UNIT 4: NEGOTIABLE INSTRUMENTUNIT 4: NEGOTIABLE INSTRUMENT

Contents Contents

4.0 Aim& objectives 4.0 Aim& objectives

4.1 Introduction4.1 Introduction

4.2 Meaning of Negotiable Instruments and Negotiation4.2 Meaning of Negotiable Instruments and Negotiation

4.2.1 Meaning of Negotiable Instruments4.2.1 Meaning of Negotiable Instruments

4.2.2 Meaning of Negotiation 4.2.2 Meaning of Negotiation

4.3 Certain Concepts Related with Negotiable Instruments4.3 Certain Concepts Related with Negotiable Instruments

4.3.1 Characteristics as to Negotiable Instruments. 4.3.1 Characteristics as to Negotiable Instruments.

4.3.2 Presumption of Negotiable Instruments4.3.2 Presumption of Negotiable Instruments

4.3.3 Alterations of Negotiable Instruments 4.3.3 Alterations of Negotiable Instruments

4.3.4 Presentment and Dishonor of Negotiable Instruments4.3.4 Presentment and Dishonor of Negotiable Instruments

4.3.5 Maturity of Negotiable Instruments4.3.5 Maturity of Negotiable Instruments

4.4 Kinds of Negotiable Instruments4.4 Kinds of Negotiable Instruments

4.4.1 Bills of Exchange 4.4.1 Bills of Exchange

4.4.2 Promissory Note 4.4.2 Promissory Note

4.4.3 Cheques 4.4.3 Cheques

4.5 Certain Concepts Related to Cheques4.5 Certain Concepts Related to Cheques

4.5.1 Holder and Holder in Due Course4.5.1 Holder and Holder in Due Course

4.5.2 Payment in Due Course4.5.2 Payment in Due Course

4.5.3 Endorsement4.5.3 Endorsement

4.5.4. Payment of Cheques4.5.4. Payment of Cheques

4.5.5. Collection of Cheques4.5.5. Collection of Cheques

4.6. Summary4.6. Summary

4.7 Answer to Check Your Progress Questions4.7 Answer to Check Your Progress Questions

4.0 AIMS AND OBJECTIVES4.0 AIMS AND OBJECTIVES

At the end of this unit the student is expected to: At the end of this unit the student is expected to:

oo Identify Negotiable Instruments Identify Negotiable Instruments

oo Define and distinguish the difference between Negotiation, assignment, andDefine and distinguish the difference between Negotiation, assignment, and

discountingdiscounting

oo Define Alteration and types of alterations that could be madeDefine Alteration and types of alterations that could be made

oo Discuss about certain concepts related with negotiable instruments such as:Discuss about certain concepts related with negotiable instruments such as:

oo Holder and Holder in due courseHolder and Holder in due course

oo EndorsementEndorsement

oo Crossing of chequesCrossing of cheques

oo Precautions regarding payment of chequesPrecautions regarding payment of cheques

oo Collection of cheques etc,Collection of cheques etc,

4.1 INTRODUCTION4.1 INTRODUCTION

Negotiable instruments have acquired an important place in the modern structure of business.Negotiable instruments have acquired an important place in the modern structure of business.

Negotiable instruments play an important role for making payments and discharging businessesNegotiable instruments play an important role for making payments and discharging businesses

obligations. The modern commercial banks, which are engaged in making and receiving paymentobligations. The modern commercial banks, which are engaged in making and receiving payment

on behalf of their customers, deal in these instruments. However, these documents must be usedon behalf of their customers, deal in these instruments. However, these documents must be used

in a proper manner so as to eliminate unnecessary liabilities of any party. in a proper manner so as to eliminate unnecessary liabilities of any party.

Therefore, in this unit we will discuss first about the meaning of negotiable instruments, theirTherefore, in this unit we will discuss first about the meaning of negotiable instruments, their

characteristics, conditions and presumptions about issuance of negotiable instruments. Therecharacteristics, conditions and presumptions about issuance of negotiable instruments. There

after we will discuss about types of negotiable instruments, their respective characteristics,after we will discuss about types of negotiable instruments, their respective characteristics,

parties to these instruments, their similarities and differences. Finally, we will discuss about theparties to these instruments, their similarities and differences. Finally, we will discuss about the

basic concepts of negotiable instruments such as; holder and holder in due course, endorsement,basic concepts of negotiable instruments such as; holder and holder in due course, endorsement,

crossing, payment in due course, precautions to be taken in payment of these instruments,crossing, payment in due course, precautions to be taken in payment of these instruments,

collections of cheques, and legal protections given to a collecting bank.collections of cheques, and legal protections given to a collecting bank.

4.2 MEANING OF NEGOTIABLE INSTRUMENTS AND NEGOTIATION4.2 MEANING OF NEGOTIABLE INSTRUMENTS AND NEGOTIATION

4.2.1 Meaning of Negotiable Instruments4.2.1 Meaning of Negotiable Instruments

A negotiable instrument is one which is by a legally recognized custom of trade or law,A negotiable instrument is one which is by a legally recognized custom of trade or law,

transferable by delivery, or by endorsement and delivery, in such circumstance that, the holder oftransferable by delivery, or by endorsement and delivery, in such circumstance that, the holder of

it for the time being may sue on it in his own name and the property in it passes, free fromit for the time being may sue on it in his own name and the property in it passes, free from

equities, to a bona fide transferee for value, not withstanding any defect in the title of theequities, to a bona fide transferee for value, not withstanding any defect in the title of the

transferor. transferor.

A negotiable instrument is that piece of paper which when transferred by delivery or byA negotiable instrument is that piece of paper which when transferred by delivery or by

endorsement and delivery passes to the transferee a good title irrespective of the title of theendorsement and delivery passes to the transferee a good title irrespective of the title of the

transferor provided the transferee is a bona fide holder for value and does not have knowledge oftransferor provided the transferee is a bona fide holder for value and does not have knowledge of

any defect in the title of the transferor. Thus mere transferability of the instrument by delivery orany defect in the title of the transferor. Thus mere transferability of the instrument by delivery or

by endorsement and delivery is not sufficient to make it negotiable. In addition to this, it mustby endorsement and delivery is not sufficient to make it negotiable. In addition to this, it must

give the transferee the right of action in his own name and without defenses, which could havegive the transferee the right of action in his own name and without defenses, which could have

been set up against the transferor. been set up against the transferor.

4.2.2 Meaning of Negotiation4.2.2 Meaning of Negotiation

Negotiation means the transfer of the right, title and interest of the holder of a negotiableNegotiation means the transfer of the right, title and interest of the holder of a negotiable

instrument, so as to give the transferee good little, if he be a holder in due course, even thoughinstrument, so as to give the transferee good little, if he be a holder in due course, even though

the transferor has a bad or defective title, except in the case of forgery of the holder’s signature ifthe transferor has a bad or defective title, except in the case of forgery of the holder’s signature if

the instrument is payable to order, or in the case of an instrument is void or except in the case ofthe instrument is payable to order, or in the case of an instrument is void or except in the case of

an instrument completed and transferred after it is stolen and which was not at all delivered byan instrument completed and transferred after it is stolen and which was not at all delivered by

the maker or drawer to any body.the maker or drawer to any body.

One of the important characteristics of a negotiable instrument is hat it is freely transferable fromOne of the important characteristics of a negotiable instrument is hat it is freely transferable from

one person to another. The ownership of a negotiable instrument can be transferred in any of theone person to another. The ownership of a negotiable instrument can be transferred in any of the

two ways:two ways:

Modes of Negotiation Modes of Negotiation

Negotiation may take place in either of the two ways: By delivery and by endorsement andNegotiation may take place in either of the two ways: By delivery and by endorsement and

delivery.delivery.

a) Negotiation by delivery a) Negotiation by delivery

Negotiable instruments payable to bearer are negotiable by mere delivery. There is no need ofNegotiable instruments payable to bearer are negotiable by mere delivery. There is no need of

endorsement in such cases. By delivery, we meant that, the transfer of the physical possession ofendorsement in such cases. By delivery, we meant that, the transfer of the physical possession of

the instrument. An instrument is said to be bearer instrument, if the instrument is expressed to bethe instrument. An instrument is said to be bearer instrument, if the instrument is expressed to be

payable to bearer and if it is endorsed in blank as follows: payable to bearer and if it is endorsed in blank as follows:

i). Pay to A or bearer i). Pay to A or bearer

ii). Pay to the bearer ii). Pay to the bearer

iii). If the last endorsement bear only the endorser’s name iii). If the last endorsement bear only the endorser’s name

Transfer by delivery of a bearer instrument is a sale of the instrument just like a sale of the goodsTransfer by delivery of a bearer instrument is a sale of the instrument just like a sale of the goods

and the transferee becomes the holder of the instrument. A person who steals or finds a bearerand the transferee becomes the holder of the instrument. A person who steals or finds a bearer

instrument is not the holder because it has not been delivered to him. Thus, delivery is essentialinstrument is not the holder because it has not been delivered to him. Thus, delivery is essential

to make the transferee the holder of the instrument.to make the transferee the holder of the instrument.

For example;For example;

oo Ato Alemayehu, the holder of a negotiable instrument payable to bearer, delivers it to AtoAto Alemayehu, the holder of a negotiable instrument payable to bearer, delivers it to Ato

Megersa’s agent to keep for Ato Megersa Megersa’s agent to keep for Ato Megersa

oo Ato Hogos and Ato Zeberga have an account at Dashen Bank. Ato Hogos, the holder of aAto Hogos and Ato Zeberga have an account at Dashen Bank. Ato Hogos, the holder of a

negotiable instrument payable to bearer directs Dashen Bank to transfer the instrument tonegotiable instrument payable to bearer directs Dashen Bank to transfer the instrument to

Ato Zeberga’s account. The banker (Dashen Bank) does so, and accordingly nowAto Zeberga’s account. The banker (Dashen Bank) does so, and accordingly now

possessed the instrument as Ato zeberg’s agent.possessed the instrument as Ato zeberg’s agent.

In both cases, the instruments are negotiated and Ato Megersa and Ato Zeberga becomes theIn both cases, the instruments are negotiated and Ato Megersa and Ato Zeberga becomes the

holder of the instrument.holder of the instrument.

b) By endorsement and delivery b) By endorsement and delivery

A negotiable instrument payable to order is negotiable by the holder through endorsement andA negotiable instrument payable to order is negotiable by the holder through endorsement and

delivery. Thus, in case of on order instrument, the holder must first endorse it and then deliver itdelivery. Thus, in case of on order instrument, the holder must first endorse it and then deliver it

to the endorsee. Endorsement can be done by signing his name by the endorser on the back of theto the endorsee. Endorsement can be done by signing his name by the endorser on the back of the

instrument. Mere endorsement does not account to negotiation of the instrument payable toinstrument. Mere endorsement does not account to negotiation of the instrument payable to

order, it must be delivered to the endorsee to make him the holder. An instrument is said to be anorder, it must be delivered to the endorsee to make him the holder. An instrument is said to be an

order instrument, if the instrument is expressed to be payable to a particular person: the payee ororder instrument, if the instrument is expressed to be payable to a particular person: the payee or

endorsee, and if the instrument does not contain words prohibiting transfer or indicating anendorsee, and if the instrument does not contain words prohibiting transfer or indicating an

intention that it shall not be transferable: -intention that it shall not be transferable: -

For example: - i)For example: - i) Pay to A Pay to A

ii). Pay to A or order ii). Pay to A or order

iii). Pay to the order of A iii). Pay to the order of A

The payee mentioned in the instrument is the rightful person to make the first endorsement. AfterThe payee mentioned in the instrument is the rightful person to make the first endorsement. After

this, any party who has become the holder of the instrument can make endorsement. Such athis, any party who has become the holder of the instrument can make endorsement. Such a

holder may be even the drawer or maker of the instrument and if this happens, the drawer orholder may be even the drawer or maker of the instrument and if this happens, the drawer or

maker of the instrument can endorse it in his capacity as the holder.maker of the instrument can endorse it in his capacity as the holder.

Delivery of the instrument is an essential formality to complete negotiation whether theDelivery of the instrument is an essential formality to complete negotiation whether the

instrument is payable to bearer or to order. The property in the instrument does not pass unless itinstrument is payable to bearer or to order. The property in the instrument does not pass unless it

is delivered to the desired person i.e. to the bearer, incase of bearer instrument, and to theis delivered to the desired person i.e. to the bearer, incase of bearer instrument, and to the

endorsee, in case of an order instrument. For example, If Ato Suleman endorse (write his nameendorsee, in case of an order instrument. For example, If Ato Suleman endorse (write his name

on the instrument) an instrument for the benefit of Ato Gemechis but deceased before delivery,on the instrument) an instrument for the benefit of Ato Gemechis but deceased before delivery,

the instrument is not said to be negotiated and Ato Gemechis, the endorsee, in the instrument,the instrument is not said to be negotiated and Ato Gemechis, the endorsee, in the instrument,

has no right to claim the amount in the instrument. Delivery of a negotiable instrument may takehas no right to claim the amount in the instrument. Delivery of a negotiable instrument may take

place in any of the following three ways:-place in any of the following three ways:-

Actual Delivery:Actual Delivery: - This exists when the change of physical possession of the instrument - This exists when the change of physical possession of the instrument

takes place from one person to another takes place from one person to another

Constructive DeliveryConstructive Delivery: - This takes place without change of actual physical possession: - This takes place without change of actual physical possession

of the instrument. A person is said to have constructive possession of the instrumentof the instrument. A person is said to have constructive possession of the instrument

when it is in the actual possession of his agent, clerk, or servant on his behalf.when it is in the actual possession of his agent, clerk, or servant on his behalf.

For example, Ato Amare holds a bill on his won account subsequently endorses it inFor example, Ato Amare holds a bill on his won account subsequently endorses it in

favorer of Ato Migbaru and holds it as to Ato Migbaru’s agent. This is a case offavorer of Ato Migbaru and holds it as to Ato Migbaru’s agent. This is a case of

constructive delivery.constructive delivery.

Conditional DeliveryConditional Delivery: - where a negotiable instrument is delivered continually, property: - where a negotiable instrument is delivered continually, property

in the instrument does not pass until the condition is fulfilled. In case of conditionalin the instrument does not pass until the condition is fulfilled. In case of conditional

delivery, if the holder transfers the instrument to some body else and does not fulfill thedelivery, if the holder transfers the instrument to some body else and does not fulfill the

condition attached to delivery, plea of conditional delivery will be available only againstcondition attached to delivery, plea of conditional delivery will be available only against

the person who takes it with the notice of the condition and not against the holder in duethe person who takes it with the notice of the condition and not against the holder in due

course.course.

For example, W/o Zewditu, the holder of a negotiable instrument, delivered it to Ato Yigermal,For example, W/o Zewditu, the holder of a negotiable instrument, delivered it to Ato Yigermal,

on condition that Ato Yigermal is to provide something in return within ten days. Ato Yigermalon condition that Ato Yigermal is to provide something in return within ten days. Ato Yigermal

further delivers the instrument to W/o Zeritu without notifying the condition that exists betweenfurther delivers the instrument to W/o Zeritu without notifying the condition that exists between

himself and W/o Zewditu. If Ato Yigermal, fail to provide what he agrees within ten days, W/ohimself and W/o Zewditu. If Ato Yigermal, fail to provide what he agrees within ten days, W/o

Zeritu can claim the amount of the instrument only from Ato Yigermal not from W/o Zewditu.Zeritu can claim the amount of the instrument only from Ato Yigermal not from W/o Zewditu.

4.3 CERTAIN CONCEPTS RELATED WITH NEGOTIABLE INSTRUMENTS4.3 CERTAIN CONCEPTS RELATED WITH NEGOTIABLE INSTRUMENTS

4.3.14.3.1 PresumptionPresumption of Negotiable Instrumentsof Negotiable Instruments

Negotiable instruments are written contracts entered between and among parties. However it isNegotiable instruments are written contracts entered between and among parties. However it is

different from other forms of contracts in certain characteristicsdifferent from other forms of contracts in certain characteristics.. The following are some of the The following are some of the

characteristics of Negotiable Instruments, which distinguish them from other forms of writtencharacteristics of Negotiable Instruments, which distinguish them from other forms of written

contracts.contracts.

i)i) Transferability.Transferability. The basic feature of a negotiable instrument is that it is easily The basic feature of a negotiable instrument is that it is easily

transferable from person to another person and the ownership of property in thetransferable from person to another person and the ownership of property in the

instrument can be transferred by mere delivery, if the instrument is bearer instrument, andinstrument can be transferred by mere delivery, if the instrument is bearer instrument, and

by endorsement and delivery, if the instrument is an order instrument. No formalities areby endorsement and delivery, if the instrument is an order instrument. No formalities are

necessary in transferring the right in a negotiable instrument.necessary in transferring the right in a negotiable instrument.

ii)ii) Good Title of the Transferee Good Title of the Transferee

The person who takes a negotiable instrument in good faith and for value gets it free fromThe person who takes a negotiable instrument in good faith and for value gets it free from

all defects and thus is entitled to recover the amount of money mentioned in theall defects and thus is entitled to recover the amount of money mentioned in the

instrument. The transferee of a negotiable instrument is known as a “holder in dueinstrument. The transferee of a negotiable instrument is known as a “holder in due

course”. His title is not affected by any defect of title on the part of the transferor or ofcourse”. His title is not affected by any defect of title on the part of the transferor or of

any of the previous holders of the instrument (see other privileges of a holder in dueany of the previous holders of the instrument (see other privileges of a holder in due

course under its section.)course under its section.)

iii) Right of Actioniii) Right of Action:- :-

The holder of a negotiable instrument who is also the holder in due course gets theThe holder of a negotiable instrument who is also the holder in due course gets the

right to sue upon the instrument in his own name and without making the transferor a partright to sue upon the instrument in his own name and without making the transferor a part

to the suit.to the suit.

iv) Presumption as to considerationiv) Presumption as to consideration:- :-

It is presumed that consideration has been given for the negotiable instrument. Besides,It is presumed that consideration has been given for the negotiable instrument. Besides,

there are other presumptions, which will be discussed later. there are other presumptions, which will be discussed later.

