orders any act to be done in addition to the payment of
money, is not a bill of exchange.
9.4.1 Parties to a bill of exchange:
There are three parties to a bill of exchange. These are: drawer, drawee and payee.
i. The person who makes the bill is called the “drawer’
ii. The person who is directed to pay is called the “drawee”.
iii. The person to whom the payment is to be made is called the “payee”.

The drawer or endorsee (if the bill is endorsed to the payee) is called the “holder”.
The holder must present the bill to the drawee for his acceptance. When the drawee
accepts the bill, by writing the words “accepted” and then signing, he is called the
acceptor”.
9.4.2 Essentials of a bill:
To be a valid bill of exchange, an instrument must comply with the following
requirements:
i. It must contain an “order to pay’. A mere request to pay on account will not
amount to an order. But an order may be expressed in polite language. The use of
the word “please pay’ does not prevent an instrument from being an order.
ii. The order to pay must b e unconditional. It means there must be no other
condition attached to the payment.
iii. It must be addressed by one person to another person.
iv. The drawer, drawee and payee must be certain.
v. The sum payable must be certain.
vi. It must be in writing and signed by the drawer.
vii. If it is not payable on demand then the time of payment must be fixed or
determinable. A determinable event is one which is bound to happen but the time
of happening may be uncertain e.g the death of the drawee’s father.

PARTIES TO A BILL OF EXCHANGE

Parties to a bill of exchange are the drawer and the drawee.
The drawer is the person who draws the bill demanding payment.
The drawee is the person to whom the bill is drawn. This is person to pay the
amount due.
The person to whom the amount is paid the payee.

TYPES/CLASSIFICATION OF BILLS
Bills of Exchange may be classified on the basis of:
1. To Whom Payable: A bill may be bearer or order. A bearer bill is a bill
payable to the holder or bearer of the instrument. An order bill is a bill payable to
the order of a specified person.
2. Where drawn and a payable: An inland bill is a bill as bill drawn and
payable within East Africa. Any other bill is foreign.
3. Whenpayable:
a. Sight bill: - This is bill payable on demand
b. Usance bill: This is bill payable at a fixed or determinable future time.
4. Whether transferable or not: -
a. Transferable bill: - This is a bill which is capable of being
negotiated by one person to another
b. Non-transferable bill: - This is a bill which contains a stipulation
prohibiting transfer. A bill drawn and signed by the drawer is referred to as draft
and must be presented to the drawee for acceptance

9.4.3 Holder of A bill:

The bills Jof Exchange Act defines a holder as “the payee or endorsee of a bill or
note who is in possession of it or the bearer thereof”.
The question of who is a “holder” of a bill largely depends on the type of bill in
question. In case of an order bill, it is the payee or endorsee in possession of the
bill; while in the case of a bearer bill it is the bearer who by definition is the person
in possession of a bill or note payable to bearer.
The act draws a distinction between two types of holders: a holder for value and a
holder in due course.
Holder for value:
To understand what is meant by “holder for value” we must first understand who is
a “holder and what is meant by value. We have already seen that a holder is
defined as the payee or endorsee in possession of a bill or the bearer thereof.
‘Value” on the other hand, “means value consideration”
A holder for value is therefore a payee or endorsee in possession of a bill, or the
bearer of a bill, who has furnished valuable consideration for it.
The holder of a bill is, under certain circumstances, deemed to be a holder for
value. In addition, where “the holder a bill has a lien on it, arising either from
contract or by implication of law, he is deemed to be a holder for value to the
extent of the sum for which he ahs a lien” s.27(3).

Holder in due course

A holder in due course is defined by section 29 as a holder who has taken a bill
complete and regular on the face of it, under the following condition, namely:
i. That he became the holder of it before it was overdue and without notice that it
had been previously dishonored, if such was the fact:
ii. That he took the bill in good faith and for value, and that at the time the bill was
negotiated to him he had no notice of any defect in the title of the person who
negotiated it.

