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NEGOTIABLE INSTRUMENTS

Negotiable Instruments are the devices to serve the credit needs of the growing business. Where cash cannot be paid immediately on the completion of a transaction, written promises or orders serve as its substitute till the stipulated time. These written documents are called instruments and if the title thereto can be transferred from one person to another either by delivery or by endorsement and delivery they are called negotiable. Bills of exchange, Cheques, Promisory Notes, bank drafts are all examples of Negotiable Instruments.

ESSENTIAL ELEMENTS 1. A negotiable instrument must be in writing.

2. It must be signed by the maker or Drawer.

3. It must be a promise or an order to pay.

4. The promise or order must be unconditional.

5 ..A negotiable instrument must call for payment in cash. If it is for anything else, the instrument is not negotiable as per the definition.

6. Money payable must be a certain sum. An instrument promising a reasonable sum is not an instrument. The instrument must be payable after fixed time or, time which is certain to arrive.

Sight and Demand InstrumentsAn instrument is payable on demand when no time has been specified. A promissory note or Bill of Exchange will become payable when presented for payment.When an instrument is payable at a fixed time or event or after happening of an event it is called time instrument.

TYPES OF INSTRUMENTS1: Promissory Note: - 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 a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument.

ESSENTIALS OF A PROMISSORY NOTEMust be in writing. An oral promise cannot be a promissory note. Promise to pay. Acknowledge of debt is not promissory note.Promise must be certain and unconditional .there should be no ambiguity.Signed by the maker. There must be no tempering with the free consent of the signatory to sign.Certain Sum of money. The amount promised must be specific.Payment in legal tender money only It will be invalid if promise to pay is payable in currency and goods or goods only.Stamping the promissory note must be properly stamped as per the Stamp Act.Consideration There is an implied consideration for a promissory note if it is not mentioned therein.

BILL OF EXCHANGEA bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.

ESSENTIALS OF A BILL OF EXCHANGE1. Writing: The Bill of Exchange must be in writing.2. Order to Pay: The bill must contain an order to pay, which may be in a request form but the meaning should be imperative. e.g.. Mr. Nelson will be much obliged Mr. Webb by paying to J.Anderson or order, nine thousand rupees on his account. 3. Unconditional. Money and money only.4. Three parties:

A Bill of Exchange requires three parties. First the person who makes the bill of exchange, called the drawer, second the person to whom it is addressed, called the drawee and thirdly the person to whom the money is to be given called the payee.

Rs 9000/00 Karachi, August 25,2002

Three months after due date pay to Saleh or bearer the sum of Rupees Order Nine thousand, for the value received.To Shehzad RoyKarachi. SulemanCHEQUE1. A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than demand. A cheque is essentially a bill of exchange however, it is a peculiar sort of instrument differing in many respects to a bill of exchange and resembling too.2. A cheque does not require acceptance.

3. It is never meant for circulation in ordinary course but is given for immediate payment.

4. A cheque is presented for payment whereas a bill is in the first instance presented for acceptance.

5. A cheque is always made payable on demand whereas an ordinary bill of exchange can be made payable after a fixed time.

1. Three parties in Bill of Exchange Drawer, drawee and payee.

1.Two parties in promissory note, i.e The maker and the Payee.2. Payee may be the same person.2. Maker can not be the payee himself 3. There is an order to pay. 3. There is a promise to pay.4. The drawer stands in and Immediate relation with the acceptor and not payee. 4. The maker stands in an immediate r relation with the payee.5. The bill must be accepted by the Drawee before presented for Payment.

5. Does not require acceptance as it is signed by the person who is liable to pay.PARTIES TO NEGOTIABLE INSTRUMENTHOLDERThe holder of a promissory note, bill of exchange or Cheque means any person entitled to the possession thereof and to receive or recover the amount due from the parties therefrom.HOLDER IN DUE COURSEA person is a HOLDER IN DUE COURSE who for some consideration became the possessor of a negotiable instrument before the amount mentioned in the instrument became due; without sufficient notice that any defect existed in the title of the person from whom he derived his own title.