V) No need to give notice of transfer to the party liable to payV) No need to give notice of transfer to the party liable to pay..

It is not necessary to give to the party, liable on the instrument, notice of itsIt is not necessary to give to the party, liable on the instrument, notice of its

transfer to ensure that he makes payment only to the transferee.transfer to ensure that he makes payment only to the transferee.

4.3.2 Presumption as to Negotiable Instruments4.3.2 Presumption as to Negotiable Instruments

The following legal presumptions are made in respect of a negotiable instrument until theThe following legal presumptions are made in respect of a negotiable instrument until the

contrary is proved. contrary is proved.

i) i) Consideration: -Consideration: -Every negotiable instrument was made or drawn for consideration andEvery negotiable instrument was made or drawn for consideration and

that every such instrument, when it has been accepted, endorsed, negotiated orthat every such instrument, when it has been accepted, endorsed, negotiated or

transferred; was accepted, endorsed, negotiated or transferred for consideration.transferred; was accepted, endorsed, negotiated or transferred for consideration.

Consideration means payment given as reward.Consideration means payment given as reward.

ii)ii) As to date As to date. The date that a negotiable instrument bears is presumed to be the date it was. The date that a negotiable instrument bears is presumed to be the date it was

made or drawn, though, the issuance date and the date written on the instrument may bemade or drawn, though, the issuance date and the date written on the instrument may be

different. The instrument may be post dated or ante dated. different. The instrument may be post dated or ante dated.

iii) As to time of acceptance: -iii) As to time of acceptance: - . Every accepted instrument (a bill of exchange) must be. Every accepted instrument (a bill of exchange) must be

accepted within a reasonable time after it is being made and before its maturity.accepted within a reasonable time after it is being made and before its maturity.

iv) As to time of transfer: -iv) As to time of transfer: -Every transfer of a negotiable instrument is made before itsEvery transfer of a negotiable instrument is made before its

maturity. An instrument transferred after maturity does not grant the holder of it a bettermaturity. An instrument transferred after maturity does not grant the holder of it a better

title.title.

v) As to order of endorsement: - v) As to order of endorsement: - The endorsements appearing up on a negotiableThe endorsements appearing up on a negotiable

instrument are made in the order in which they appear. Their liability also falls in theinstrument are made in the order in which they appear. Their liability also falls in the

order that it appears.order that it appears.

vi) As to stamp.vi) As to stamp. Negotiable instruments are assumed to be properly stamped as they are Negotiable instruments are assumed to be properly stamped as they are

issued.issued.

vii) Holder as a holder in due course vii) Holder as a holder in due course : - The holder of a negotiable instrument is a holder in: - The holder of a negotiable instrument is a holder in

due course; provided that, the instrument has been obtained from its lawful owner, ordue course; provided that, the instrument has been obtained from its lawful owner, or

from any person in lawful custody, by means of an offence or fraud, or has been obtainedfrom any person in lawful custody, by means of an offence or fraud, or has been obtained

from the maker or accepter by means of an offence or fraud or for unlawfulfrom the maker or accepter by means of an offence or fraud or for unlawful

consideration, the burden of proving that the holder is a holder in due course lies uponconsideration, the burden of proving that the holder is a holder in due course lies upon

him. him.

viiiviii) In a suit upon a dishonored instrument,) In a suit upon a dishonored instrument, the court shall on proof of the protest, the court shall on proof of the protest,

presume that it was dishonored until this fact is disproved.presume that it was dishonored until this fact is disproved.

4.3.3 Alterations of Negotiable Instrument 4.3.3 Alterations of Negotiable Instrument

Normally, a written contract cannot be unilaterally altered. If a contract in writing has beenNormally, a written contract cannot be unilaterally altered. If a contract in writing has been

executed, it can only be altered by a voluntary act by both parties as evidenced by theirexecuted, it can only be altered by a voluntary act by both parties as evidenced by their

signatures to the alterations. This rule applies equally to Negotiable Instruments. In the case ofsignatures to the alterations. This rule applies equally to Negotiable Instruments. In the case of

Negotiable Instruments, alternations may be divided in to the following three categories:Negotiable Instruments, alternations may be divided in to the following three categories:

Material Alterations, Immaterial Alterations, and Unilaterally Allowed Alteration Material Alterations, Immaterial Alterations, and Unilaterally Allowed Alteration

1. Material Alteration1. Material Alteration

It is an alteration, which makes significant variations in the rights and liabilities of the parties.It is an alteration, which makes significant variations in the rights and liabilities of the parties.

The parties who have not agreed to such an alteration are absolved from liability on theThe parties who have not agreed to such an alteration are absolved from liability on the

instrument. Therefore, material alterations cannot be made by one party without the consent ofinstrument. Therefore, material alterations cannot be made by one party without the consent of

the other party. These material alterations include:the other party. These material alterations include:

a)a) Alteration of the date of the instrument Alteration of the date of the instrument

b)b) Alteration of the sum payable Alteration of the sum payable

c)c) Alteration in the time of payment Alteration in the time of payment

d)d) Alteration of the place of payment Alteration of the place of payment

e)e) Alteration of the rate of interest Alteration of the rate of interest

f)f) Alteration of the name of the parties Alteration of the name of the parties

g)g) Addition or omission f a new or an existing parties to or from the instrumentAddition or omission f a new or an existing parties to or from the instrument

h)h) Tearing an instrument in a material part Tearing an instrument in a material part

2. Immaterial Alterations2. Immaterial Alterations

It is an alteration, which does not have a significant effect on the position of the parties. AnyIt is an alteration, which does not have a significant effect on the position of the parties. Any

party without the consent of the other party may make it. I t includes:-party without the consent of the other party may make it. I t includes:-

a)a) Alterations made before the issue of the instrument Alterations made before the issue of the instrument

b)b) Alteration made to carry out the common intention of the parties to theAlteration made to carry out the common intention of the parties to the

instrument instrument

c)c) Alteration made for correction of a mistake in date or of a clerical error like:Alteration made for correction of a mistake in date or of a clerical error like:

Crossing a “t”, dotting an “i”, correcting spelling errors.Crossing a “t”, dotting an “i”, correcting spelling errors.

d)d) Alteration made with the consent of all the partiesAlteration made with the consent of all the parties

e)e) Alteration which have resulted from an accident, e.g. mutilation by washingAlteration which have resulted from an accident, e.g. mutilation by washing

and ironing of a garment and ironing of a garment

f)f) Correcting other obvious error in the body of the instrumentCorrecting other obvious error in the body of the instrument

3. Unilaterally Allowed Alteration3. Unilaterally Allowed Alteration

There are certain alterations to an instrument, which are allowed to be made by one party withoutThere are certain alterations to an instrument, which are allowed to be made by one party without

the consent of the other party. These includethe consent of the other party. These include;;

a. Crossing uncrossed instrument a. Crossing uncrossed instrument

b. Conversion of a blank endorsement in to endorsement in full and vice versa b. Conversion of a blank endorsement in to endorsement in full and vice versa

c. Filling a blanks in inchoate instrumentsc. Filling a blanks in inchoate instruments

d. Altering a general crossing to a special crossing d. Altering a general crossing to a special crossing

Presumtion of Negotiable InstrumentsPresumtion of Negotiable Instruments

An instrument to be a negotiable instrument, it should fulfill the following conditionsAn instrument to be a negotiable instrument, it should fulfill the following conditions

a. The transferee should be a holder in due coursea. The transferee should be a holder in due course

b. The instrument should not be completed after stolen.b. The instrument should not be completed after stolen.

c. The instrument should be delivered by the maker or drawer to any bodyc. The instrument should be delivered by the maker or drawer to any body

d. Signature should not be forged in case of order instrument d. Signature should not be forged in case of order instrument

e. The title of the transferor may be bad or defective.e. The title of the transferor may be bad or defective.

4.3.4 Presentment and Dishonor of Negotiable Instruments4.3.4 Presentment and Dishonor of Negotiable Instruments

4.3.4.1. Presentment of Negotiable Instruments4.3.4.1. Presentment of Negotiable Instruments

Presentment of a negotiable instrument means placing the instrument before the drawee or makerPresentment of a negotiable instrument means placing the instrument before the drawee or maker

for any of the following purposes:for any of the following purposes:

i)i) Presentment for acceptance Presentment for acceptance

ii)ii) Presentment for sightPresentment for sight

iii)iii) Presentment for paymentPresentment for payment

i). Presentment for Acceptancei). Presentment for Acceptance

Acceptance is defined as the signification by the drawee of his assent to the order of the drawer.Acceptance is defined as the signification by the drawee of his assent to the order of the drawer.

After acceptance, the drawee is known as the accepter. It is only a bill of exchange, which mayAfter acceptance, the drawee is known as the accepter. It is only a bill of exchange, which may

have to be presented for acceptance. Presentment of a bill is not necessary for acceptance in allhave to be presented for acceptance. Presentment of a bill is not necessary for acceptance in all

the cases. Bill of Exchange payable on demand or at sight or on a certain date need not bethe cases. Bill of Exchange payable on demand or at sight or on a certain date need not be

presented by the holder for acceptance; however, presentment of a bill for acceptance is desirablepresented by the holder for acceptance; however, presentment of a bill for acceptance is desirable

in order to:in order to:

a.a. Obtain additional security of the acceptor’s name on the bill Obtain additional security of the acceptor’s name on the bill

b.b. Obtain an immediate right of recourse against the drawer and the other parties inObtain an immediate right of recourse against the drawer and the other parties in

case the bill is dishonored by non-acceptance.case the bill is dishonored by non-acceptance.

Presentment for acceptance of a bill is, however, necessary in thePresentment for acceptance of a bill is, however, necessary in the following cases:following cases:

a. When a bill is payable at a given time after acceptance or sight, presentmenta. When a bill is payable at a given time after acceptance or sight, presentment

for acceptance is necessary to fix the maturity of the instrumentfor acceptance is necessary to fix the maturity of the instrument

b. When a bill expressly stipulates that it shall be presented for acceptance; it must beb. When a bill expressly stipulates that it shall be presented for acceptance; it must be

presented for acceptance before it is presented for payment.presented for acceptance before it is presented for payment.

The essentials of a valid acceptance are: The essentials of a valid acceptance are:

a)a) Acceptance must be in writing and must appear on the bill Acceptance must be in writing and must appear on the bill

b)b) Acceptance must be signed by the drawee or his duly authorized agentAcceptance must be signed by the drawee or his duly authorized agent

c)c) The bill must be delivered to the holderThe bill must be delivered to the holder

Types of acceptancesTypes of acceptances

The acceptor is the drawee or any person who has signed his assent up on the bill and delivered itThe acceptor is the drawee or any person who has signed his assent up on the bill and delivered it

to the holder or has given notice of his so doing to the holder. He can be only the drawee or ato the holder or has given notice of his so doing to the holder. He can be only the drawee or a

person named as drawee in case of need or an acceptor for honor or an agent to the drawee.person named as drawee in case of need or an acceptor for honor or an agent to the drawee.

Acceptance may be general or qualified.Acceptance may be general or qualified.

a.a. General Acceptance.General Acceptance.

When the drawee of a bill accepts the order of the drawer to pay the amount in full without anyWhen the drawee of a bill accepts the order of the drawer to pay the amount in full without any

condition or limitation, acceptance is said to be general or absolute. It is affected when thecondition or limitation, acceptance is said to be general or absolute. It is affected when the

drawee signs his name on the bill with the word “accepted.” thereby signifying his assent to thedrawee signs his name on the bill with the word “accepted.” thereby signifying his assent to the

bill. No addition must be made on the instrument.bill. No addition must be made on the instrument.

b. Qualified Acceptance. b. Qualified Acceptance.

In case of qualified acceptance, the drawee accepts the bill subject to certain qualifications orIn case of qualified acceptance, the drawee accepts the bill subject to certain qualifications or

conditions. Acceptance is qualified in various ways i.e. as to time, place, event, amount, drawee,conditions. Acceptance is qualified in various ways i.e. as to time, place, event, amount, drawee,

etc. may be added to the acceptance. etc. may be added to the acceptance.

ii) Presentment for sightii) Presentment for sight

The Negotiable Instrument Act sec. 63 deals with the necessity to presentment for sight ofThe Negotiable Instrument Act sec. 63 deals with the necessity to presentment for sight of

promissory note payable at certain period, after sight. A promissory note, payable at a certainpromissory note payable at certain period, after sight. A promissory note, payable at a certain

period, after sight, must be presented to the maker for sight by a person entitled to demandperiod, after sight, must be presented to the maker for sight by a person entitled to demand

payment, within a reasonable time after it is made and in business hours on a business day. If thepayment, within a reasonable time after it is made and in business hours on a business day. If the

holder fails to present in such case, no party in the instrument is liable to the person making suchholder fails to present in such case, no party in the instrument is liable to the person making such

default.default.

iii) Presentment for payment iii) Presentment for payment

According to sec.64 of the negotiable instrument act, promissory notes, bill of exchange andAccording to sec.64 of the negotiable instrument act, promissory notes, bill of exchange and

cheques must be presented for payment to the maker, acceptor or drawee respectively, by or nocheques must be presented for payment to the maker, acceptor or drawee respectively, by or no

behalf of the holder. In case of the death of these parties, presentment should be made to his legalbehalf of the holder. In case of the death of these parties, presentment should be made to his legal

representative or assignee. It can be presented for payment either by the holder or his authorizedrepresentative or assignee. It can be presented for payment either by the holder or his authorized

agent or in case of his death or insolvency, by his legal representative or official assignee. If theagent or in case of his death or insolvency, by his legal representative or official assignee. If the

holder fails to present, the other parties to the instrument are not liable to the holder.holder fails to present, the other parties to the instrument are not liable to the holder.

Rules Regarding Presentment for paymentRules Regarding Presentment for payment

The following rules are applicable as to presentment of a negotiable instrument for payment.The following rules are applicable as to presentment of a negotiable instrument for payment.

Presentment for payment must be made during the usual hours, of business. In case of a banker,Presentment for payment must be made during the usual hours, of business. In case of a banker,

presentment must be made within banking hours.presentment must be made within banking hours.

A promissory note or a bill of exchange which is payable at a specified period after dateA promissory note or a bill of exchange which is payable at a specified period after date

or sight must be presented for payment at maturity. or sight must be presented for payment at maturity.

A promissory note, bull of exchange, or a cheque made, drawn or accepted payable at a ''A promissory note, bull of exchange, or a cheque made, drawn or accepted payable at a ''

specified place and not elsewhere'' must be presented for payment at that place in order tospecified place and not elsewhere'' must be presented for payment at that place in order to

charge any party. In case the holder fails to present the bill at the specified place, allcharge any party. In case the holder fails to present the bill at the specified place, all

parties will be discharged from their liability,parties will be discharged from their liability,

A promissory note or a bill of exchange made, drawn or accepted payable at a specifiedA promissory note or a bill of exchange made, drawn or accepted payable at a specified

place must be presented for payment at that place in order to charge the maker or drawer.place must be presented for payment at that place in order to charge the maker or drawer.

Failure to present will discharge all the prior parties, drawer and endorsers but not theFailure to present will discharge all the prior parties, drawer and endorsers but not the

acceptor.acceptor.

If no specific place is mentioned in the bill or the note, it must be presented for paymentIf no specific place is mentioned in the bill or the note, it must be presented for payment

at the place of business, or at the usual residence of the drawee (acceptor) or the maker,at the place of business, or at the usual residence of the drawee (acceptor) or the maker,

as the case may be. If the latter has no known place of business or fixed residence, suchas the case may be. If the latter has no known place of business or fixed residence, such

presentment may be made to him in person wherever he can found.presentment may be made to him in person wherever he can found.

A negotiable instrument payable on demand must be presented for payment within aA negotiable instrument payable on demand must be presented for payment within a

reasonable time after it is received by the holder.reasonable time after it is received by the holder.

Presentment for payment may be made to:- Presentment for payment may be made to:-

a) the duly authorized agent of the drawee, maker or acceptor a) the duly authorized agent of the drawee, maker or acceptor

b) his legal representative in case of his death b) his legal representative in case of his death

c) his assignee, if he has been declared insolvent c) his assignee, if he has been declared insolvent

A presentment through the post office by means of a registered letter is sufficient, ifA presentment through the post office by means of a registered letter is sufficient, if

authorized by agreement or usage. authorized by agreement or usage.

Delay in presentment may be excused if the delay is caused by circumstances beyond theDelay in presentment may be excused if the delay is caused by circumstances beyond the

control of the holder and not imputable to his default, misconduct or negligence. When thecontrol of the holder and not imputable to his default, misconduct or negligence. When the

cause of delay ceases to operate, presentment must be made within a reasonable time. cause of delay ceases to operate, presentment must be made within a reasonable time.

Presentment for payment is excused when:Presentment for payment is excused when:

There is intentional prevention of presentmentThere is intentional prevention of presentment: - When the holder of a negotiable: - When the holder of a negotiable

instrument lost the same, he has to report to the maker and the maker is required to give ainstrument lost the same, he has to report to the maker and the maker is required to give a

copy of the original instrument. But, when a bill of exchange is lost and a duplicate is notcopy of the original instrument. But, when a bill of exchange is lost and a duplicate is not

supplied, presentment is not necessary, as it is considered the existence of an intentionalsupplied, presentment is not necessary, as it is considered the existence of an intentional

prevention of presentment.prevention of presentment.