The above definition requires further consideration. First, the bill in question must
be” complete and regular on the face of it”. This means that a holder of an inchoate
instrument or of a bill that is wanting in any material respect – e.g where it is
undated – cannot be a holder in due course. (although such folder has a right to fill
in the date, he is not thereby constituted into a holder in due course). Also, where
an endorser does not sign his full names, this is an irregularity which denies his
endorsee the status of holder in due course.
Secondly, a person can only be a holder in due course if he became a holder of the
bill before it was overdue. A bill payable on demand is deemed to be overdue
when it appears on the face of it to have been in circulation for an unreasonable
length of time; and what is an unreasonable length of time is a question of fact.
S.36 (3). According to bankers” practice a cheque, which by definition is a bill of
exchange payable on demand, becomes “stale” after it has been in circulation for
six months). Where an overdue bill is negotiated, it can only be negotiated subject
to any defect of title affecting it at its maturity, and thenceforward no person who
takes it can acquire or give a better title than that which the person from whom he
took it had.
In other words the ‘nemo dat rule’ applies to overdue bills and any person taking
such bill takes it at his own risk; there is no assurance of good title to the bill.
The burden is on any one who claims that a particular bill is overdue to prove this
fact, otherwise, section 36(4) provides. “Except where an endorsement bears date
after maturity of the bill, every negotiation is prima facie deemed to have been
affected before the bill was overdue.”

a) Explain the meaning of the term “holder” in relation to a bill of exchange

and outline the duties of a holder of a bill of exchange. (10 marks)

RIGHTS OF A HOLDER OF A BILL

a) A bona fide holder acquires a defect-free title
b) Right to sue on it in his own names
c) Right to negotiate the bill unless the lost endorsement is restrictive.

DUTIES OF THE HOLDER

a) It is the duty of the drawer to present the bill to the drawee for accepts
b) It is the duty of the payee to represent the bill to the bill the acceptor for
payment.
c) In the event of the dishonour f a bill, it is the duty of the payee:
i. To notify the party the fact of dishonor
ii. To have the bill noted and / or professional
9.4.4 Negotiation of a bill
A bill is negotiated when it is transferred from one person to another in such a
manner as to constitute the transferee the holder of the bill. S 31(1). Thus where A
is the holder of a bill and he transfers it to B so as to constitute B holder of the bill,
A is said to have negotiated the bill to B. The manner in which a bill is negotiated
depends on whether it is a bearer bill or an order bill.
Bearer Bill:
“Bill payable to bearer is negotiated by delivery”. S.31(2). It will be recalled that
under the Act, delivery means the transfer of possession, actual or constructive,
from one person to another: S.2 thus, where A is the bearer or holder of a bearer
bill, and he wishes t negotiate it to B, the negotiation may be effected by A
transferring possession of the bill from himself to B. Nothing more need be done.
The negotiation is completed as soon as the bill is handed over to and received by
B.
Order bill
Mere delivery is not sufficient to negotiate an order bill. Such bill is, under section
31(3) negotiated “by the endorsement of the holder completed by delivery”, Thus,
if A. the holder of an order bill, wishes to negotiate it to B, A can only do this by
writing on the back of the bill (e.g “pay B”, accompanied by his signature or by
simply signing it and then delivering the bill to B. Merely delivering the bill to B
without an endorsement is not sufficient. However, it is provided that “where the
holder of a bill payable to his order transfers it for value without endorsing it, the
transfer gives the transferee such title as the transfere or had in the bill and the
transferee in addition acquires the right to have the endorsement of the transferor”
S.31(4) This means that where A delivers an order bill to B for value but without
endorsing it, B has a right to enforce the bill against A; but as regards third parties,
the bill may be enforced by B against them only to the extent of A’s title. If A had
a defective title to the bill, B acquired no valid title and cannot enforce it against
third parties.
9.4.5 Requisites of a valid Endorsement/ characteristics of endorsement
i. For an endorsement to operate as a negotiation, it must comply with the
following conditions, (S.32):

a. It must be written on the bill itself and be signed by the endoser; the simple
of the endorser on the bill, without additional words, is sufficient; while an
 endorsement written on a “copy” of a bill issued or negotiated in a country
where “copies” are recognized, is deemed to be written on the bill itself:

