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Negotiable Instruments- Explained

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DEFINITIONS

Negotiable instruments

Negotiable means ‘transferable by delivery,’ while instrument means ‘a written document which creates a right in favour of some person.’ Literally, negotiable instrument means ‘a written document transferable by delivery.’

The Negotiable Instrument Act 1881[1] contains the law relating to negotiable instruments. The Act deals with three kinds of negotiable instruments, namely, promissory notes, bills of exchange and cheques.

Section 13(1) of the Act provides that  ‘A “negotiable instrument” means a promissory note, bill of exchange or cheque payable either to order or to bearer.’

The term ‘payable to order’ means payable to payee or to his order, [2] e g  pay to A or order, or pay to the order of A, or pay to A, B or order etc. But it must ‘not contain words prohibiting transfer or indicating an intention that it shall not be transferable,[3] e g  pay to A only, pay to A and none else, etc. Since they restrict negotiability, such documents are not treated as negotiable instruments.

On the other hand, the term ‘payable to bearer’ means payable to ‘a person who by negotiation comes into possession of a negotiable instrument, which is payable to bearer.’ For instance, pay to bearer, or pay to A or bearer, or pay to A, B or bearer, etc.

In practice, notes and bills are made payable to order while cheques are made payable to bearer.

From the point of view of function and use, a negotiable instrument may be defined as a contractual obligation, in writing and signed by the party executing it, containing an unconditional promise or order to pay a certain sum of money, on demand or at a fixed or determinable future time, payable to the payee, or to the order of the payee or to the bearer. When another person is ordered to pay (as in the case of bill of exchange or cheque) such person must be named or otherwise indicated in the instrument with reasonable certainty.

On the basis of distinctive features, Thomas[4] defines negotiable instruments. He says ‘A negotiable instrument is one which is, by a legally recognised custom of trade or by law, transferable by delivery or by endorsement and delivery in such circumstances that (a) the holder of it for the time being may sue on it in his own name and (b) the property in it passes, free from equities, to a bonafide transferee for value, notwithstanding any defect in the title of the transferor.’

Promissory note

Section 4 of the Act provides that ‘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.’ For instance, ‘I promise to pay B or order Taka 500’[5], is a promissory note.

Bill of exchange

Section 5 of the Act provides that ‘A “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.’ For instance, an order of A instructing B to pay C Taka 500 is a bill of exchange.

Cheque

Section 6 of the Act provides that ‘A “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.’

Drawer and drawee

‘The maker of a bill of exchange or cheque is called the “drawer;” the person thereby directed  to pay is called the “drawee.”[6]

Drawee in case of need

‘When in the bill or in any endorsement thereon the name of any person is given in addition to the drawee to be resorted to in case of need, such person is called a “drawee in case of need”.‘[7]

Acceptor

‘After the drawee of a bill has signed his assent upon the bill, or, if there are more parts thereof than one, upon one of such parts, and delivered the same, or given notice of such signing to the holder or to some person on his behalf, he is called the “acceptor”.’[8]

Acceptor for honour

‘When a bill of exchange has been noted or protested for non-acceptance or for better security, and any person accepts it supra protest for honour of the drawer or of any one of the endorsers, such person is called an “acceptor for honour”.’[9]

Payee

‘The person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid, is called the “payee”.’[10]

‘A negotiable instrument may be made payable to two or more payees jointly or it may be made payable in the alternative to one of two, or one or some of several payees.’[11]

Bearer

Section 3(c) of the Act provides that ‘ “bearer” means a  person who by negotiation comes into possession of a negotiable instrument , which is payable to bearer.’

Inland and foreign instrument

‘A promissory note, bill of exchange or cheque drawn or made in Bangladesh, and made payable in, or drawn upon any person resident in Bangladesh, shall be deemed to be an inland instrument.’[12]

‘Any such instrument not so drawn, made or made payable shall be deemed to be foreign instrument.’[13]

Ambiguous instrument

‘Where an instrument may be construed either as a promissory note or bill of exchange, the holder may at his election treat it as either, and the instrument shall be thenceforward treated accordingly.’[14]

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[1] Act XXVI of 1881, hereinafter referred to as ‘the Act’.
[2] Explanation (iii) to section 13 reads ‘Where a promissory note, bill of exchange or cheque, either originally or by endorsement, is expressed to be payable to the order of a specified person, and not to him or his order, it is nevertheless payable to him or his order at his option.’
[3] Explanation (i) to section 13 reads ‘ A promissory note, bill of exchange or cheque is payable to order which is expressed to be so payable or which is expressed to be payable to a particular person, and does not contain words prohibiting transfer or indicating an intention that it shall not be transferable.’
[4] Commerce, Its Theory and Practice.
[5] Illustration (a) to section 4.
[6] 1st paragraph of Section 7.
[7] 2nd paragraph to Section 7.
[8] 3rd paragraph to Section 7.
[9] 4th paragraph to Section 7.
[10] 5th paragraph to Section 7.
[11] Section 13 (2).
[12] Section 11.
[13] Section 12.
[14] Section 17.
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