Place of Business Closed: - Place of Business Closed: - When the instrument is payable at the maker, acceptor andWhen the instrument is payable at the maker, acceptor and

drawees place of business and that is closed during normal business hours, no presentment isdrawees place of business and that is closed during normal business hours, no presentment is

necessary.necessary.

Payer absents from place of paymentPayer absents from place of payment. When the instrument is payable at a specified place. When the instrument is payable at a specified place

on the due date but there is no person authorized to refuse or make payment at that place.on the due date but there is no person authorized to refuse or make payment at that place.

Payer is not found after due search. Payer is not found after due search. When the instrument is not payable at any specifiedWhen the instrument is not payable at any specified

place and the person liable to make payment is not found after making reasonable search.place and the person liable to make payment is not found after making reasonable search.

Waiver of presentmentWaiver of presentment. This is when the parties to the negotiable instrument have. This is when the parties to the negotiable instrument have

undertaken to pay the instrument in spite of its non-presentment for payment. Presentmentundertaken to pay the instrument in spite of its non-presentment for payment. Presentment

for payment in this case is waived either expressly or impliedly. for payment in this case is waived either expressly or impliedly.

When the drawer could not suffer damage for non-payment, any holder can make the draweeWhen the drawer could not suffer damage for non-payment, any holder can make the drawee

liable without presentment, e.g. where the drawer draws the bill on himself or when theliable without presentment, e.g. where the drawer draws the bill on himself or when the

drawee is a fictitious person.drawee is a fictitious person.

When the bill is dishonored by non-acceptanceWhen the bill is dishonored by non-acceptance

When presentment has become impossibleWhen presentment has become impossible e.g. by declaration of war between the countries e.g. by declaration of war between the countries

of the holder and the drawee.of the holder and the drawee.

4.3.4.2. Dishonor of Negotiable Instrument4.3.4.2. Dishonor of Negotiable Instrument

A bill of exchange is said to be dishonored when either it is not accepted by the drawee orA bill of exchange is said to be dishonored when either it is not accepted by the drawee or

payment is request by the drawee or acceptor. A promissory note or a cheque is said to bepayment is request by the drawee or acceptor. A promissory note or a cheque is said to be

dishonored when the maker of the note or the drawee banker refuses payment. Thus negotiabledishonored when the maker of the note or the drawee banker refuses payment. Thus negotiable

instrument may be dishonored either by non-payment or non-acceptance.instrument may be dishonored either by non-payment or non-acceptance.

a. Dishonor by non-acceptance a. Dishonor by non-acceptance

Only a bill of exchange can be dishonored by non-acceptance. It shall be dishonored by non-Only a bill of exchange can be dishonored by non-acceptance. It shall be dishonored by non-

acceptance in the following cases:- acceptance in the following cases:-

1.1. The drawee has refused to accept the bill when it is presented to him for acceptance or heThe drawee has refused to accept the bill when it is presented to him for acceptance or he

does not accept the bill within 48 hours from the time of presentment for acceptance.does not accept the bill within 48 hours from the time of presentment for acceptance.

2.2. When acceptance of bill is not given in those case where presentment for acceptance isWhen acceptance of bill is not given in those case where presentment for acceptance is

excused.excused.

3.3. When the drawee is incompetent to contractWhen the drawee is incompetent to contract

4.4. When the drawee gives a qualified acceptance (if the holder wish to consider as accepted,When the drawee gives a qualified acceptance (if the holder wish to consider as accepted,

it can be treated as accepted).it can be treated as accepted).

In these cases an immediate right of recourse against the drawee and endorser accrues to theIn these cases an immediate right of recourse against the drawee and endorser accrues to the

holder without waiting until the maturity date.holder without waiting until the maturity date.

b. Dishonor by Non-payment b. Dishonor by Non-payment

All types of negotiable instruments may be dishonored by non-payment in the following cases: -All types of negotiable instruments may be dishonored by non-payment in the following cases: -

1.1. If the maker of the pronote, acceptor of the bill or drawee of the cheque refuses to pay or If the maker of the pronote, acceptor of the bill or drawee of the cheque refuses to pay or

2.2. When payment is excused and the bill is overdue unpaid. When payment is excused and the bill is overdue unpaid.

3.3. When they cannot be obtained at maturity day.When they cannot be obtained at maturity day.

When a bill is dishonored by non-payment, an immediate right of recourse against the drawerWhen a bill is dishonored by non-payment, an immediate right of recourse against the drawer

and the endorser accrues to the holder. Notice of dishonor should be given on the dishonor of aand the endorser accrues to the holder. Notice of dishonor should be given on the dishonor of a

negotiable instrument. negotiable instrument.

Notice should be given by the holder or some party thereto who remains liable on the instrument.Notice should be given by the holder or some party thereto who remains liable on the instrument.

The agent of any such party may also give notice. A notice by a stranger is invalid. When theThe agent of any such party may also give notice. A notice by a stranger is invalid. When the

holder has given the notice to any of the parties liable on the instrument and the party has in turnholder has given the notice to any of the parties liable on the instrument and the party has in turn

given due notice of dishonor to all other prior parties, the holder can treat it as notice given bygiven due notice of dishonor to all other prior parties, the holder can treat it as notice given by

him.him.

No notice is necessary to the maker of a note or acceptor of a bill of exchange or drawee of aNo notice is necessary to the maker of a note or acceptor of a bill of exchange or drawee of a

cheque as they are the principal debtors and they themselves have dishonored the note or the bill.cheque as they are the principal debtors and they themselves have dishonored the note or the bill.

Notice must be given to other parties to whom the holder wants to make liable. Notice ofNotice must be given to other parties to whom the holder wants to make liable. Notice of

dishonor must be given as follows.dishonor must be given as follows.

-- When there are two or more persons jointly liable as drawees or endorsers, notice toWhen there are two or more persons jointly liable as drawees or endorsers, notice to

any one of them is taken as notice to all.any one of them is taken as notice to all.

-- In case of death of a person, notice may be given to his legal representative.In case of death of a person, notice may be given to his legal representative.

-- In case of his insolvency, it may be given to the official Assigner or receiver. In case of his insolvency, it may be given to the official Assigner or receiver.

Effect of the Omission to give notice Effect of the Omission to give notice

Omission to give notice of dishonor to parties entitled to such notice will discharge them fromOmission to give notice of dishonor to parties entitled to such notice will discharge them from

their liability. Therefore, holder must give notice to all the prior parties to enforce his righttheir liability. Therefore, holder must give notice to all the prior parties to enforce his right

against them.against them.

Mode of Giving Notice Mode of Giving Notice

Notice of dishonor may be given to a duly authorized agent of the person to whom it is requiredNotice of dishonor may be given to a duly authorized agent of the person to whom it is required

to be given or when he has died, to his legal representative, or where he has been declared anto be given or when he has died, to his legal representative, or where he has been declared an

insolvent, to his assignee; may be oral or written; may, if written, be sent by post; and may be ininsolvent, to his assignee; may be oral or written; may, if written, be sent by post; and may be in

any form; but it must inform the party to whom it is given either in express terms or byany form; but it must inform the party to whom it is given either in express terms or by

reasonable intendment, that the instrument has been dishonored and in what way, and that he willreasonable intendment, that the instrument has been dishonored and in what way, and that he will

be held liable; and it must be given within a reasonable time after dishonor, at the place ofbe held liable; and it must be given within a reasonable time after dishonor, at the place of

business or, at the residence, incase such party has no place of business, of the party for whom itbusiness or, at the residence, incase such party has no place of business, of the party for whom it

is intended.is intended.

Thus notice of dishonor may be oral or written. If written, it may be sent by post. If the notice isThus notice of dishonor may be oral or written. If written, it may be sent by post. If the notice is

dully directed and sent by post and miscarries, such miscarriage does not vender the noticedully directed and sent by post and miscarries, such miscarriage does not vender the notice

invalid. Any party receiving notice of dishonors must, in order to render any prior party liable toinvalid. Any party receiving notice of dishonors must, in order to render any prior party liable to

him self, give notice of dishonor to such party within a reasonable time, unless such party hashim self, give notice of dishonor to such party within a reasonable time, unless such party has

received.received.

4.3.5 Maturity of Negotiable Instruments 4.3.5 Maturity of Negotiable Instruments

The maturity of a promissory note or a bill of exchange is the date at which it falls due. A bill orThe maturity of a promissory note or a bill of exchange is the date at which it falls due. A bill or

note payable at sight or on demand or a cheque becomes payable at once and so three is nonote payable at sight or on demand or a cheque becomes payable at once and so three is no

question of these being matured.question of these being matured.

Every promissory note or bill of exchange which is not expressed to be payable on demand, atEvery promissory note or bill of exchange which is not expressed to be payable on demand, at

sight or on presentment is presented at maturity, on the third day after the day on which it issight or on presentment is presented at maturity, on the third day after the day on which it is

expressed to be payable. These additional three days are called the days of grace.expressed to be payable. These additional three days are called the days of grace.

Rules for the determination of the maturity dateRules for the determination of the maturity date

1.1.If a negotiable instrument has been made payable after a stated number of months ''after date’’If a negotiable instrument has been made payable after a stated number of months ''after date’’

or after sight '' or after a certain event'' the period stated shall be held to terminate on the day ofor after sight '' or after a certain event'' the period stated shall be held to terminate on the day of

the month which corresponds with the day on which the instrument is dated, presented forthe month which corresponds with the day on which the instrument is dated, presented for

acceptance or sight or the event happens.acceptance or sight or the event happens.

IllustrationIllustration

a). A negotiable instrument, dated 30a). A negotiable instrument, dated 30 thth April 1991 is payable three months after date. It April 1991 is payable three months after date. It

matures for payment on 3matures for payment on 3rdrd August. 1991. August. 1991.

b). A bill, dated 30 b). A bill, dated 30 thth April 1991 is payable two months after sight. It is presented for April 1991 is payable two months after sight. It is presented for

acceptance on 4acceptance on 4thth May 1991. It s date of maturity will be 7 May 1991. It s date of maturity will be 7thth July 1991. July 1991.

c). A bill dated 30c). A bill dated 30thth April 1991, is payable one month after the death of A. A dies on 15 April 1991, is payable one month after the death of A. A dies on 15 thth

May, 1991. Its date of maturity will be on 18May, 1991. Its date of maturity will be on 18thth June 1991. June 1991.

2. 2. If the month in which the specified number of months (the period) will terminate has no If the month in which the specified number of months (the period) will terminate has no

corresponding date. Bill of exchange will mature on the last day of the month. corresponding date. Bill of exchange will mature on the last day of the month.

IllustrationsIllustrations

A bill drawn on 29A bill drawn on 29 thth December 1991, and payable two months after date shall mature on 3rd December 1991, and payable two months after date shall mature on 3rd

March 1991.March 1991.

3.3. Where bill of exchange is drawn payable after a certain number of days after the date or Where bill of exchange is drawn payable after a certain number of days after the date or

after sight or after a certain even, the day on which it was drawn or presented for sight orafter sight or after a certain even, the day on which it was drawn or presented for sight or

acceptance or on which the event happens shall not be counted towards the number ofacceptance or on which the event happens shall not be counted towards the number of

days for which the bill has been drawn.days for which the bill has been drawn.

Illustrations Illustrations

a)a) A bill drawn on 1A bill drawn on 1stst January 1991 and payable thirty days after date shall fall due for January 1991 and payable thirty days after date shall fall due for

payment on 3payment on 3rdrd February 1991. February 1991.

b)b) A bill drawn on 1A bill drawn on 1stst January 1991 and payable thirty days after sight is presented for January 1991 and payable thirty days after sight is presented for

acceptance on 3acceptance on 3rdrd January. The instrument will mature on 5 January. The instrument will mature on 5thth February. February.

4.4. If the maturity day of a negotiable instrument comes out to be a public holiday, the If the maturity day of a negotiable instrument comes out to be a public holiday, the

instrument shall be deemed to be due on the preceding business day. In case the holidayinstrument shall be deemed to be due on the preceding business day. In case the holiday

is an emergency holiday, the instrument shall fall due for payment on the next succeedingis an emergency holiday, the instrument shall fall due for payment on the next succeeding

business day.business day.

Illustrations Illustrations

a)a) A bill of exchange dated 23A bill of exchange dated 23rdrd December is payable one month after date. The December is payable one month after date. The

instrument shall due for payment on 25instrument shall due for payment on 25 thth January (26 January (26thth January being a public January being a public

holiday).holiday).

b)b) A bill falls due for payment on 25A bill falls due for payment on 25thth January. The government declares the day as a January. The government declares the day as a

holiday. The instrument shall fall due for payment on 27holiday. The instrument shall fall due for payment on 27 thth January. (If 26 January. (If 26thth January is January is

a public holiday).a public holiday).

The expression “public holiday” includes Sundays and any other days declared by theThe expression “public holiday” includes Sundays and any other days declared by the

government to be a public holiday.government to be a public holiday.

4.4. KINDS OF NEGOTIABLE INSTRUMENTS 4.4. KINDS OF NEGOTIABLE INSTRUMENTS

There are two broad categories of Negotiable Instruments. They are:There are two broad categories of Negotiable Instruments. They are:

Negotiable Instruments by statue: Negotiable Instruments by statue: The Negotiable Instruments Act states three instruments:The Negotiable Instruments Act states three instruments:

cheque, bill of exchange and promissory note as Negotiable Instruments. These are, there fore,cheque, bill of exchange and promissory note as Negotiable Instruments. These are, there fore,

called negotiable instruments by statute.called negotiable instruments by statute.

Negotiable Instruments by custom:-Negotiable Instruments by custom:- The Transfer of property Act states that instruments may The Transfer of property Act states that instruments may

be negotiated by custom and their negotiability will be recognized by courts. Instruments fallingbe negotiated by custom and their negotiability will be recognized by courts. Instruments falling

in this category are: Bank draft, Notes, etc. However, it is nowhere stated that these are the onlyin this category are: Bank draft, Notes, etc. However, it is nowhere stated that these are the only

documents that are negotiable instruments. Other instruments may also be added to this list ofdocuments that are negotiable instruments. Other instruments may also be added to this list of

negotiable instruments provided they fulfill the following two conditions.negotiable instruments provided they fulfill the following two conditions.

a)a) They are transferable by mere delivery or by endorsement and delivery; andThey are transferable by mere delivery or by endorsement and delivery; and

b)b) The holder in due course can sue in his own name.The holder in due course can sue in his own name.

Therefore, every instrument which entitles a person to receive money and which possesses theTherefore, every instrument which entitles a person to receive money and which possesses the

characteristics of negotiability is a negotiable instrument. In other words, it can be said that acharacteristics of negotiability is a negotiable instrument. In other words, it can be said that a

negotiable instrument is an ordinary chose-in-action clothed with the feature of negotiability.negotiable instrument is an ordinary chose-in-action clothed with the feature of negotiability.

4.4.1. Bills of Exchange 4.4.1. Bills of Exchange

The Negotiable Instruments Act defines a bill of exchange as an instrument in writing containingThe Negotiable Instruments Act defines a bill of exchange as an instrument in writing containing

unconditional order, signed by the maker, directing a certain person to pay a certain sum ofunconditional order, signed by the maker, directing a certain person to pay a certain sum of

money only to, or to the order of, certain person, or to the bearer of the instrument. Thus a bill ofmoney only to, or to the order of, certain person, or to the bearer of the instrument. Thus a bill of

exchange is a written acknowledgment of debt, written by the creditor and accepted by theexchange is a written acknowledgment of debt, written by the creditor and accepted by the

debtor.debtor.

a. Essential Characteristics a. Essential Characteristics

The essential characteristics of bill of exchange are:The essential characteristics of bill of exchange are:

1.1. It must be in writing It must be in writing

2.2. It must be signed by the drawer It must be signed by the drawer

3.3. The drawer, drawee and payee must be certain. The drawer, drawee and payee must be certain.

4.4. The sum payable must also be certain The sum payable must also be certain

5.5. It should be properly stamped It should be properly stamped

6.6. It must contain and express order to pay money and money aloneIt must contain and express order to pay money and money alone

A mere request to pay on account, will not amount to an order. But an order expressed inA mere request to pay on account, will not amount to an order. But an order expressed in

courteous words or polite language will not be taken to be mere request. courteous words or polite language will not be taken to be mere request.

Example: -Example: -

1.1. I shall be highly obliged if you make it convenient to pay Birr 100.00 to Alemu.I shall be highly obliged if you make it convenient to pay Birr 100.00 to Alemu.

2.2. Ato Amare, please let the bearer have Birr 100.00 and place it to the debit of myAto Amare, please let the bearer have Birr 100.00 and place it to the debit of my

account.account.

3.3. Please pay Birr 100.00 to the order of A.Please pay Birr 100.00 to the order of A.

4.4. Mr. A will oblige Mr. B by paying to the order of Mr. C.Mr. A will oblige Mr. B by paying to the order of Mr. C.

The 1The 1stst and 2 and 2ndnd are not order to pay but only a request to pay. The 3 are not order to pay but only a request to pay. The 3rdrd and 4 and 4thth are order to pay. are order to pay.

Hence, the 1Hence, the 1stst and 2 and 2ndnd are not termed as a bill of exchange but the 3 are not termed as a bill of exchange but the 3rdrd and 4 and 4thth are bills of exchange. are bills of exchange.