b. It must be an endorsement of the entire bill; a partial endorsement, that is to

say, an endorsement which purports to transfer to the endorsee a part only of
the amount payable, or which purports to transfer the bill to two or more
endorsees severally, does not operate as a negation of the bill:

c. Where a bill is payable to the order of two or more payees or endorsees who
are not partners, all must endorse, unless the one endorsing has authority to
edorse for the others;

d. Where, in a bill payable to order the payee or endorsee is wrongly

designated, or his name is misspelt, he may endorse the bill as therein
described, adding, if he thinks fit, his proper signature;

e. Where there are two or more endorsements on a bill, each endorsement is

deemed to have been made in the order in which it appears on the bill, until
the contrary is proved:

f. An endorsement may be done in blank or special; it may also contain terms

making it restrictive.

9.4.6 Liabilities of parties

The liabilities of parties to a bill are as follows;
The Acceptor:

Under section 54, the acceptor of a bill, by accepting it: engages that he will pay it
according to the tenor of his acceptance and is precluded from denying to a holder
in due course; the existence of the drawer, the genuineness of his signature, and his
capacity of the drawer to endorser, but not the genuineness or validity of his
endorsement;

In the case of a bill payable to drawer’s order, the then capacity of the drawer to
endorse, but not the genuineness or validity of his endorsement:
In the case of a bill payable to the order of third person, the existence of the payee
and his then capacity to endorse, but not the genuineness or validity of his
endorsement.

(b) The Drawer:

Under section 55(1) the drawer of a bill by drawing it:
i. Engages that on due presentment it shall be accepted and paid according to its
tenor and that if it be dishonored he will compensate the holder or any endorser
who is compelled to pay it, so long as the requisite proceedings on dishonour be
duly taken:
ii. Is precluded from denying to a holder in due course the existence of the payee
and his then capacity to endorse.

The Endorser:
Under section 55(2) the endorser of a bill by endorsing it:
i. engages that on due presentment it shall be accepted and paid according to its
tenor, and that if it be dishonored he will compensate the holder or a subsequent
endorser who is compelled to pay it, so long as the requisite proceedings on
dishonour be duly taken:
ii. Is precluded from denying to a holder in due course the genuineness and
regularity in all respects of the drawers signature and all previous endorsements;
iii. Is precluded from denying to his immediate or a subsequent endorsee that the
bill was at the time of his endorsement a valid and subsisting bill, and that he had
then a good title thereto.
compliance with tile law.

b) Types of endorsements that may be made on a bill of exchange. (8

marks)
1. Blank: This endorsement which does not specify the endorsee. It converts an
order to a bearer
bill. The endorser signs his name only and does not specify the name of the
endorsee. The effect of a blank endorsement is to convert the order instrument into
bearer instrument (Sec. 54), which may be transferred merely by delivery.

2, Special: This is an endorsement which specifies the person to whom or to whose

order, the bill
payable. The endorser, in addition to his signature, also adds a direction to pay the
amount mentioned in the instrument to, or to the order of, a specified person the
endorsement is said to be in full
3. Conditional: This is an endorsement which either exempts the endorser from
liability if the bill

is dishonored or makes payment of the bill subject to a specified condition. If the

endorser of a negotiable instrument, by express words in the endorsement, makes
his liability, dependent on the happening of a specified event, although such event
may never happen, such endorsement is called a ‘conditional’ endorsement. E.g

(i) “Pay B or order on his marriage;”

(ii) “Pay B on the arrival of Pearless ship at Bombay.”

4. Restrictive: This is an endorsement which prohibits further negation of the bill.
It constitutes the
endorsee, the payee who cannot negotiate the bill. An endorsement which, by
express words, prohibits the endorsee from further negotiating the instrument or
restricts the endorsee to deal with his instrument as directed by the endorser is
called ‘restrictive’ endorsement. “Pay C only.” It is a restrictive endorsement as C
cannot negotiate the bill further.

5. Sans recourse endorsement (Sec. 52):

When the endorser expressly excludes his own liability on the negotiable
instrument to the endorsee or any subsequent holder in case of dishonour of the
instrument, the endorsement is known as ‘sans recourse’ endorsement.

