Page 84 - DMGT407Corporate and Business Laws

Unit 4: Law of Negotiable Instruments

Promissory note, bill of exchange and cheque are negotiable instruments by statute as they are Notes
so recognised by s.13. There are certain instruments which are recognised as negotiable
instruments by usage. Thus, bank notes, bank drafts, share warrants, bearer debentures, dividend
warrants, scripts and treasury bills are negotiable by usage.
An instrument is called ‘negotiable’ if it possesses the following features:

1. Freely transferable: Transferability may be by (a) delivery, or (b) by endorsement and
delivery.
2. Holder’s title free from defects: The term ‘negotiability’ means that not only is the instrument
transferable by endorsement and/or delivery, but that its holder in due course acquires a
good title notwithstanding any defects in a previous holder’s title. A holder in due course
is one who receives the instrument for value and without any notice as to the defect in the
title of the transferor.

3. The holder can sue in his own name: Another feature of a negotiable instrument is that its
holder in due course can sue on the instrument in his own name.
4. A negotiable instrument can be transferred infinitum, i.e., can be transferred any number
of times, till its maturity.
5. A negotiable instrument is subject to certain presumptions: An instrument, which does
not have these characteristics, is not negotiable, but is assignable, i.e., the transferee takes
it subject to all equities and liabilities of the transferor.

Example: One G, by means of a fraud, obtained a cheque from F. The cheque was made
payable to G or order. G gave the cheque to W in payment of his own debt, but forgot to endorse
it. W had no notice of the fraud then, but before he could obtain G’s endorsement, he was given
notice of the fraud. W does not get a good title to the cheque. In the case of a cheque payable to
order, the title passes by endorsement and delivery. As there was no indorsement by G on the
cheque, therefore W did not get any title.

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Caution It is to be kept in mind that the share certificate, bill of lading, dock warrant,
I.O.U., postal order instruments are not negotiable instruments as they do not possess the
features mentioned.

Essential Elements of a Negotiable Instrument

After discussing the characteristics of different negotiable instruments, it is with profit, that we
can sum up the essential elements of a negotiable instrument. These are as follows:
1. It must be in writing, which includes, typing, computer print out or engraving.
2. The instrument must be signed by the person who is the maker (in the case of a promissory
note) or a drawer (as in the case of a bill of exchange or a cheque).
3. There must be an unconditional promise (as in the case of a promissory note) or order (as
in the case of a bill of exchange or cheque) to pay.
4. The instrument must involve payment of a certain sum of money only and nothing else.
5. The instrument must be payable at a time which is certain to arrive. If it is payable ‘when
convenient’ the instrument is not a negotiable one. However, if the time of payment is
linked to the death of a person, it is nevertheless a negotiable instrument as death is
certain, though the time thereof is not.

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