7. 7. The order must be unconditionalThe order must be unconditional

It should not be attached with uncertain future events. It must not order any act to be doneIt should not be attached with uncertain future events. It must not order any act to be done

in addition to the payment of money. in addition to the payment of money. Specimen of bill of ExchangeSpecimen of bill of Exchange

1.1. Order bill payable on demand Order bill payable on demand

Br 400.00 Addis Ababa. Feb. 6.2001Br 400.00 Addis Ababa. Feb. 6.2001

On demand pay. To Ato Abera or order the sum of Birr On demand pay. To Ato Abera or order the sum of Birr

400.00 for value received.400.00 for value received.

To Yitayew Legeta Abebayehu YetemenTo Yitayew Legeta Abebayehu Yetemen

stamp stamp

2.2. Bearer bill payable at a future fixed time /on the expiry of a specified period ofBearer bill payable at a future fixed time /on the expiry of a specified period of

timetime

Br 100.00 Bahir Dar, March 1,2001.Br 100.00 Bahir Dar, March 1,2001.

Three months after date pay bearer the sum of Br1000.00 for value Three months after date pay bearer the sum of Br1000.00 for value

receivedreceived

Alemayehu Techane Alemayehu Techane

To: Amare Gemechu To: Amare Gemechu

Address Stamp Address Stamp

3.3. Bill payable 90 days after acceptance Bill payable 90 days after acceptance

Br 200.00 Merkato, January 7,2001Br 200.00 Merkato, January 7,2001

Ninety days after sight pay to my order Br 200.00 for value received.Ninety days after sight pay to my order Br 200.00 for value received.

Abebayehu Yetemegn Abebayehu Yetemegn

To : Yitayew Legeta To : Yitayew Legeta

Address Stamp. Address Stamp.

The word “value received” though usually written in a promissory note and a bill ofThe word “value received” though usually written in a promissory note and a bill of

exchange, it is not legally compulsory. exchange, it is not legally compulsory.

The drawer and the drawee and the drawer and payee may be the same person.The drawer and the drawee and the drawer and payee may be the same person.

If the drawer and the drawee are the same or the drawee is a fictitious person, theIf the drawer and the drawee are the same or the drawee is a fictitious person, the

instrument may be treated as a bill of exchange or a promissory not at the holder’sinstrument may be treated as a bill of exchange or a promissory not at the holder’s

option.option.

The holder is the payee or endorsee that is in possession of the bill, or the in case ofThe holder is the payee or endorsee that is in possession of the bill, or the in case of

order bill bearer in the case of a bearer bill.order bill bearer in the case of a bearer bill.

A bill is payable to order when A bill is payable to order when

a. It is expressed to be payable to order a. It is expressed to be payable to order

b.b. It is payable to a particular person and does not contain words prohibitingIt is payable to a particular person and does not contain words prohibiting

transfer.transfer.

Ex. “to pay AB Br 500.00”Ex. “to pay AB Br 500.00”

“Pay AB only” or “pay AB personally Br 500.00” is not an order bill “Pay AB only” or “pay AB personally Br 500.00” is not an order bill

c.c. It is payable to the order of a particular person.It is payable to the order of a particular person.

Ex. A bill payable to “the order of AB” is payable either to AB or to AB’s order.Ex. A bill payable to “the order of AB” is payable either to AB or to AB’s order.

A bill is payable to bearer: - A bill is payable to bearer: - When it is expressed to be so payable or when the only or lastWhen it is expressed to be so payable or when the only or last

endorsement is an endorsement in blank.endorsement is an endorsement in blank.

a. Classifications of Bills of Exchange. a. Classifications of Bills of Exchange.

Bills of exchange can be classified as follows:Bills of exchange can be classified as follows:

1. Inland and Foreign Bills.1. Inland and Foreign Bills.

a) Inland Billa) Inland Bill

An inland bill is one, which is: -An inland bill is one, which is: -

-- Both drawn and payable within the same country, or Both drawn and payable within the same country, or

-- Drawn within the country upon some person resident therein whether payable inDrawn within the country upon some person resident therein whether payable in

or outside the country or outside the country

-- Drawn in the country on a person residing outside the country but payable in theDrawn in the country on a person residing outside the country but payable in the

country country

b) Foreign Bills b) Foreign Bills

A Bill, which is not an inland bill, is a foreign bill. A foreign bill is one, which is:A Bill, which is not an inland bill, is a foreign bill. A foreign bill is one, which is:

-- Drawn in a country on a person residing outside the country and payable outsideDrawn in a country on a person residing outside the country and payable outside

the country.the country.

-- Drawn outside the country and made payable either in or outside the country.Drawn outside the country and made payable either in or outside the country.

-- Drawn outside the country on a person residing in the country Drawn outside the country on a person residing in the country

-- Drawn outside the country and payable outside the country. Drawn outside the country and payable outside the country.

2. Time and Demand Bills 2. Time and Demand Bills

a)a) Time billTime bill: A bill payable after a fixed time is termed as a time bill. A bill payable “after: A bill payable after a fixed time is termed as a time bill. A bill payable “after

date” is a time bill. In case a bill payable “after date”, the maturity date is to be reckoneddate” is a time bill. In case a bill payable “after date”, the maturity date is to be reckoned

from the date as mentioned in the bill but in case of bill ‘payable after sight”, the date offrom the date as mentioned in the bill but in case of bill ‘payable after sight”, the date of

maturity is to be calculated from the date of presentment for acceptance.maturity is to be calculated from the date of presentment for acceptance.

b)b) Demand bill: Demand bill: A bill payable at sight or on demand is termed as a demand bill. Demand billsA bill payable at sight or on demand is termed as a demand bill. Demand bills

are also referred as “sight bills” and they require no acceptance. All clean and documentaryare also referred as “sight bills” and they require no acceptance. All clean and documentary

bills which are payable upon presentation, at sight or on demand, are demand bills becausebills which are payable upon presentation, at sight or on demand, are demand bills because

they are payable on demand. they are payable on demand.

3. Trade and Accommodation Bills 3. Trade and Accommodation Bills

a)a) Trade Bill: Trade Bill: A bill drawn and accepted for a genuine trade transaction is a “trade bill”. It isA bill drawn and accepted for a genuine trade transaction is a “trade bill”. It is

drawn in the course of a trade transactions.drawn in the course of a trade transactions.

b)b) Accommodation bill:Accommodation bill: A bill drawn and accepted not for a genuine trade transaction but only A bill drawn and accepted not for a genuine trade transaction but only

to provide financial help to some party is termed as an accommodation bill”. It is a bill whichto provide financial help to some party is termed as an accommodation bill”. It is a bill which

does not originate in pursuance of a commercial transaction like sale of goods or lending ofdoes not originate in pursuance of a commercial transaction like sale of goods or lending of

money, and is drawn, accepted or endorsed without consideration merely to help the businessmoney, and is drawn, accepted or endorsed without consideration merely to help the business

associate.associate.

Illustration: -Illustration: -

“A” is in need of money for three months. He induces his friend “B” to accept a bill of exchange“A” is in need of money for three months. He induces his friend “B” to accept a bill of exchange

drawn on him for Br 100.00 for three months. The bill is drawn and accepted by A and Bdrawn on him for Br 100.00 for three months. The bill is drawn and accepted by A and B

respectively and A becomes the accommodated party and B becomes the accommodating party. respectively and A becomes the accommodated party and B becomes the accommodating party.

The following are the rules regarding accommodation bills. The following are the rules regarding accommodation bills.

1.1. In case the accommodated party continues to hold the bill till maternity, theIn case the accommodated party continues to hold the bill till maternity, the

accommodating party shall not be liable to him for payment of the bill since theaccommodating party shall not be liable to him for payment of the bill since the

contract b/n them is not based on any consideration.contract b/n them is not based on any consideration.

2.2. The accommodating party is liable to a holder of the instrument for value even thoughThe accommodating party is liable to a holder of the instrument for value even though

the holder may have known that the party was only an accommodating party. the holder may have known that the party was only an accommodating party.

The accommodating party can, in turn, claim compensation from the accommodated party forThe accommodating party can, in turn, claim compensation from the accommodated party for

the amount it has been asked to pay the holder for value.the amount it has been asked to pay the holder for value.

4. Clean and Documentary Bill 4. Clean and Documentary Bill

a)a) Clean Bills: Clean Bills: A bill drawn and accepted with out support of documents is a clean bill, A bill drawn and accepted with out support of documents is a clean bill,

b)b) Documentary Bills: - Documentary Bills: - It contains such documents as bill of lading or railway receipt,It contains such documents as bill of lading or railway receipt,

certificate of origin, consular invoice, insurance, policy, carriers invoice.certificate of origin, consular invoice, insurance, policy, carriers invoice.

c)c) Parties to a bill of Exchange Parties to a bill of Exchange

1.1. Drawer: Drawer: He is the maker of a bill of exchange. He is the one who order some otherHe is the maker of a bill of exchange. He is the one who order some other

person or institution to pay money to some specified person. He must sign it. Thoughperson or institution to pay money to some specified person. He must sign it. Though

there is no objection to its being accepted before the drawer places his signature on it,there is no objection to its being accepted before the drawer places his signature on it,

it remains incomplete and cannot be issued. it remains incomplete and cannot be issued.

2.2. The Drawee/Acceptor. The Drawee/Acceptor. He is the person ordered by the drawer to pay money. He canHe is the person ordered by the drawer to pay money. He can

be a person or an institution. He becomes the “acceptor” after he has signified hisbe a person or an institution. He becomes the “acceptor” after he has signified his

assent to the order of the drawer by writing the word “accepted” right across the faceassent to the order of the drawer by writing the word “accepted” right across the face

of the bill with his signature and date.of the bill with his signature and date.

3.3. Payee: Payee: He is the person to whom or to whose favor the money is directed by theHe is the person to whom or to whose favor the money is directed by the

instrument to be paid. The drawer may make the bill payable to him or may nameinstrument to be paid. The drawer may make the bill payable to him or may name

another person in the bill to whom it has to pay. another person in the bill to whom it has to pay.

4.4. Holder:Holder: He is any person entitled in his own name to the possession of the instrument He is any person entitled in his own name to the possession of the instrument

and to receive or recover the amount thereon from the parties. He may be the originaland to receive or recover the amount thereon from the parties. He may be the original

payee named in the bill or one to whom the bill is endorsed over the original payee. Ifpayee named in the bill or one to whom the bill is endorsed over the original payee. If

the instrument is a note payable to bearer, the bearer is the holder otherwise thethe instrument is a note payable to bearer, the bearer is the holder otherwise the

endorsee will be the holder.endorsee will be the holder.

5.5. Endorser:Endorser:When the holder transfers or endorses the instrument to any one else heWhen the holder transfers or endorses the instrument to any one else he

becomes the endorser.becomes the endorser.

6.6. Endorsee Endorsee The person to whom the bill is indorsed. He can be again a person or anThe person to whom the bill is indorsed. He can be again a person or an

institution. institution.

7.7. Drawee in case of need: Drawee in case of need: When, in the bill or in any other instrument, the name ofWhen, in the bill or in any other instrument, the name of

any person is given, in addition to the drawee, to be resorted to in case of need, heany person is given, in addition to the drawee, to be resorted to in case of need, he

will be the drawee in case of need. If the original drawee refuses to accept the bill, thewill be the drawee in case of need. If the original drawee refuses to accept the bill, the

bill must be presented to such a drawee in case of need. In other way he is a guarantorbill must be presented to such a drawee in case of need. In other way he is a guarantor

at the time of issuance.at the time of issuance.

8.8. Acceptor for honors:Acceptor for honors: In case the original drawee refuses to accept the bill or to In case the original drawee refuses to accept the bill or to

furnish better security when demanded by the holder, any person who is not liable onfurnish better security when demanded by the holder, any person who is not liable on

the bill may accept it with the consent of the holder for the honor of any party liablethe bill may accept it with the consent of the holder for the honor of any party liable

on the bill. To be valid, an acceptance for honor can only take place after the bill hason the bill. To be valid, an acceptance for honor can only take place after the bill has

been protested for non-acceptance and is not overdue. been protested for non-acceptance and is not overdue.

Discounting A BillDiscounting A Bill

When a banker discounts a bill, he buys it out right for a sum less than its face value or maturityWhen a banker discounts a bill, he buys it out right for a sum less than its face value or maturity

value. The amount received by the discounter is the proceed i.e. the discounted balance. Thevalue. The amount received by the discounter is the proceed i.e. the discounted balance. The

difference between the face value or maturity value of the note and the proceed amount is termeddifference between the face value or maturity value of the note and the proceed amount is termed

discount. The rate applied to determine the discount is termed as a discount rate. The discountdiscount. The rate applied to determine the discount is termed as a discount rate. The discount

rate is again determined based on the remaining dates of the note and the banks policy. rate is again determined based on the remaining dates of the note and the banks policy.

Recording method: - Dr Cash xxx (by the amount received) Recording method: - Dr Cash xxx (by the amount received)

The customer account xxx (by face value or maturity value) The customer account xxx (by face value or maturity value)

When the banker buys trade bills, there are points to be considered in order to avoidWhen the banker buys trade bills, there are points to be considered in order to avoid

unmarketable bills, which may eventually produce endless trouble.unmarketable bills, which may eventually produce endless trouble.

For example: - If a bill drawn by A on B brought to be discounted For example: - If a bill drawn by A on B brought to be discounted

-- The banker should consider the position of the acceptor –B.The banker should consider the position of the acceptor –B.

-- The banker should obtain opinion about B from the banker if his account is heldThe banker should obtain opinion about B from the banker if his account is held

at another bank.at another bank.

-- The banker should consider The banker should consider

-- How many other bills accepted by B are in the bill case?How many other bills accepted by B are in the bill case?

-- Have any of B’s acceptances ever been dishonored?Have any of B’s acceptances ever been dishonored?

A bill is a genuine trade bill if A bill is a genuine trade bill if

1.1. The bill is accepted by B because he has received value for it from A.The bill is accepted by B because he has received value for it from A.

2.2. ‘B’ accept it merely for the accommodation of ‘A’ on the understanding that ‘A’ he must ‘B’ accept it merely for the accommodation of ‘A’ on the understanding that ‘A’ he must

meet it at maturity.meet it at maturity.

A banker who discounts a bill is “holder for value” and at maturity he obtains the full proceeds.A banker who discounts a bill is “holder for value” and at maturity he obtains the full proceeds.

4.4.2.4.4.2. Promissory Notes Promissory Notes

According to the Negotiable Instruments Act, a promissory note is an instrument in writing (notAccording to the Negotiable Instruments Act, a promissory note is an instrument in writing (not

being a bank or a currency note) containing an unconditional undertaking signed by the maker, tobeing a bank 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 thepay a certain sum of money only to, or to the order of a certain person, or to the bearer of the

instrument.instrument.

A promissory note is drawn and signed by the debtor (called the “maker”). Who promises to payA promissory note is drawn and signed by the debtor (called the “maker”). Who promises to pay

the creditor (called the “payee”), a certain sum of money. The note may be drawn in any form,the creditor (called the “payee”), a certain sum of money. The note may be drawn in any form,

but the words used must clearly bring out a promise to pay.but the words used must clearly bring out a promise to pay.

A promissory note may be payable on demand or after the expiry of a fixed time afterA promissory note may be payable on demand or after the expiry of a fixed time after

date or sight.date or sight.

A specimen of a promissory note payable on demand.A specimen of a promissory note payable on demand.

Amount Place: Addis AbabaAmount Place: Addis Ababa

Br 10,000.00Br 10,000.00 Date: Sept.,15, 2003Date: Sept.,15, 2003

On demand, I promise to pay to Ato Yigermal or hisOn demand, I promise to pay to Ato Yigermal or his

order a sum of birr Ten Thousand, value received.order a sum of birr Ten Thousand, value received.

To: Ato Yigrmal StampTo: Ato Yigrmal Stamp

Address maker Address maker

A specimen of a promissory note payable after the expiry of a fixed time after dateA specimen of a promissory note payable after the expiry of a fixed time after date

A specimen of a promissory note payable after the expiry of a fixed time after sight A specimen of a promissory note payable after the expiry of a fixed time after sight

Amount Place: ArussiAmount Place: Arussi

Br 20,000.00 Date: Nov.,1, 2003Br 20,000.00 Date: Nov.,1, 2003

Ninety days after sight, I promise to pay to AtoNinety days after sight, I promise to pay to Ato

Amount Place: Addis AbabaAmount Place: Addis Ababa

Br 5,000.00 Date: Nov.,3, 2003Br 5,000.00 Date: Nov.,3, 2003

Thirty days after date, I promise to pay to AtoThirty days after date, I promise to pay to Ato

Geremew or his order a sum of Birr Five Thousand,Geremew or his order a sum of Birr Five Thousand,

value received.value received.

To: Ato Geremew stampTo: Ato Geremew stamp

Address maker Address maker

Habtamu or his order a sum of Birr Twenty Thousand,Habtamu or his order a sum of Birr Twenty Thousand,

value received.value received.

To: Ato Habtamu stampTo: Ato Habtamu stamp

Address maker Address maker

A promissory note may be payable to either the bearer or to the order.A promissory note may be payable to either the bearer or to the order.

A specimen of a promissory note payable to the order.A specimen of a promissory note payable to the order.

Amount Place: WollaitaAmount Place: Wollaita

Br. 15,000.00 Date: Oct. 15, 2003.Br. 15,000.00 Date: Oct. 15, 2003.

I promise to pay Ato Kebede or his order a sum of BirrI promise to pay Ato Kebede or his order a sum of Birr

Fifteen thousand, value received.Fifteen thousand, value received.

To: Ato Kebede Stamp To: Ato Kebede Stamp

Address maker Address maker

N.B: This form of a promissory note can be prepared by any one. N.B: This form of a promissory note can be prepared by any one.

Specimen for a promissory note, payable to the bearer. Specimen for a promissory note, payable to the bearer.