NEGOTIATION OF NEGOTIABLE INSTRUMENTThe process of transferring the title or ownership of the instrument is called negotiation. As a result of negotiation the owner acquires a right to sue for the recovery of the amount mentioned in the instrument. Mere handing over the instrument for safe custody does not amount to negotiation.MODES OF NEGOTIATION1. Negotiation by delivery:- A negotiable instrument can be transferred by delivery only, it does not require the signature of the transferor.

2. Negotiation by Endorsement and delivery:- A negotiable instrument payable to order can be negotiated or transferred by the holder by endorsement and delivery.

ENDORSEMENT When the maker, or holder of a negotiable instrument signs the same, otherwise than as maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto he is said to endorse the same and is called the endorser.

KINDS OF ENDORSEMENTS1. Blank Endorsement: Where the indorser signs only his name on the back of the instrument for the purpose of negotiating it, that is a negotiating in blank. The effect of blank endorsement is that it turns an order instrument into bearer instrument. It may be negotiated by simple delivery and the bearer is entitled to payment.2. Full Endorsement: Where the indorser adds to his signature the name of a person to whose order he wants the instrument to be paid, that is an instrument in full. The effect of an endorsement in full is that the instrument can be paid only to the indorsee and can be further negotiated only by his endorsement. The instrument retains its order character.

3. Restrictive Endorsement:An endorsement constitutes the indorsee the owner of the instrument and also confers upon him the right of further negotiation. But the right of further negotiation is by express words in the endorsement restricted.E.g. B signs Pay the contents to C onlyPay C for my useThe within must be credited to C4. Partial Endorsement: AN instrument can not be indorsed for a part of its amount only. If for example an instrument is for Rs 100, it can not be indorsed for Rs 50. But if the amount due has already been paid partly, a note to that effect may be endorsed and it may be then negotiated for the balance.

TYPES AND CROSSING OF CHEQUES1. OPEN CHEQUESa. Bearer Cheques: - The paying banker does not need to see the authenticity of the holder of the cheque.b. Order Cheques: - These are also payable at the counter but paid after verifying the identity of the holder.CROSSED CHEQUES Crossing effects the mode of payment of the cheque. The cheque is no more payable to the payee or holder at the counter of the bank. The payment of a crossed cheque can be obtained only through a banker. Thus crossing is a mode assuring that only rightful holder gets payment. Even if some wrongful person gets payment he can be easily traced, as he has to open a bank account and then deposit the cheque to get the payment.TYPES OF CROSSINGGeneral Crossing:- A cheque is said to have general crossing when it bears across its face, two parallel lines either with or without the words Not Negotiable or and company without the name of the banker. Special Crossing:- Where a Cheque bears the name of a banker across its face with or without the words Not Negotiable it is said to have special crossing. The effect is that it spayment can be obtained through the nominated banker onlyAccount Payee only Crossing :- In this type of Crossing the words account payee or payees account only are endorsed.Not negotiable crossing: A person taking a cheque crossed generally or specially, bearing in either case the words not Negotiable, shall not have and shall not be .capable of giving a better title to the cheuqe than that which the person himself hasLIABILITY OF DRAWERThe drawer of a cheque gives a guarantee to the holder that it shall be paid by the banker when it is presented for payment. If the cheque is dishonored, the drawer is liable to compensate the holder provided that he has received notice of dishonor. The liability of a drawer of cheque is primary in contravention to that of a bill when it is secondary.

LIABILITY OF DRAWEEThe relationship between the banker and his customer is contractual. The bankers contractual duty to pay Cheques is owned only to its customer and not to the payee or holder of the cheque. Thus if the banker refuses to pay the cheque the holder has no remedy against the bankerLIABILTIY FOR UNJUSTIFIED DISHONORAn unjustified dishonor is not merely a breach of contractual obligation but a tort as it can damage customers reputation. The banker should be careful in choice of words that he uses in returning the cheques. The words not sufficient has been held to be defamatory the words though consistent with truth yet should be expressed in least defamatory way.

WHEN JUSTIFIED IN REFUSING1. When cheque postdated.2. When cheuqe outdated.3. When funds insufficient.4. When customer countermands payment.5. When cheque mutilated.6. When cheque is of doubtful validity.7. When customers signature does not agree.8. When customer has died.9. When customer has become insolvent.10. Where GARNISHEE order has been issued.CRIMINAL LIABILITY FOR ISSUING CHEQUES WITHOUT FUNDS