Such an endorsement is generally made by adding the words ‘sans recourse’ or

‘without recourse.’ Thus, “Pay X or order sans recourse” or “Pay X without
recourse to me” or “Pay X or order at his own risk” is examples of this type of
endorsement.

6. Facultative endorsement:

When the endorser expressly gives up some of his rights under the negotiable
instrument, the endorsement is called a ‘facultative’ endorsement. Thus, “Pay X or
order, notice of dishonour waived” is a facultative endorsement.
As a result of such an endorsement the endorsee is relieved of his duty to give
notice of dishonour to the endorser and the latter remains liable to the endorsee for
the non-payment of the instrument, even though no notice of dishonour has been
given to him.

DISCHARGE OF A BILL
A bill of exchange is said to be discharged when all rights of action on it are
extinguish. However, a party may still be held liable on it depending on the method
of discharge. A bill may be discharged in any of the following ways:
1. By Payment in due course: If the bill is paid by or on behalf of the acceptor at
or after maturity, it is discharged and parties freed.
2. When acceptor is or becomes the holder at maturity (Merger): If the
acceptor of a bill becomes the payee of right, at or after maturity, the bill is
discharged.
3. Renunciation or waiver: When the holder of a bill at or after majority
unconditionally and absolutely renounces his right against the acceptor, the bill is
discharged. The remuneration must be written or the bill must be presented to the
acceptor.
4. Cancellation: When a bill is intentionally cancelled by the payee or his
agent, and the cancellation is apparent thereon, the bill is discharged. An
unintentional cancellation or under mistake or without authority does not discharge
a bill.
5. Material Alteration: Under Sec. 64(1) of the Act, a material attention of a
bill discharges all the parties not privy to the alteration. Under sec. 64 (2) material
alteration comprises a change in amount payable, time of payment, date place of
payment.
6. Non-presentation: Under sec. 45(1) of the Act, the presentation of a bill for
as prescribed by law discharges the drawer and endorsers.

PRESENTATION OF A BILL FOR PAYMENT

On maturity of a bill, it must be presented to the acceptor for payment. Its
presentation is governed by the following rules:
 a) If payable on demand, it must be presented within a reasonable time of
acceptance or negotiation.
b) If payable in future, it must be presented on the date it falls due or within three
days of grace.
c) It may be presented by the payee or his agent.
d) It must be presented to the acceptor at the agreed place i.e. his place of business
or residence.
e) It must be presented to the acceptor, however, if dead to his personal
representative.
f) If the acceptor has been declared bankrupt it must be presented to him or his
trustee in bankruptcy g) It must be presented at a reasonable hour on a business day
h) If trade custom or usage permits, presentation may be effected by post.
If on presentation, the amount is paid by or on behalf of the acceptor, the bill is
discharged. However, presentation for payment maybe dispensed with if it is
impossible to secure the same even with exercise of reasonable diligence. If the
acceptor cannot be found or payment is refused the bill is said to be dishonoured.

CHARACTERISTIC/ELEMENTS/ESSENTIAL OF THE DEFINITION

Question: Outline the characteristics of a promissory note. (6 marks)

A promissory note is an unconditional promise in writing made by one person to

another, signed by the maker, engaging to pay on demand or at a fixed or
determinable future time, a sum certain in money to or to the order of a specified
person or bearer.

1. It is an unconditional written promise made by a person to another

2. It must be signed by the maker 3. It contains on engagement to pay a sum certain
in money.
4. The sum is payable an demand or at a fixed or determinable future time. 5. The
sum is payable to a specified person his order or the bearer
9.5 Cheques
Nature of a cheque:
A cheque is defined as “a bill of exchange drawn on banker payable on demand “:
s.73 (1). A cheque, as such, is a bill of exchange. It is a bill payable on demand,
and, subject to certain exceptions, the provisions of the act applicable to a bill of
exchange payable on demand equally apply to a cheques. 73(2).
But unlike other bills, the drawee of a cheque must necessarily be a banker; and
this gives rise to a banker- customer relationship between the drawer and drawee,,
with special rules to govern such relationship, the nature of this relationship, and
the duties it imposes on the parties, are considered below.
9.5.1 Differences between Cheques and other bills
1. Cheques may be crossed , and are usually crossed, but it is unsual to cross other
bills, (but dividend warrants may be crossed:s. 96)