Amount Place: Arba MinchAmount Place: Arba Minch

Br. 9,000.00 Date: Nov. 6,2003Br. 9,000.00 Date: Nov. 6,2003

I promise to pay to the bearer a sum of Birr Nine Thousand,I promise to pay to the bearer a sum of Birr Nine Thousand,

value received.value received.

StampStamp

Maker Maker

N.B: This can be prepared only by the government or National Bank.N.B: This can be prepared only by the government or National Bank.

Currency or Bank notes are bearer promissory notes, which are issued by the National Bank.Currency or Bank notes are bearer promissory notes, which are issued by the National Bank.

They are promises made by government. But, in actuality they are not promissory notes.They are promises made by government. But, in actuality they are not promissory notes.

Because, as you promise, it implies that you enter in to an understanding to pay money in theBecause, as you promise, it implies that you enter in to an understanding to pay money in the

future time, but when you give money now, even though it is a promise, the payment is actuallyfuture time, but when you give money now, even though it is a promise, the payment is actually

made and no payment is expected in the future. However, one thing must be made clear; thatmade and no payment is expected in the future. However, one thing must be made clear; that

government is always ready to redeem these currency notes.government is always ready to redeem these currency notes.

a. Essential features of promissory note a. Essential features of promissory note

A promissory note must possess the following essential characteristics. They are:A promissory note must possess the following essential characteristics. They are:

1.1. It must be in writing.It must be in writing. A mere verbal promise or oral promise to pay does not constitute A mere verbal promise or oral promise to pay does not constitute

as a promissory note.as a promissory note.

2.2. It must contain an expressed promise or clear undertaking to payIt must contain an expressed promise or clear undertaking to pay: - A mere/simple: - A mere/simple

acknowledgment of a debt is not a promissory note. The promise to pay money must beacknowledgment of a debt is not a promissory note. The promise to pay money must be

stated in express words and not implied. However, the use of the word “promise” in thestated in express words and not implied. However, the use of the word “promise” in the

instrument is not necessary. instrument is not necessary.

The following are promissory notes:The following are promissory notes:

If Ato Akloge writes:-If Ato Akloge writes:-

i). “I promise to pay Ato Geremew or order Br.500.00.”i). “I promise to pay Ato Geremew or order Br.500.00.”

ii) “I acknowledge myself to be indebted to Ato Chanyalew for Br.1, 000.00 to be paidii) “I acknowledge myself to be indebted to Ato Chanyalew for Br.1, 000.00 to be paid

on demand, for value received.”on demand, for value received.”

The following are not promissory notes.The following are not promissory notes.

If Ato Alemayehu writes:-If Ato Alemayehu writes:-

i). “Ato Abate I owe you Br.100.00.” i). “Ato Abate I owe you Br.100.00.”

ii). “I have taken from Ato Zerihun one thousand only. The amount to beii). “I have taken from Ato Zerihun one thousand only. The amount to be

repayable after one year along with interest at the rate of 8 percent per annum,”repayable after one year along with interest at the rate of 8 percent per annum,”

iii). “Ato Alemu I am liable to pay you Br. 100.00.” iii). “Ato Alemu I am liable to pay you Br. 100.00.”

These are not promissory notes because: the first one is a simple acknowledgment of a debt, theThese are not promissory notes because: the first one is a simple acknowledgment of a debt, the

second is simply an implied, not expressed, and the third one is expressing only being indebted,second is simply an implied, not expressed, and the third one is expressing only being indebted,

not the obligation to pay.not the obligation to pay.

In the second case the banker, deputed to collect the amount of the cheque from another banker,In the second case the banker, deputed to collect the amount of the cheque from another banker,

is called the collecting banker. He presents the cheque for encashment to the drawee banker andis called the collecting banker. He presents the cheque for encashment to the drawee banker and

on its realization it credits the accounts of the customer with the amount so realized.on its realization it credits the accounts of the customer with the amount so realized.

3.3. The undertaking to pay is unconditional. The undertaking to pay is unconditional. Conditions can be certain or uncertain condition.Conditions can be certain or uncertain condition.

Therefore payments should not be attached with uncertain conditions.Therefore payments should not be attached with uncertain conditions.

The following documents are not promissory notes.The following documents are not promissory notes.

-- I promise to pay to Mr. B Br 1,000.00, if he marries Ms CI promise to pay to Mr. B Br 1,000.00, if he marries Ms C

-- I promise to pay as soon as possible a sum of Br 1,000.00I promise to pay as soon as possible a sum of Br 1,000.00

The following documents are promissory notes.The following documents are promissory notes.

-- I promise to pay Br 1,000.00 seven days after the death of Mr. D.I promise to pay Br 1,000.00 seven days after the death of Mr. D.

-- Sixty days after sigh, I promise to pay A’ Mr. Z or order a sum of Br 1,000.00Sixty days after sigh, I promise to pay A’ Mr. Z or order a sum of Br 1,000.00

value received. value received.

4.4. It must be signed by the maker: It must be signed by the maker: It may be signed on any part of the instrument. It may beIt may be signed on any part of the instrument. It may be

signed with pencil or ink or thumb mark or initials. An agent can sign the promissory notesigned with pencil or ink or thumb mark or initials. An agent can sign the promissory note

but the agent must expressly state as to on whose behalf he is signing, otherwise, hebut the agent must expressly state as to on whose behalf he is signing, otherwise, he

himself may be held liable as a maker.himself may be held liable as a maker.

5.5. The maker must be certain:The maker must be certain: He may be described by name or by his designation. In case He may be described by name or by his designation. In case

two or more persons promise to pay, they may bind themselves jointly or jointly andtwo or more persons promise to pay, they may bind themselves jointly or jointly and

severally, their liability cannot be in the alternative. severally, their liability cannot be in the alternative.

6.6. The payee must be certain: The payee must be certain: The payee may be ascertained by name or by designation. InThe payee may be ascertained by name or by designation. In

case there is a mistake in the name of the payee or his designation, the note is valid, if thecase there is a mistake in the name of the payee or his designation, the note is valid, if the

payee can be ascertainable by evidence. Even when the name of a dead person is entered aspayee can be ascertainable by evidence. Even when the name of a dead person is entered as

payee in ignorance of his death, his legal representative can enforce payment.payee in ignorance of his death, his legal representative can enforce payment.

7.7. The promise should be to pay money and money only:The promise should be to pay money and money only: Money means legal tender Money means legal tender

money. If the promise to pay includes other items with money, it will not be deemed as amoney. If the promise to pay includes other items with money, it will not be deemed as a

pronto. It may be discussed as follows. pronto. It may be discussed as follows.

“ I promise to pay to Mr. A Birr 1,00.00 and one Cow.” “ I promise to pay to Mr. A Birr 1,00.00 and one Cow.”

This document is not a promissory not, because it includes money with cow.This document is not a promissory not, because it includes money with cow.

8.8. Amount should be certain: Amount should be certain: The amount to be paid should be either expressly or impliedlyThe amount to be paid should be either expressly or impliedly

stated and it should be specificstated and it should be specific

The following are not promissory notes.The following are not promissory notes.

-I promise to pay to W/t Nigist Birr 500.00 and all other sums, which become due.-I promise to pay to W/t Nigist Birr 500.00 and all other sums, which become due.

-I promise to pay to W/t Azalch Birr 1,000.00 first deducting there from any amount,-I promise to pay to W/t Azalch Birr 1,000.00 first deducting there from any amount,

which, she owes to me.which, she owes to me.

The following are promissory notes.The following are promissory notes.

a)a) Thirty days from date, I promise to pay to Mr. A Birr 1,000.00 with an interestThirty days from date, I promise to pay to Mr. A Birr 1,000.00 with an interest

rte of 10%.rte of 10%.

b)b) Thirty days from date, I promise to pay to Mr. A Birr 1,000.00 with theThirty days from date, I promise to pay to Mr. A Birr 1,000.00 with the

prevailing interest rate.prevailing interest rate.

c)c) Three months from date, I promise to pay to Mr. B USD 1,000.00 with anThree months from date, I promise to pay to Mr. B USD 1,000.00 with an

exchange rate of Br 8.5216.exchange rate of Br 8.5216.

d)d) Three months from date, I promise to pay to Mr. B USD 100.00 with theThree months from date, I promise to pay to Mr. B USD 100.00 with the

prevailing exchange rate. prevailing exchange rate.

9.9. The Instrument must be properly stamped: The Instrument must be properly stamped: The promissory note must be stamped orThe promissory note must be stamped or

signed to ascertain who the issuer is. Therefore, if the issuer is an individual, he can put hissigned to ascertain who the issuer is. Therefore, if the issuer is an individual, he can put his

signature and stamp it. However, if the issuer is an institution, it can only stamp it.signature and stamp it. However, if the issuer is an institution, it can only stamp it.

10.10. Other formalitiesOther formalities

The date of the instrument is not material unless the amount is made payable at aThe date of the instrument is not material unless the amount is made payable at a

certain, time after date. Even in such a case, omission of a date does not invalidate thecertain, time after date. Even in such a case, omission of a date does not invalidate the

instrument if the date of execution can be independently ascertained and proved.instrument if the date of execution can be independently ascertained and proved.

“ I promise to pay Birr 1,000.00 to Mr. C on the first day of the first month colander“ I promise to pay Birr 1,000.00 to Mr. C on the first day of the first month colander

year”year”

Number, place, date and consideration though usually found in the promissory notesNumber, place, date and consideration though usually found in the promissory notes

but are not essential in law.but are not essential in law.

The words “Value received” are also unnecessary.The words “Value received” are also unnecessary.

b. Presentation of promissory Notesb. Presentation of promissory Notes

Negotiable Instruments are presented for three causes: for acceptance, for sight and for payment.Negotiable Instruments are presented for three causes: for acceptance, for sight and for payment.

But presentation of a promissory note for acceptance is not needed i.e. presentation is notBut presentation of a promissory note for acceptance is not needed i.e. presentation is not

necessary for fixing the liability on the maker because it is already done as he/she writes thenecessary for fixing the liability on the maker because it is already done as he/she writes the

promissory note. But presentation is necessary under the following conditions.promissory note. But presentation is necessary under the following conditions.

1.1. When it is payable after a certain period “after sight”, it must be presented with in aWhen it is payable after a certain period “after sight”, it must be presented with in a

reasonable time and during business hours on a business day.reasonable time and during business hours on a business day.

2.2. It must be presented for payment, if it is a demand note within a reasonable time, after itIt must be presented for payment, if it is a demand note within a reasonable time, after it

has been received by the holder, and in other cases within a reasonable time after maturity.has been received by the holder, and in other cases within a reasonable time after maturity.

However, delay in presentation owing to unavoidable cause can be condoned. TheHowever, delay in presentation owing to unavoidable cause can be condoned. The

instrument to be presented just at the end of the unavoidable cause.instrument to be presented just at the end of the unavoidable cause.

3.A promissory note, which is payable in installments, must be presented on the due dates of 3.A promissory note, which is payable in installments, must be presented on the due dates of

installments.installments.

4. A promissory note, which is payable at a specified place, must be presented for payment at4. A promissory note, which is payable at a specified place, must be presented for payment at

that place.that place.

Difference between a bill of exchange and a promissory note.Difference between a bill of exchange and a promissory note.

1. Number of parties 1. Number of parties

Bill of exchange Bill of exchange: - There are three parties: drawer, drawee and payee. The drawer may: - There are three parties: drawer, drawee and payee. The drawer may

also be the payee. In bill of exchange, drawer and payee and drawer and drawee can bealso be the payee. In bill of exchange, drawer and payee and drawer and drawee can be

one and the same person one and the same person

Promissory notePromissory note: -There are only two parities maker and payee. Maker cannot be payee: -There are only two parities maker and payee. Maker cannot be payee

2. Promise and order2. Promise and order

A bill contains an order to pay certain sum of money, whereas a promissory note containsA bill contains an order to pay certain sum of money, whereas a promissory note contains

a promise to pay a certain sum of money to the payee.a promise to pay a certain sum of money to the payee.

3. Acceptance3. Acceptance

Bill payable after sight requires acceptance of the drawee before it is presented forBill payable after sight requires acceptance of the drawee before it is presented for

payment while a pronto does not.payment while a pronto does not.

4. Nature of Liability4. Nature of Liability

The liability of the maker of a note is primary and absolute but that of a drawer of a billThe liability of the maker of a note is primary and absolute but that of a drawer of a bill

of exchange is secondary and conditional. The drawer can be liable only on the default ofof exchange is secondary and conditional. The drawer can be liable only on the default of

the acceptor in payment of the money due and provided the fact of dishonor has beenthe acceptor in payment of the money due and provided the fact of dishonor has been

notified to him. notified to him.

5. Maker’s Position5. Maker’s Position

The maker of a promissory note stands in an immediate relationship with a payee.The maker of a promissory note stands in an immediate relationship with a payee.

The maker in a promissory note being the originator of the note cannot make itThe maker in a promissory note being the originator of the note cannot make it

conditional.conditional.

The drawer in a bill of exchange stands in immediate relationship with the acceptor andThe drawer in a bill of exchange stands in immediate relationship with the acceptor and

not the payee. The drawee (acceptor) in a bill of exchange can accept the billnot the payee. The drawee (acceptor) in a bill of exchange can accept the bill

conditionally because his contract is only supplementary. Being super imposed on that ofconditionally because his contract is only supplementary. Being super imposed on that of

the drawer. the drawer.

6. Notice in the case of dishonor6. Notice in the case of dishonor

Notice of dishonor must be submitted to all prior parties, in case of dishonor of a billNotice of dishonor must be submitted to all prior parties, in case of dishonor of a bill

either by non-acceptance or non-payment. either by non-acceptance or non-payment.

In case of dishonor of a promissory note no notice is necessary to the maker as the makerIn case of dishonor of a promissory note no notice is necessary to the maker as the maker

is the one who dishonor it by non-payment. is the one who dishonor it by non-payment.

7. 7. Who may draw the instrumentWho may draw the instrument? ?

A creditor always draws a bill on the debtor. Promissory note is drawn by the debtor A creditor always draws a bill on the debtor. Promissory note is drawn by the debtor

and given to the creditor.and given to the creditor.

8. 8. Bearer or order Bearer or order. A bill can be drawn payable to bearer, provided it is not payable on. A bill can be drawn payable to bearer, provided it is not payable on

demand. A promissory note cannot be made payable to bearer.demand. A promissory note cannot be made payable to bearer.

4.4.3. Cheque 4.4.3. Cheque

According to the Negotiable Instruments Act. “A cheque is a bill of exchange drawn on aAccording to the Negotiable Instruments Act. “A cheque is a bill of exchange drawn on a

specified bank and not expressed to be payable otherwise than on demand.” It is unconditionalspecified bank and not expressed to be payable otherwise than on demand.” It is unconditional

order in writhing, signed by the drawer requiring the banker to pay on demand a sum certain inorder in writhing, signed by the drawer requiring the banker to pay on demand a sum certain in

money to, or to the order of a specified person or to the bearer.money to, or to the order of a specified person or to the bearer.

-- It is always drawn on a specified banker It is always drawn on a specified banker

-- It is always payable on demandIt is always payable on demand

-- It is a bill of exchange.It is a bill of exchange.

Thus, all cheques are bill of exchange but all bills are not cheques. Thus, all cheques are bill of exchange but all bills are not cheques.

A. Essentials /Characteristics of a cheque.A. Essentials /Characteristics of a cheque.

An instrument to be called a cheque must fulfill the following conditionsAn instrument to be called a cheque must fulfill the following conditions

i. The instrument must be in writhing.i. The instrument must be in writhing.

The instrument to be referred as a cheque, it must be in writhing. It can be written inThe instrument to be referred as a cheque, it must be in writhing. It can be written in

different forms such as: printed characters, type written, pen or pencil or engraveddifferent forms such as: printed characters, type written, pen or pencil or engraved

characters. There is no legal restriction as to the form of writing. However, banks do notcharacters. There is no legal restriction as to the form of writing. However, banks do not

generally honor cheques drawn in pencil, unless confirmed by the drawer, because it isgenerally honor cheques drawn in pencil, unless confirmed by the drawer, because it is

easy to make unauthorized alterations when a cheque is drawn in pencil.easy to make unauthorized alterations when a cheque is drawn in pencil.

ii. The instrument must contain an unconditional order.ii. The instrument must contain an unconditional order.

The order to pay must be unconditional, that is, no condition should be attached to theThe order to pay must be unconditional, that is, no condition should be attached to the

payment of the cheque. If the banker is asked to do something else besides payment ofpayment of the cheque. If the banker is asked to do something else besides payment of

money on the cheque, the order will be conditional order. Thus it will not be called amoney on the cheque, the order will be conditional order. Thus it will not be called a

cheque. But if the condition is communicated only to the payee but not the banker, thecheque. But if the condition is communicated only to the payee but not the banker, the

order to pay may be regarded unconditional.order to pay may be regarded unconditional.

iii. The maker must sign the instrument iii. The maker must sign the instrument

In order to be a valid cheque the instrument must contain the signature of the drawer. InIn order to be a valid cheque the instrument must contain the signature of the drawer. In

the case of an illiterate person, his/her thumb impression is necessary. Pencil signaturesthe case of an illiterate person, his/her thumb impression is necessary. Pencil signatures

are discouraged by banker, but legally permissible. Rubber stamp impression is notare discouraged by banker, but legally permissible. Rubber stamp impression is not

permitted generally. permitted generally.

iv. Drawn on a Specified Bankeriv. Drawn on a Specified Banker..

It should be drawn on a banker only. The name of the banker must be specified or stated.It should be drawn on a banker only. The name of the banker must be specified or stated.

Fortunately, the name of the bank and the name of the specific branch where the accountFortunately, the name of the bank and the name of the specific branch where the account

is maintained is printed on the face of the cheque.is maintained is printed on the face of the cheque.

v. The order must for a certain sum of money only.v. The order must for a certain sum of money only.

The order must be for the payment of money only. The money means legal tender-The order must be for the payment of money only. The money means legal tender-

currency. The amount must be certain or definite; when the cheque is drawn in anycurrency. The amount must be certain or definite; when the cheque is drawn in any

foreign currency and when it is payable with interest at a given rate up to the date offoreign currency and when it is payable with interest at a given rate up to the date of

happening of a fixed future event, it is believed the amount is certain. happening of a fixed future event, it is believed the amount is certain.

vi. Payee to be certain. vi. Payee to be certain.

The person to whom the amount is to be paid must be certain. It may be made payable toThe person to whom the amount is to be paid must be certain. It may be made payable to

a certain person or to his order or to the bearer. If not payable to barer;a certain person or to his order or to the bearer. If not payable to barer;

-The payee must be named of other wise indicated therein with reasonable-The payee must be named of other wise indicated therein with reasonable

certainty. certainty.

-The payee need not be a human being; it can be a legal person. -The payee need not be a human being; it can be a legal person.

vii. Payable on demandvii. Payable on demand..

The instrument must be payable to or to the order of a certain person or to his bearer onThe instrument must be payable to or to the order of a certain person or to his bearer on

demand. Cheques are always made payable on demand at sight or at presentment.demand. Cheques are always made payable on demand at sight or at presentment.

vii. vii. Other Characteristics of cheques.Other Characteristics of cheques.

1.1. A cheque drawn to cash or bearer can be paid to the presenter. It should be endorsed byA cheque drawn to cash or bearer can be paid to the presenter. It should be endorsed by

the bearer at the time of encashment or crediting to his/her account.the bearer at the time of encashment or crediting to his/her account.

2.2. Only the drawer should endorse a cheque drawn to self.Only the drawer should endorse a cheque drawn to self.

3.3. A cheque drawn in the name of corporation, Co-operatives or legal bodies in generalA cheque drawn in the name of corporation, Co-operatives or legal bodies in general

cannot be paid in cash. Such cheques shall be credited to the payee’s or endorsee’scannot be paid in cash. Such cheques shall be credited to the payee’s or endorsee’s

account. The cheque should bear a seal whenever possible.account. The cheque should bear a seal whenever possible.

4.4. A cheque drawn to specific person shall be paid to such person or credited to his/herA cheque drawn to specific person shall be paid to such person or credited to his/her

account upon endorsement. He can transfer to another person by endorsement.account upon endorsement. He can transfer to another person by endorsement.

5.5. A cheque drawn to joint account holder (or in the name of two persons) shall be paidA cheque drawn to joint account holder (or in the name of two persons) shall be paid

against their endorsement.against their endorsement.

6.6. A cheque drawn to the order or alternative individuals can be paid by the endorsement ofA cheque drawn to the order or alternative individuals can be paid by the endorsement of

one of the individuals.one of the individuals.

7.7. Unlike a bill of exchange, a cheque does not require any acceptance.Unlike a bill of exchange, a cheque does not require any acceptance.

B. Dating of cheques.B. Dating of cheques.

There are two ways of dating a cheque.There are two ways of dating a cheque.

1. Ante-dated cheque1. Ante-dated cheque..

It is one that bears a date earlier than the date of issue; It is a negotiable instrument andIt is one that bears a date earlier than the date of issue; It is a negotiable instrument and

payable on demand.payable on demand.

2. Post –dated Cheque2. Post –dated Cheque

It is one that bears a date later than the date of issue. It is a negotiable instrument but notIt is one that bears a date later than the date of issue. It is a negotiable instrument but not

an instrument payable on demand. A cheque is not invalid merely on the ground that it isan instrument payable on demand. A cheque is not invalid merely on the ground that it is

antedated or post-dated, or that it bears a date on Sunday (holiday).antedated or post-dated, or that it bears a date on Sunday (holiday).

A bank is not bound to honor an undated cheque. It is an inchoate cheque. But it is still aA bank is not bound to honor an undated cheque. It is an inchoate cheque. But it is still a

valid cheque. Hence, the holder of such a cheque is authorized to fill in the date within avalid cheque. Hence, the holder of such a cheque is authorized to fill in the date within a

reasonable time.reasonable time.

The holder of a cheque must present it for payment within a reasonable time of its issue,The holder of a cheque must present it for payment within a reasonable time of its issue,

and failure to do this will discharge the drawer to the extent of any damage he may sufferand failure to do this will discharge the drawer to the extent of any damage he may suffer

from the delay. from the delay.

Differences between a Cheque and Bills of ExchangeDifferences between a Cheque and Bills of Exchange

1.1. A cheque is always drawn on a banker, while a bill of exchange may b e drawn on anyA cheque is always drawn on a banker, while a bill of exchange may b e drawn on any

person or institution, including banker.person or institution, including banker.

2.2. A cheque is always payable on demand whereas a bill of exchange may be payable onA cheque is always payable on demand whereas a bill of exchange may be payable on

demand or on the expiry of a fixed period. When a bill is payable after a specifieddemand or on the expiry of a fixed period. When a bill is payable after a specified

period, three days of grace are allowed for payment. No grace day is allowed in case ofperiod, three days of grace are allowed for payment. No grace day is allowed in case of

a cheque.a cheque.

3.3. A cheque maybe crossed but there is no such provision in case of a bill of exchange.A cheque maybe crossed but there is no such provision in case of a bill of exchange.

4.4. A cheque does not require acceptance, whereas a bill of exchange, unless payable onA cheque does not require acceptance, whereas a bill of exchange, unless payable on

demand, requires acceptance.demand, requires acceptance.

5.5. A bill payable on demand can never be drawn to bearer whereas a cheque drawn toA bill payable on demand can never be drawn to bearer whereas a cheque drawn to

bearer payable on demand is valid.bearer payable on demand is valid.

6.6. A bill of exchange, except in certain cases, must be stamped, whereas a cheque doesA bill of exchange, except in certain cases, must be stamped, whereas a cheque does

not require any stamp.not require any stamp.

7.7. The payment of a cheque may be countermanded by the drawer, but payment of a bill,The payment of a cheque may be countermanded by the drawer, but payment of a bill,

after acceptance, cannot be countermanded.after acceptance, cannot be countermanded.

8.8. Notice of dishonor is essential in case of a bill whereas no notice of dishonor isNotice of dishonor is essential in case of a bill whereas no notice of dishonor is

necessary in case of a cheque.necessary in case of a cheque.

SummarySummary

ChequeCheque Bill of ExchangeBill of Exchange

1. Order on a specified bank1. Order on a specified bank 1.Order on any person or institution1.Order on any person or institution

2. Always payable on demand 2. Always payable on demand 2. Payable either on demand or after a specified2. Payable either on demand or after a specified

period of time or at sight.period of time or at sight.

3. Drawn in home currency only3. Drawn in home currency only 3. May be drawn in home currency or any foreign3. May be drawn in home currency or any foreign

currency.currency.

4. No acceptance is required4. No acceptance is required 4. Acceptance is a must in case of time bills.4. Acceptance is a must in case of time bills.

5. No days of grace are allowed to5. No days of grace are allowed to

the bankthe bank

5. Three days of grace allowed to the acceptor 5. Three days of grace allowed to the acceptor

6. Bearer cheques can be issued 6. Bearer cheques can be issued 6. A bill of exchange can be made payable only to6. A bill of exchange can be made payable only to

order.order.

7. Can be crossed 7. Can be crossed 7. Cannot be crossed 7. Cannot be crossed

8. the liability of the drawer is8. the liability of the drawer is

primary for paymentprimary for payment

8. the liability of the drawee or acceptor is primary8. the liability of the drawee or acceptor is primary

and that of drawer is or acceptor is primary and thatand that of drawer is or acceptor is primary and that

of drawer is secondary of drawer is secondary

Crossing of cheques Crossing of cheques

In actual practice, there are two types of cheques. Namely open cheques and crossed cheques. In actual practice, there are two types of cheques. Namely open cheques and crossed cheques.

Open cheques:Open cheques: are those, which can be directly presented to the bank for payment over the are those, which can be directly presented to the bank for payment over the

counter and those which doesn’t bear any crossing over their face. They may be either bearercounter and those which doesn’t bear any crossing over their face. They may be either bearer

cheque or an order cheque.cheque or an order cheque.

Crossed chequesCrossed cheques: where a cheque bears across its face two parallel transverse lines, the cheque: where a cheque bears across its face two parallel transverse lines, the cheque

is said to be crossed. The lines are generally drawn on the top corner of the left hand side of theis said to be crossed. The lines are generally drawn on the top corner of the left hand side of the

cheque though there is no hard and fast rule regarding this. cheque though there is no hard and fast rule regarding this.

Crossing is a direction to the paying banker that the cheque should be paid only to a banker andCrossing is a direction to the paying banker that the cheque should be paid only to a banker and

if the banker is named in the crossing, only to the banker. Crossing prevents the paying bankerif the banker is named in the crossing, only to the banker. Crossing prevents the paying banker

from paying the value of the cheque at the counter. Whenever two parallel transverse linesfrom paying the value of the cheque at the counter. Whenever two parallel transverse lines

appear on the cheque, the bank will not make payment to its holder at the counter of the bank.appear on the cheque, the bank will not make payment to its holder at the counter of the bank.

The payment of a crossed cheque can only be obtained through the bank of the holder. ThisThe payment of a crossed cheque can only be obtained through the bank of the holder. This

ensures the safety of payment by means of cheques. Thus, crossing affords security andensures the safety of payment by means of cheques. Thus, crossing affords security and

protection to the true owner of the cheque. The holder of the cheque is not allowed to cash itprotection to the true owner of the cheque. The holder of the cheque is not allowed to cash it

across the counter but he can deposit it in his account and can withdraw by his won cheque, thereacross the counter but he can deposit it in his account and can withdraw by his won cheque, there

after.after.

Crossed cheques are negotiable by delivery, incase they are payable to bearer and byCrossed cheques are negotiable by delivery, incase they are payable to bearer and by

endorsement and delivery when they are payable to order. But when words “Not negotiable” areendorsement and delivery when they are payable to order. But when words “Not negotiable” are

added to the crossing, the cheque is not negotiable, though transferable.added to the crossing, the cheque is not negotiable, though transferable.

Advantages of CrossingAdvantages of Crossing

A crossed cheque offers the following advantagesA crossed cheque offers the following advantages

i) Crossing protects payment of cheques to the wrong full holder.i) Crossing protects payment of cheques to the wrong full holder.

ii) Crossing cautions the bank not to pay the amount of cheque at the counter.ii) Crossing cautions the bank not to pay the amount of cheque at the counter.

Payment of a crossed cheque must be collected through a bank. This reduces the riskPayment of a crossed cheque must be collected through a bank. This reduces the risk

of fraud.of fraud.

iii) If a cheque is crossed, it is easy to trace the person for whose benefit the payment wasiii) If a cheque is crossed, it is easy to trace the person for whose benefit the payment was

collected.collected.

Bearer cheque:-Bearer cheque:- In case of a bearer cheque, the liability of the paying bank is over, after making In case of a bearer cheque, the liability of the paying bank is over, after making

payment to the bearer of the cheque. If it is lost or stolen, the bank will not be responsible, if thepayment to the bearer of the cheque. If it is lost or stolen, the bank will not be responsible, if the

payment is made to an unauthorized person or a thief. The bank cannot refuse to make thepayment is made to an unauthorized person or a thief. The bank cannot refuse to make the

payment of a bearer cheque if it is in order and there is sufficient balance in the concernedpayment of a bearer cheque if it is in order and there is sufficient balance in the concerned

account. If an instrument is issued originally expressed to be payable to bearer, it will always beaccount. If an instrument is issued originally expressed to be payable to bearer, it will always be

treated as bearer and the bank will be discharged from liability by making payment across thetreated as bearer and the bank will be discharged from liability by making payment across the

counter to the bearer.counter to the bearer.

Order Cheque:- Order Cheque:- In case of an order cheque, the bank makes payment across its counter to theIn case of an order cheque, the bank makes payment across its counter to the

person or payee named in the cheque. The bank must ensure that payment is made only to theperson or payee named in the cheque. The bank must ensure that payment is made only to the

payee. In other words, the identity of the payee of the cheque must be verified before making thepayee. In other words, the identity of the payee of the cheque must be verified before making the

payment.payment.

Since open cheques are not required to go through a bank before being presented to the draweeSince open cheques are not required to go through a bank before being presented to the drawee

bank for payment, there are certain risks attached to such cheques. When an open cheque is lostbank for payment, there are certain risks attached to such cheques. When an open cheque is lost

or stolen, the finder or thief may get it encashed at the drawee bank. If the cheque is payable toor stolen, the finder or thief may get it encashed at the drawee bank. If the cheque is payable to

order and the drawee bank makes payment in due course, it will be discharged from its liability.order and the drawee bank makes payment in due course, it will be discharged from its liability.

Thus, open cheques are liable to risks in the course of circulation. In order to avoid such risksThus, open cheques are liable to risks in the course of circulation. In order to avoid such risks

and protect the holder of the cheque, crossing has been introduced.and protect the holder of the cheque, crossing has been introduced.

Type of CrossingType of Crossing

The Negotiable Instruments Act provided two types of crossing: Generals crossing and SpecialThe Negotiable Instruments Act provided two types of crossing: Generals crossing and Special

crossing. In Addition the commercial usage adopted a third type of crossing: Restrictivecrossing. In Addition the commercial usage adopted a third type of crossing: Restrictive

Crossing.Crossing.

General Crossing:- General Crossing:- When a cheque bears across its face two transverse parallel lines with orWhen a cheque bears across its face two transverse parallel lines with or

with out any words, such us “and company “or “and co”, “not negotiable” it is called generallywith out any words, such us “and company “or “and co”, “not negotiable” it is called generally

grossed and the process is known as general crossing. These, two transverse lines across the facegrossed and the process is known as general crossing. These, two transverse lines across the face

of the cheque are essential for general crossing. of the cheque are essential for general crossing.

A cheque bearing general crossing cannot be enchased at the counter of the bank. It must beA cheque bearing general crossing cannot be enchased at the counter of the bank. It must be

presented for collection through the bank of the payee to the drawee bank. After collection, thepresented for collection through the bank of the payee to the drawee bank. After collection, the

collecting bank will credit the account of the customer with the amount of the cheque. Thecollecting bank will credit the account of the customer with the amount of the cheque. The

customer can then withdraw the amount.customer can then withdraw the amount.

The addition of the words “account payee” or “payee’s account” to the crossing increases theThe addition of the words “account payee” or “payee’s account” to the crossing increases the

safety of the cheque. However, they cannot be strictly considered as addition to the crossing, thesafety of the cheque. However, they cannot be strictly considered as addition to the crossing, the

paying banker’s position remains practically the same and they are intended to warn thepaying banker’s position remains practically the same and they are intended to warn the

collecting banker that the amount should not be collected except for the benefit of the payee’scollecting banker that the amount should not be collected except for the benefit of the payee’s

account. But the addition of the word “not negotiable” has significant legal effect.account. But the addition of the word “not negotiable” has significant legal effect.

Significance of general crossing Significance of general crossing

General crossing provides the following meaning:-General crossing provides the following meaning:-

1.1. Cash will not be paid across the counter.Cash will not be paid across the counter.

2.2. The cheque is deposited in the holder’s account, if he has an account in that particularThe cheque is deposited in the holder’s account, if he has an account in that particular

bank/ branch.bank/ branch.

3.3. The cheque is instructed to be deposited in another bank/ branch, if he has no account inThe cheque is instructed to be deposited in another bank/ branch, if he has no account in

the collecting bank/ branch.the collecting bank/ branch.

4.4. He can withdraw from his account through a cheque, if it is deposited in a correctHe can withdraw from his account through a cheque, if it is deposited in a correct

account.account.

5.5. He can withdraw from his account through withdrawal slip, if it is deposited in savingHe can withdraw from his account through withdrawal slip, if it is deposited in saving

account.account.

6.6. He can withdraw (collect) it through a person having an account in the same bank or anyHe can withdraw (collect) it through a person having an account in the same bank or any

other bank.other bank.

Specimen forms of general crossingSpecimen forms of general crossing

i.i. And companyAnd company

ii.ii. & Company& Company

iii.iii. Not NegotiableNot Negotiable

iv.iv. Not negotiable & com.Not negotiable & com.

Special Crossing:- Special Crossing:- The Negotiable Instrument Act states that “where a cheque bears across itsThe Negotiable Instrument Act states that “where a cheque bears across its

face an addition of the name of a banker, either with or without the word “not negotiable”, thatface an addition of the name of a banker, either with or without the word “not negotiable”, that

addition shall be deemed a crossing and the cheque shall be deemed to be crossed specially andaddition shall be deemed a crossing and the cheque shall be deemed to be crossed specially and

to be crossed to that holder,” Here, the name of the banker through whom the cheque can beto be crossed to that holder,” Here, the name of the banker through whom the cheque can be

collected appears on the face of the cheque. collected appears on the face of the cheque.

A special crossing warns a paying banker that the amount should be paid only to the bankerA special crossing warns a paying banker that the amount should be paid only to the banker

whose name mentioned in the crossing. The special crossing on the cheque is a direction to thewhose name mentioned in the crossing. The special crossing on the cheque is a direction to the

paying banker to honor the cheque only when it is presented through the bank mentioned in thepaying banker to honor the cheque only when it is presented through the bank mentioned in the

crossing and no other bank. The cheque crossed specially is safer than the generally crossedcrossing and no other bank. The cheque crossed specially is safer than the generally crossed

cheque. The banker to whom a cheque is crossed specially may appoint another banker as hischeque. The banker to whom a cheque is crossed specially may appoint another banker as his

agent for the collection of such cheque.agent for the collection of such cheque.