The rules relating to acceptance do not apply to cheques.(under section 39

presentment for acceptance is necessary only where a bill is payable after sight, or
expressly stipulates that it shall be presented for acceptance, or where it is drawn
payable elsewhere than at the residence or place of business of the drawee.
Cheques are therefore excluded).

We have seen that where a bill is not duly presented for payment, the drawer and
endorsers are discharged. But in the case of a cheque, a delay in presenting it for
payment does not discharge the drawer or person on whose account it is drawn
unless such delay is proved to have caused actual damage to him and the discharge
is only to the extent of such damages:s.74.

A cheque is always drawn on a banker but a bill may be drawn on anyone

including the bank.

In the case of a bill, three days period of grace is allowed, while no grace is given
in the case of cheques.

The notice of dishonour of a bill is necessary but no notice is necessary in the case
of a cheque.
9.5.2 Banker/Customer Relationship:
The relationship between a banker and his customer is a matter of contract. The
banker is in the position of a debtor, and the customer in that of a creditor: the
customer advances his money to the banker on the understanding that the latter will
repay it on demand.
Duties of the Customer:
The duty owed by a customer to his banker is the duty of care.
This duty usually arises when the customer is drawing a cheque. He is then
“bound to take usual and reasonable precautions to prevent forgery”.
“whereas it is the duty of the customer of bank in issuing a cheque to the bank
to take reasonable care so as not to mislead the bank, that duty must be
immediately connected with the transaction itself. There is no duty on the part
of the customer to take precaution in the general course of carrying on his
business to prevent forgeries on the part of its servants or thefts”.

Duties of the banker

i. A banker must honour his customer’s cheques as long as there is a sufficient and
available credit balance.The banker’s authority to pay is determined or revoked
either by countermand (i.e stoppage) of payment or by notice of the customer’s
death: s.75. The authority to pay may also be revoked by other circumstances, such
as notice of the customer’s mental incapacity or bankruptcy.
ii. The duty not to pay without the customer’s authority enjoins the banker to take
reasonable care in honouring his customer’s cheques.
iii. “A bank owes a contractual duty to its customers and in the discharge of that
duty a bank must take reasonable care in honouring cheques especially open
cheques to be paid on the counter. A bank must ensure that the drawer’s signature
on the cheque strictly conforms with the specimen signature given when the
account was opened. When the drawers signature, on the cheque differs from the
specimen signature the payment should be refused with comments like “signature
differs”
iv. If, in breach of the above duty, the bank acts negligently and wrongfully debits
the customers account, the customer may successfully sue the bank and have his
account re-credited with the amount wrongfully paid out:
v. It is also the banker’s duty to collect his customer’s cheques, provided they are
banked with him for collection.
vi. Finally, where a customer gives his documents to his banked for safe custody,
the duties of a banker are thereby imposed on the banker and he must then take
reasonable care of the documents.

9.5.3 Crossed cheques

A crossed cheque is one which bears a crossing. A crossed cheque may be crossed
generally or crossed specially.

Effect of crossing:
A crossing is a material part of the cheque and it is not lawful for any person to
obliterate or, except as authorized by the act, to add to or alter the crossing: S.78
Unlike an open cheque, a crossed cheque cannot be paid over the counter but must
be paid to a banker. This means that the payee of such a cheque may take it to his
banker for collection; it is the latter banker who will receive payment from the
drawee bank on behalf of the payee. Where the cheque is crossed specially, it is
only the banker named by the crossing who is entitled to receive payment of the
same. A paying banker who fails to effect payment of a crossed cheque in this
manner may incur liability to the true owner of the cheque, S.79 (2)
The effect of the words “not negotiable” is given by section 81: “Where a person
takes a crossed cheque which bears on it the words “not negotiable”, he shall not
have, and shall not be capable of giving a better title to the cheque than that which
the person from whom he took it had.”