The specimen forms of special crossing areThe specimen forms of special crossing are:-:-

1.1. Commercial Bank of EthiopiaCommercial Bank of Ethiopia

2.2. Not Negotiable, Dashen BankNot Negotiable, Dashen Bank

3.3. Account payee, AIBAccount payee, AIB

Significance of Special Grossing Significance of Special Grossing

The paying banker should pay the amount only to the banker whose name is stated on the face ofThe paying banker should pay the amount only to the banker whose name is stated on the face of

the cheque or to its agent for collection.the cheque or to its agent for collection.

IllustrationIllustration

Mr. ‘A’ issued a cheque on Awash International Bank, Arada Branch, in favor of Mr.’ B’ for BrMr. ‘A’ issued a cheque on Awash International Bank, Arada Branch, in favor of Mr.’ B’ for Br

10,000.00 with the name of Awash International Bank, Bole Branch, written on it. It means the10,000.00 with the name of Awash International Bank, Bole Branch, written on it. It means the

paying banker AIC, Arada branch, must pay the amount to AIC-Bole branch or to its agent. Thispaying banker AIC, Arada branch, must pay the amount to AIC-Bole branch or to its agent. This

type of crossing is very safe. Because a bank (AIC-Bole branch) will not collect the chequetype of crossing is very safe. Because a bank (AIC-Bole branch) will not collect the cheque

unless the person on whose behalf the cheque is to be collected is its customer.unless the person on whose behalf the cheque is to be collected is its customer.

Restrictive Crossing:- Restrictive Crossing:- Restrictive crossing is only a direction to the collecting banker that theRestrictive crossing is only a direction to the collecting banker that the

proceeds of the cheque are to be credited only to the account of the payee named in the cheque.proceeds of the cheque are to be credited only to the account of the payee named in the cheque.

In case the collecting banker allows the proceeds to be credited to some other account, it may beIn case the collecting banker allows the proceeds to be credited to some other account, it may be

held liable for wrongful conversion of funds. In restrictive crossing, the lines of crossing containheld liable for wrongful conversion of funds. In restrictive crossing, the lines of crossing contain

the words “Account payee only” or “Payee’s account only”. Restrictive crossing does not affectthe words “Account payee only” or “Payee’s account only”. Restrictive crossing does not affect

the negotiability of the cheque, if it is negotiable to its origin. Thus, the payee mentioned in thethe negotiability of the cheque, if it is negotiable to its origin. Thus, the payee mentioned in the

cheque is entitled to transfer the cheque to any one. But the transferability of such a chequecheque is entitled to transfer the cheque to any one. But the transferability of such a cheque

renders difficulty because the bank will not like to receive payment on behalf of any person otherrenders difficulty because the bank will not like to receive payment on behalf of any person other

than the payee. The words “Account payee only” constitute a direction to the collecting bankerthan the payee. The words “Account payee only” constitute a direction to the collecting banker

that the proceeds of the cheque are to be credited to the account of the payee only.that the proceeds of the cheque are to be credited to the account of the payee only.

Thus, in practice restrictive crossing hinders the negotiability of the cheque; such a crossing doesThus, in practice restrictive crossing hinders the negotiability of the cheque; such a crossing does

not in any way affect the paying banker. It is not the duty of the paying banker to ascertain thatnot in any way affect the paying banker. It is not the duty of the paying banker to ascertain that

the cheque is being collected on behalf of the person named as payee.the cheque is being collected on behalf of the person named as payee.

A cheque may be crossed either generally or specially with the words “not negotiable” on it. AA cheque may be crossed either generally or specially with the words “not negotiable” on it. A

person taking cheques crossed generally or specially, bearing in either case the words notperson taking cheques 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 cheque than thatnegotiable, 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.which the person from whom he took it had.

“Not negotiable” crossing does not make the instrument “non-transferable”. But the person“Not negotiable” crossing does not make the instrument “non-transferable”. But the person

holding a crossed cheque bearing the words ‘not negotiable’ does not get better title than that ofholding a crossed cheque bearing the words ‘not negotiable’ does not get better title than that of

his transferor and he can not convey a better title to his own transferee. Thus “not negotiable”his transferor and he can not convey a better title to his own transferee. Thus “not negotiable”

crossing takes away the negotiable value of the cheque because the person taking it will only getcrossing takes away the negotiable value of the cheque because the person taking it will only get

the rights of the transferor. He will not become the holder in due cause.the rights of the transferor. He will not become the holder in due cause.

Specimen of Restrictive Crossing is:-Specimen of Restrictive Crossing is:-

1. Account payee only1. Account payee only

2. Payee’s account only2. Payee’s account only

Double Crossing:- Double Crossing:- Special crossing is meant for giving direction to a particular bank to collectSpecial crossing is meant for giving direction to a particular bank to collect

payment. But such a cheque can be crossed specially again to another bank, by the bank inpayment. But such a cheque can be crossed specially again to another bank, by the bank in

whose favor the cheque is originally crossed specially, acting as an agent for collection. whose favor the cheque is originally crossed specially, acting as an agent for collection.

A cheque can be specially crossed only once except when the second crossing is to a banker asA cheque can be specially crossed only once except when the second crossing is to a banker as

agent for collection. It is necessary to specify in the second special crossing that the banker inagent for collection. It is necessary to specify in the second special crossing that the banker in

whose favor it is made is an agent for collection on behalf of the first bank. whose favor it is made is an agent for collection on behalf of the first bank.

A specimen of such a Valid crossing is given below:-A specimen of such a Valid crossing is given below:-

Bank of AbyssiniaBank of Abyssinia

ToTo

Commercial Bank of EthiopiaCommercial Bank of Ethiopia

As an agent for collectionAs an agent for collection

The phrase as “agent for collection” is very important. When the second special crossing to aThe phrase as “agent for collection” is very important. When the second special crossing to a

bank is not done as agent for collection, the payee banker must refuse the payment of the cheque.bank is not done as agent for collection, the payee banker must refuse the payment of the cheque.

In short, the payee banker is under an obligation to dishonor the cheque crossed specially toIn short, the payee banker is under an obligation to dishonor the cheque crossed specially to

more than one banker except when the second crossing is to an agent for the purpose ofmore than one banker except when the second crossing is to an agent for the purpose of

collection.collection.

What is not crossing?What is not crossing?

Two transverse lines on the face of the cheque are essential in case of general crossing, whereasTwo transverse lines on the face of the cheque are essential in case of general crossing, whereas

the name of a bank on the face of the cheque is also a must for special crossing. the name of a bank on the face of the cheque is also a must for special crossing.

The following cases do not constitute crossing: The following cases do not constitute crossing:

i)i) A cheque bearing the words “not negotiable” or “account payee only” without twoA cheque bearing the words “not negotiable” or “account payee only” without two

parallel lines or the name of any bank.parallel lines or the name of any bank.

ii)ii) A cheque bearing single line across its faceA cheque bearing single line across its face

iii)iii) A cheque bearing “X” mark on its face.A cheque bearing “X” mark on its face.

Persons Authorized to Cross a ChequePersons Authorized to Cross a Cheque

A cheque can be crossed by any of the following parties:-A cheque can be crossed by any of the following parties:-

i) i) The drawerThe drawer: -The drawer of the cheque can make a general, special or restrictive: -The drawer of the cheque can make a general, special or restrictive

crossing on cheque before issuing it.crossing on cheque before issuing it.

ii) ii) The HolderThe Holder: - He can cross a cheque delivered to him under the following condition:-: - He can cross a cheque delivered to him under the following condition:-

a)a) Where the cheque is uncrossed, the holder may cross it generally or specially.Where the cheque is uncrossed, the holder may cross it generally or specially.

b)b) Where a cheque is crossed generally, the holder may cross it specially. Where a cheque is crossed generally, the holder may cross it specially.

c)c) Where a cheque is crossed generally or specially, the holder may add the wordWhere a cheque is crossed generally or specially, the holder may add the word

“not negotiable”.“not negotiable”.

iii) iii) The bankerThe banker: -Where a cheque is crossed specially, the banker to whom it is crossed: -Where a cheque is crossed specially, the banker to whom it is crossed

may again cross it specially to another banker as his agent for collection. A chequemay again cross it specially to another banker as his agent for collection. A cheque

can be crossed especially only once except where the second crossing is to a banker acan be crossed especially only once except where the second crossing is to a banker a

s agent for collection.s agent for collection.

Liability of paying Banker on Crossed Cheques Liability of paying Banker on Crossed Cheques

The banker on whom a cheque is drawn is known as the “paying bankers”. In case cheques areThe banker on whom a cheque is drawn is known as the “paying bankers”. In case cheques are

crossed generally, the paying banker should make the payment to a banker only, but where thecrossed generally, the paying banker should make the payment to a banker only, but where the

cheque is crossed specially, the paying banker should pay it only to the banker to whom it ischeque is crossed specially, the paying banker should pay it only to the banker to whom it is

crossed or his agent for collection. Any banker paying a cheque crossed generally, otherwisecrossed or his agent for collection. Any banker paying a cheque crossed generally, otherwise

than to a banker, or a cheque crossed specially otherwise than to the banker to whom the same isthan to a banker, or a cheque crossed specially otherwise than to the banker to whom the same is

crossed, or his agent for collection, being a banker, shall be liable to the true owner of the chequecrossed, or his agent for collection, being a banker, shall be liable to the true owner of the cheque

for any loss he may sustain owing to the cheque having been so paid. If a cheque is crossedfor any loss he may sustain owing to the cheque having been so paid. If a cheque is crossed

specially to more than one banker, except when crossed to an agent for the purpose of collectionspecially to more than one banker, except when crossed to an agent for the purpose of collection

the banker on whom it is drawn should refuse payment therefore. If the paying banker makesthe banker on whom it is drawn should refuse payment therefore. If the paying banker makes

payment of a crossed cheque in violation of the direction of the drawer conversed through thepayment of a crossed cheque in violation of the direction of the drawer conversed through the

crossing, the banker shall be liable to the true owner of the cheque for any loss sustained by himcrossing, the banker shall be liable to the true owner of the cheque for any loss sustained by him

as a result of such payment.as a result of such payment.

If the bank fails to follow the instruction given by the drawer on a crossed cheque, the paymentIf the bank fails to follow the instruction given by the drawer on a crossed cheque, the payment

by the bank is not treated as “payment in due louse”. If the payment is made to a wrong person,by the bank is not treated as “payment in due louse”. If the payment is made to a wrong person,

the banker will not be entitled to debit the account of the customer with the amount of payment.the banker will not be entitled to debit the account of the customer with the amount of payment.

The banker will also lose the protection granted to him by the law.The banker will also lose the protection granted to him by the law.

Opening of Crossing Opening of Crossing

Cancellation of crossing of a cheque is known as opening of crossing. When the crossing isCancellation of crossing of a cheque is known as opening of crossing. When the crossing is

cancelled, it becomes an open cheque. Cancellation can be done only by the drawer of thecancelled, it becomes an open cheque. Cancellation can be done only by the drawer of the

cheque. For canceling the crossing, the drawer should write the words “pay cash “and then affixcheque. For canceling the crossing, the drawer should write the words “pay cash “and then affix

his full signature twice for both cancellation of crossing and the new instruction. When this ishis full signature twice for both cancellation of crossing and the new instruction. When this is

done, the cheque becomes eligible for payment at the counter of the bank. When the crossing ondone, the cheque becomes eligible for payment at the counter of the bank. When the crossing on

the cheque is opened, the bank should verify the signature of the drawer carefully. If the drawer’sthe cheque is opened, the bank should verify the signature of the drawer carefully. If the drawer’s

signature is forged by the holder in order to cancel the crossing, and the banker makes paymentsignature is forged by the holder in order to cancel the crossing, and the banker makes payment

at the counter, the banker will be held liable to the true owner of the cheque.at the counter, the banker will be held liable to the true owner of the cheque.

Obliteration of Crossing Obliteration of Crossing

Obliteration of crossing is a crime. Crossing on a cheque may be obliterated or erased byObliteration of crossing is a crime. Crossing on a cheque may be obliterated or erased by

dishonest person so cleverly and skillfully that the paying banker is not able to detect suchdishonest person so cleverly and skillfully that the paying banker is not able to detect such

obliteration despite utmost care on his part. If it is not possible for a man of ordinary prudence toobliteration despite utmost care on his part. If it is not possible for a man of ordinary prudence to

detect such obliteration, and the banker makes payment at the counter, he will be protected bydetect such obliteration, and the banker makes payment at the counter, he will be protected by

the Negotiable Instruments Act (section 89) as if he has made the payment in due course the Negotiable Instruments Act (section 89) as if he has made the payment in due course

4.5. CERTAIN CONCEPTS RELATED WITH CHEQUES 4.5. CERTAIN CONCEPTS RELATED WITH CHEQUES

4.5.1. Holder and Holder in Due Course4.5.1. Holder and Holder in Due Course

A) HolderA) Holder

According to the Negotiable Instrument Act, "holder of a promissory note, bill of exchange orAccording to the Negotiable Instrument Act, "holder of a promissory note, bill of exchange or

cheque means any person entitled in his own name to the possession of an instrument and tocheque means any person entitled in his own name to the possession of an instrument and to

receive or recover the amount due thereon from the parties in the instrument. A person is calledreceive or recover the amount due thereon from the parties in the instrument. A person is called

the holder of a negotiable instrument if the following conditions are satisfied.the holder of a negotiable instrument if the following conditions are satisfied.

1) He must be entitled to the Possession of the instrument in his own name and under a1) He must be entitled to the Possession of the instrument in his own name and under a

legal title.legal title.

A holder may be the payee or endorsee or the bearer. If the instrument is payable to the order: theA holder may be the payee or endorsee or the bearer. If the instrument is payable to the order: the

payee, if the instrument is not negotiated and the endorsee, if the instrument is negotiated. If thepayee, if the instrument is not negotiated and the endorsee, if the instrument is negotiated. If the

instrument is payable to the bearer, the holder is the one who actually /physically possess theinstrument is payable to the bearer, the holder is the one who actually /physically possess the

instrument. Actual possession is necessary if the instrument is payable to the bearer and it is notinstrument. Actual possession is necessary if the instrument is payable to the bearer and it is not

necessary if it is payable to the order- being either payee or endorsee is suffice. The holder mustnecessary if it is payable to the order- being either payee or endorsee is suffice. The holder must

have the legal right to possess the instrument in his own name - It means that the title to thehave the legal right to possess the instrument in his own name - It means that the title to the

instrument is acquired lawfully and in a proper manner. But, if a person acquires a cheque or billinstrument is acquired lawfully and in a proper manner. But, if a person acquires a cheque or bill

by theft, fraud, or forged endorsement or finds it laying some where, he does not acquire in hisby theft, fraud, or forged endorsement or finds it laying some where, he does not acquire in his

own name legal title thereto and hence, he cannot be called its holder.own name legal title thereto and hence, he cannot be called its holder.

2) He must be entitled to receive or recover the amount from the parties concerned in his2) He must be entitled to receive or recover the amount from the parties concerned in his

own name.own name.

A person can be entitled to receive or recover the amount in his own name if he is a payee orA person can be entitled to receive or recover the amount in his own name if he is a payee or

endorsee, in the instrument payable to the order and the bearer, in the instrument payable to theendorsee, in the instrument payable to the order and the bearer, in the instrument payable to the

bearer. The holder is competent to require payment or recover the amount by filing a suit in hisbearer. The holder is competent to require payment or recover the amount by filing a suit in his

own name against other parties, to negotiate the instrument and to give a valid discharge. In caseown name against other parties, to negotiate the instrument and to give a valid discharge. In case

the instrument is lost or destroyed, its holder is the person who was entitled at the time of loss orthe instrument is lost or destroyed, its holder is the person who was entitled at the time of loss or

destroy.destroy.

B) Holder in due courseB) Holder in due course

According to the Negotiable Instrument Act. "Holder in due course means any person who, forAccording to the Negotiable Instrument Act. "Holder in due course means any person who, for

consideration, became the possessor of a negotiable instrument, if payable to bearer, or the payeeconsideration, became the possessor of a negotiable instrument, if payable to bearer, or the payee

or endorsee if payable to order, before the amount mentioned in it became payable, and withoutor endorsee if payable to order, before the amount mentioned in it became payable, and without

having sufficient cause to believe that defect existed in the title of the person from whom hehaving sufficient cause to believe that defect existed in the title of the person from whom he

derived his title."derived his title."

The essential qualifications of a holder in due course are summarized as follows:The essential qualifications of a holder in due course are summarized as follows:

1. He must be a holder for valuable consideration. 1. He must be a holder for valuable consideration.

He must receive the instrument as a reward for some legal and genuine activity. He must receive the instrument as a reward for some legal and genuine activity.

2. He must become a holder (possessor) of the instrument before the maturity date of the2. He must become a holder (possessor) of the instrument before the maturity date of the

instrument instrument

3. He must become holder of the negotiable instrument in good faith i.e. without having3. He must become holder of the negotiable instrument in good faith i.e. without having

sufficient cause to believe that defect existed in the title of the person who transfers thesufficient cause to believe that defect existed in the title of the person who transfers the

instrument.instrument.

4. A holder in due course must take the Negotiable Instrument complete and regular on the4. A holder in due course must take the Negotiable Instrument complete and regular on the

face of it. Complete refers that all the necessary information is filled. Regular also refersface of it. Complete refers that all the necessary information is filled. Regular also refers

that the endorsement, the form of the cheque, and other components of a cheque are inthat the endorsement, the form of the cheque, and other components of a cheque are in

order. order.