9.6 Promissory Notes

9.6.1 Nature of a promissory Note
Section 84(1) defines a promissory note in the words:
A promissory note is an unconditional promise in writing made by one person to
another signed by the maker, engaging to pay, on demand or at a fixed or
determinable future time, a sum certain in money, to or to the order of a specified
person or to the bearer”
Section 90(1) of the Act provides that “the provisions of the Act relating to bills of
exchange apply to promissory notes, with the necessary modifications to
promissory notes.
9.6.2 Differences between promissory notes and Bills of exchange
A bill is an ‘order to pay” while a promissory note” is a promise to pay”.

A bill of exchange requires three parties i.e. the drawer, the drawee and the payee.
But a promissory note only requires two parties i.e the maker and the payee (or
promissory and promise).

Summary of the topic

Characteristics of negotiable instruments

Parties to a bill of exchange

Negotiation of a bill

Discharge of a bill

Differences between bills of exchange and cheques

Differences between promissory notes and bills of exchange

Difference between Bill of Exchange and Promissory Note

Negotiable instruments are signed documents that contains a promise to pay a

specific amount of money to the bearer or assignee at a specified date or on being
demanded. These instruments are transferrable in nature, allowing the person or
entity to use the instrument most appropriately.

There are three types of Negotiable Instruments, namely Bill of Exchange,

Cheques and Promissory Note.

Meaning of Bill of Exchange

Bill of Exchange is a negotiable instrument which is a legally binding document

containing an order to pay a certain sum of money to a person within a pre-
determined time frame or on-demand by the bearer of the instrument.
A creditor issues Bill of Exchange to a debtor for payment of money owed by the
debtor for the goods and services availed. A prominent feature of Bill of Exchange
is, it needs to be accepted by a debtor to in order to be valid.

It is used in business to settle the outstanding debt between the parties involved in
the transaction. There are 3 parties involved in the bill of exchange, they are:

1. Drawer: Drawer is the person who issues the instrument in order to receive a
payment.
2. Drawee: Drawee is the person who needs to pay the amount to the drawer.
3. Payee: Payee is the person who receives the payment. In most cases, the
drawer and the payee are the same individuals unless it is transferred to third
party payee by the drawer.

Meaning of Promissory Note

A promissory note is a negotiable instrument containing written promise to pay a

certain amount of money to its holder by an individual or an entity either on
demand by the holder or at a pre-specified date.

The most important feature of Promissory Note is, once it is drawn by the debtor, it
need not be accepted by the creditor.

Two parties are involved in the promissory note. They are:

1. Drawer/Maker: Drawer is the debtor who promises to pay the amount to

lender or creditor.
2. Payee: Payee is the creditor who is been promised by the borrower or debtor
about the pending payment.

Key Differences between Bill of Exchange and Promissory note represented in a

comparison format are as follows

Bill of Exchange Promissory Note

Definition
A negotiable instrument issued to order A negotiable instrument issued by the
the debtor to pay the creditor a certain debtor with a written promise to pay the
sum of money within a specific date or creditor a certain amount within a specific
on demand. date or on demand.
Section
Mentioned in Section 5 of the Mentioned in Section 4 of the Negotiable
Negotiable Instruments Act, 1881 Instruments Act, 1881
Issued By
Creditor Debtor
Parties Involved
Three parties involved i.e a drawer, the Two parties involved i.e a drawer/maker
drawee and a payee. and the payee
Acceptance
Drawee needs to accept the bill of
No acceptance required from the drawee.
exchange before payment.
Liability
Liability of drawer is secondary and Liability of drawer is primary and
conditional. absolute.
Dishonouring of instrument
Notice served to all the concerned
No notice served to the drawer in case of
parties involved in the transaction on
dishonouring the instrument.
dishonouring the instrument.
Copies
Bill of exchange can have copies. The promissory note allows no copies.
Is it Payable to drawer/maker
Yes, the same person can be drawer and The same person cannot be drawer and
payee. payee