If the contrary is proved, the person who becomes the possessor of the instrument cannot be aIf the contrary is proved, the person who becomes the possessor of the instrument cannot be a

holder in due course. holder in due course.

C. Privileges of a Holder in due course C. Privileges of a Holder in due course

A holder in due course enjoys all the rights of a holder. In addition he enjoys the followingA holder in due course enjoys all the rights of a holder. In addition he enjoys the following

privileges.privileges.

1. He/she possesses better title from all defects1. He/she possesses better title from all defects

Whatever the title of the transferor, the holder in due course will have a better title. This is toWhatever the title of the transferor, the holder in due course will have a better title. This is to

mean that, if the transferor or any prior party possesses the instrument unlawfully or, withoutmean that, if the transferor or any prior party possesses the instrument unlawfully or, without

consideration, or found a lost instrument and transfer the instrument for consideration to anconsideration, or found a lost instrument and transfer the instrument for consideration to an

endorsee, an endorsee can further negotiate, transfer or claim the amount in suit of law by hisendorsee, an endorsee can further negotiate, transfer or claim the amount in suit of law by his

own name. His title is not affected by the fact that the person from whom he has taken theown name. His title is not affected by the fact that the person from whom he has taken the

instrument had defective or no title to the instrument. He can recover the amount of theinstrument had defective or no title to the instrument. He can recover the amount of the

instrument from all previous parties although there was a defect in the title of the party frominstrument from all previous parties although there was a defect in the title of the party from

whom he took it.whom he took it.

2. His rights are not affected in case of an inchoate instrument 2. His rights are not affected in case of an inchoate instrument

Assume that the drawer (A) delivers a blank instrument to the payee (B) for birr 10,000.00.Assume that the drawer (A) delivers a blank instrument to the payee (B) for birr 10,000.00.

However the payee writes Br 12, 000.00 on the instrument and negotiates to an endorsee (C),However the payee writes Br 12, 000.00 on the instrument and negotiates to an endorsee (C),

then C further negotiates the instrument to D. Finally, D claims the amount Br 12,000.00 not Brthen C further negotiates the instrument to D. Finally, D claims the amount Br 12,000.00 not Br

10,000.00 and the drawer (A) has no right to decline/refuse to pay the claimed amount.10,000.00 and the drawer (A) has no right to decline/refuse to pay the claimed amount.

33. All prior parties liable to a holder in due course. . All prior parties liable to a holder in due course.

Every prior party to a negotiable instrument, that is the maker or drawer, acceptor or endorser isEvery prior party to a negotiable instrument, that is the maker or drawer, acceptor or endorser is

liable to a holder in due course until the instrument is duly satisfied.liable to a holder in due course until the instrument is duly satisfied.

4. He can enforce payment of a fictitious bill. 4. He can enforce payment of a fictitious bill.

If the drawer issues a fictitious bill and negotiates the bill, the holder in due course will have theIf the drawer issues a fictitious bill and negotiates the bill, the holder in due course will have the

right to claim the amount stated in the instrument from the drawer himself or any other priorright to claim the amount stated in the instrument from the drawer himself or any other prior

party, severally or jointly, wholly or partially.party, severally or jointly, wholly or partially.

5. Transfer of better title. 5. Transfer of better title.

Once an instrument passes through the hands of a holder in due course, it is purged of all effects.Once an instrument passes through the hands of a holder in due course, it is purged of all effects.

A holder of a negotiable instrument who drives title from a holder in due course gets the rightA holder of a negotiable instrument who drives title from a holder in due course gets the right

thereon of that holder in due course.thereon of that holder in due course.

6. Estoppels against denying original validity of instrument. 6. Estoppels against denying original validity of instrument.

The maker or drawer or acceptor of an instrument will not be allowed to deny the originalThe maker or drawer or acceptor of an instrument will not be allowed to deny the original

validity of the instrument if it is in the hands of the holder in due course.validity of the instrument if it is in the hands of the holder in due course.

7. Estoppels against denying capacity of payee to endorse. 7. Estoppels against denying capacity of payee to endorse.

No maker of a promissory note and no acceptor of a bill of exchange payable to order shall, in aNo maker of a promissory note and no acceptor of a bill of exchange payable to order shall, in a

suit thereon by a holder in due course, be permitted to deny to payee’s capacity, at the date of thesuit thereon by a holder in due course, be permitted to deny to payee’s capacity, at the date of the

note or bill, to endorse the same.note or bill, to endorse the same.

8. Estoppels against denying signature or capacity of prior parties8. Estoppels against denying signature or capacity of prior parties. .

No endorser of a negotiable instrument shall, in a suit thereon by a subsequent holder, beNo endorser of a negotiable instrument shall, in a suit thereon by a subsequent holder, be

permitted to deny the signature of capacity to contract of any prior party to the instrument.permitted to deny the signature of capacity to contract of any prior party to the instrument.

9. No effect of conditional delivery. 9. No effect of conditional delivery. If the drawer issues an instrument on condition that theIf the drawer issues an instrument on condition that the

payee satisfies certain obligations and the payee further negotiates the instrument, evenpayee satisfies certain obligations and the payee further negotiates the instrument, even

without satisfying the obligation, the last holder can claim the balance in the instrument fromwithout satisfying the obligation, the last holder can claim the balance in the instrument from

all prior parties including the drawer. all prior parties including the drawer.

10. No effect of absence of consideration or presence of an unlawful consideration or10. No effect of absence of consideration or presence of an unlawful consideration or

purging of prior defects. purging of prior defects. A person liable on a negotiable instrument cannot defend himselfA person liable on a negotiable instrument cannot defend himself

against a holder in due course on the ground that the instrument was lost or obtained fromagainst a holder in due course on the ground that the instrument was lost or obtained from

him by means of an offence or fraud or for an unlawful consideration.him by means of an offence or fraud or for an unlawful consideration.

D. Differences between Holder and Holder in due courseD. Differences between Holder and Holder in due course

Holder and holder in due course of a negotiable instrument differ in regard to the following. Holder and holder in due course of a negotiable instrument differ in regard to the following.

1. Consideration1. Consideration: The existence of consideration is not essential in case of a holder, but a holder: The existence of consideration is not essential in case of a holder, but a holder

in due course must obtain the instrument after paying its full value. Consideration should bein due course must obtain the instrument after paying its full value. Consideration should be

lawful and should not be forbidden by law, or fraudulent or immoral or opposed public policylawful and should not be forbidden by law, or fraudulent or immoral or opposed public policy

and should not involve any injury to the person or property of another. But it need not beand should not involve any injury to the person or property of another. But it need not be

adequate when the transaction is a bona fide one.adequate when the transaction is a bona fide one.

2. Possession2. Possession. The person entitled to be called holder in due course must become the possessor. The person entitled to be called holder in due course must become the possessor

of the instrument before it become payable. In case of a holder, neither actual possession nor anyof the instrument before it become payable. In case of a holder, neither actual possession nor any

time limit with in which it must be acquired is important. For example, a bill of exchangetime limit with in which it must be acquired is important. For example, a bill of exchange

payable on 31payable on 31stst March 2004; the person must get it before this date for becoming the holder in March 2004; the person must get it before this date for becoming the holder in

due course. However, the person can get the bill even after 31due course. However, the person can get the bill even after 31stst march 2004 to be a holder. If a march 2004 to be a holder. If a

person receives an instrument after its due date, the person receives it at his own risk because itperson receives an instrument after its due date, the person receives it at his own risk because it

may turn out to be a stolen one. Therefore, the holder in due course must prove that he becamemay turn out to be a stolen one. Therefore, the holder in due course must prove that he became

the holder of the instrument before it became payable.the holder of the instrument before it became payable.

3. Transferor’s Title3. Transferor’s Title: - A holder in due course must acquire an instrument with out suspicion in: - A holder in due course must acquire an instrument with out suspicion in

the title of the transferor. This condition is not essential in case of a holder. The holder in duethe title of the transferor. This condition is not essential in case of a holder. The holder in due

course must obtain the instrument after taking all possible care about the transferor’s title. Therecourse must obtain the instrument after taking all possible care about the transferor’s title. There

should be no cause to believe that any defect exists in the title of the transferor. In other wordsshould be no cause to believe that any defect exists in the title of the transferor. In other words

there should be an absolute good faith in the part of the person receiving the instrument.there should be an absolute good faith in the part of the person receiving the instrument.

Summary Summary

Holder Vs Holder in Due CourseHolder Vs Holder in Due Course

Holder Holder Holder in Due courseHolder in Due course

1.Consideration is not essential 1.Consideration is not essential 1. The instrument must be obtained by1. The instrument must be obtained by

paying its full value.paying its full value.

2. The holder must be entitled to the2. The holder must be entitled to the

possession of the instrument in his ownpossession of the instrument in his own

name. Actual possession of the instrumentname. Actual possession of the instrument

is immaterial is immaterial

2. The holder in due course must become2. The holder in due course must become

the possessor of the instrument before itthe possessor of the instrument before it

becomes payable.becomes payable.

3.The holder has the right to recover the3.The holder has the right to recover the

amount in his own nameamount in his own name

3.The holder in due course must obtain the3.The holder in due course must obtain the

instrument with out any suspicion to theinstrument with out any suspicion to the

title of the transferor title of the transferor

4. The holder does not enjoy the privileges4. The holder does not enjoy the privileges

available to a holder in due course. available to a holder in due course.

4.The holder in due course enjoys certain4.The holder in due course enjoys certain

privileges such as better title, purging ofprivileges such as better title, purging of

prior defects in the instrument, right ofprior defects in the instrument, right of

estoppels, etcestoppels, etc

E. Rights of a holderE. Rights of a holder

The rights of a Holder of a negotiable instrument are as follows;The rights of a Holder of a negotiable instrument are as follows;

i)i) He can claim payment of the instrument and can sue in his own name on the instrument He can claim payment of the instrument and can sue in his own name on the instrument

ii)ii) He can obtain a duplicate instrument; if he loses the original.He can obtain a duplicate instrument; if he loses the original.

iii)iii) He can negotiate the instrument to a third person and can also convert the endorsement inHe can negotiate the instrument to a third person and can also convert the endorsement in

blank in to endorsement in full. blank in to endorsement in full.

iv)iv) He is entitled to cross the cheque either generally or specially and also with the wordHe is entitled to cross the cheque either generally or specially and also with the word

‘Not Negotiable” ‘Not Negotiable”

4.5.2 Payment in Due Course4.5.2 Payment in Due Course

According to a Negotiable Instruments Act, "Payment in due course means payment inAccording to a Negotiable Instruments Act, "Payment in due course means payment in

accordance with the apparent tenor of the instrument in good faith and without negligence to anyaccordance with the apparent tenor of the instrument in good faith and without negligence to any

person in possession thereof under circumstances which do not afford a reasonable ground forperson in possession thereof under circumstances which do not afford a reasonable ground for

believing that he is not entitled to receive payment of the amount mentioned in the instrument."believing that he is not entitled to receive payment of the amount mentioned in the instrument."

Payment should be made to the right person, and according the tenor of the instrument by thePayment should be made to the right person, and according the tenor of the instrument by the

paying banker, the acceptor of the bill. Otherwise the latter shall be responsible for thepaying banker, the acceptor of the bill. Otherwise the latter shall be responsible for the

beneficiary. Payment is an effective discharge only if it is “payment in due course”.beneficiary. Payment is an effective discharge only if it is “payment in due course”.

The essential features of a payment in due course areThe essential features of a payment in due course are:-:-

1.1. The payment should be made in accordance with the apparent tenor of the instrumentThe payment should be made in accordance with the apparent tenor of the instrument ,,

that is, according to the true intention of the parties as apparent from the document itself.that is, according to the true intention of the parties as apparent from the document itself.

For example;For example;

-- If the cheque is postdated - It means pay only after the future stated dateIf the cheque is postdated - It means pay only after the future stated date

-- If the cheque is crossed - It is ordering the paying banker not to pay cash at theIf the cheque is crossed - It is ordering the paying banker not to pay cash at the

counter but to credit an account.counter but to credit an account.

The payment should be made at or after maturity. A payment before maturity is not a paymentThe payment should be made at or after maturity. A payment before maturity is not a payment

according to the apparent tenor of the instrument and so, not a payment in due course. If anaccording to the apparent tenor of the instrument and so, not a payment in due course. If an

instrument is paid before maturity and is subsequently endorsed to a bone fide endorsee, itinstrument is paid before maturity and is subsequently endorsed to a bone fide endorsee, it

remains valid. When the instrument is payable on demand, its payment will not be effectiveremains valid. When the instrument is payable on demand, its payment will not be effective

discharge unless it is cancelled. A payment by the drawee or acceptor before maturity operates asdischarge unless it is cancelled. A payment by the drawee or acceptor before maturity operates as

a purchase of the instrument, he may endorse the bill to any person and then all the parties to thea purchase of the instrument, he may endorse the bill to any person and then all the parties to the

instrument will remain liable.instrument will remain liable.

2. The payment should be made in good faith and with out negligence. 2. The payment should be made in good faith and with out negligence. In good faith, meansIn good faith, means

honestly and not fraudulently. The paying bank should effect payments to suspicious or doubtfulhonestly and not fraudulently. The paying bank should effect payments to suspicious or doubtful

payees or presenters after making proper inquires from the drawer, otherwise, the paying bankpayees or presenters after making proper inquires from the drawer, otherwise, the paying bank

will be liable. The banker should not make payment negligently. He should take all thewill be liable. The banker should not make payment negligently. He should take all the

necessary precaution and act as a reasonable person will act in a particular circumstance of anecessary precaution and act as a reasonable person will act in a particular circumstance of a

case. Therefore, he should ascertain that the cheque is complete, all alterations are dulycase. Therefore, he should ascertain that the cheque is complete, all alterations are duly

confirmed and the endorsements are regular.confirmed and the endorsements are regular.

3. 3. Payment must be made to the person in possession of the instrument in circumstancesPayment must be made to the person in possession of the instrument in circumstances ,,

which do not arouse suspension about his title to possess the instrument and to receive payment.which do not arouse suspension about his title to possess the instrument and to receive payment.

In other words, payment should be made to the rightful holder who can give a valid discharge. IfIn other words, payment should be made to the rightful holder who can give a valid discharge. If

the instrument is made payable to bearer, the rightful holder is the person who has received it bythe instrument is made payable to bearer, the rightful holder is the person who has received it by

delivery. The maker or drawee while making the payment to the possessor of the instrumentdelivery. The maker or drawee while making the payment to the possessor of the instrument

must see that there is nothing to show that he is not entitled to recover it. However, when themust see that there is nothing to show that he is not entitled to recover it. However, when the

instrument is payable to a particular person or order and is not endorsed by him, payment to theinstrument is payable to a particular person or order and is not endorsed by him, payment to the

possessor of such an instrument will not amount to payment in due course. Further, the paymentpossessor of such an instrument will not amount to payment in due course. Further, the payment

must be made by the maker or drawee of the instrument or on his behalf.must be made by the maker or drawee of the instrument or on his behalf.

Examples of payments, which are not, deemed payment in due course can be shown as follows;Examples of payments, which are not, deemed payment in due course can be shown as follows;

1. A cheque bearing a special crossing in the name of Abyssinia Bank is paid when presented1. A cheque bearing a special crossing in the name of Abyssinia Bank is paid when presented

through Dashen Bankthrough Dashen Bank

2. The banker pays a cheque containing forged signature of the drawer.2. The banker pays a cheque containing forged signature of the drawer.

3. A cheque dated 30th October 2002 is presented for payment on 20th of October 2002 and is3. A cheque dated 30th October 2002 is presented for payment on 20th of October 2002 and is

paid on the same date.paid on the same date.

4. A cheque having alterations in the name of a payee or the amount of the cheque (material4. A cheque having alterations in the name of a payee or the amount of the cheque (material

alteration), not confirmed by the full signature of the drawer, is paid by the banker.alteration), not confirmed by the full signature of the drawer, is paid by the banker.

5. The drawer of a cheque countermands its payments, but the banker pays the cheque.5. The drawer of a cheque countermands its payments, but the banker pays the cheque.

6. An agent or a prone of a company presents a cheque for big amount on behalf of the6. An agent or a prone of a company presents a cheque for big amount on behalf of the

company, which is contrary to the past practice and the banker pays the cheque without anycompany, which is contrary to the past practice and the banker pays the cheque without any

enquiry.enquiry.

4.5.3. Endorsement4.5.3. Endorsement

According to The Negotiable Instruments Act, "When the maker or holder of a negotiableAccording to The Negotiable Instruments Act, "When the maker or holder of a negotiable

instrument signs the same, otherwise than as a maker, for the purpose of negotiation, on the backinstrument signs the same, otherwise than as a maker, for the purpose of negotiation, on the back

or face of the instrument, usually on the back, or on a slip of paper annexed there to, or signs foror face of the instrument, usually on the back, or on a slip of paper annexed there to, or signs for

the same purpose a stamped paper intended to be completed as negotiable instrument, he is saidthe same purpose a stamped paper intended to be completed as negotiable instrument, he is said

to have endorsed the same and is called the endorser." Endorsement means signing a negotiableto have endorsed the same and is called the endorser." Endorsement means signing a negotiable

instrument for the purpose of negotiation. instrument for the purpose of negotiation.

Negotiable instruments can be negotiated in two different ways Negotiable instruments can be negotiated in two different ways

a). By delivery only - if the instrument is payable to bearer. Here no need of endorsementa). By delivery only - if the instrument is payable to bearer. Here no need of endorsement

b). By endorsement and delivery - if the instrument is payable to order i.e. beforeb). By endorsement and delivery - if the instrument is payable to order i.e. before

delivery the drawer or any holder signs the instrument for the purpose of negotiation.delivery the drawer or any holder signs the instrument for the purpose of negotiation.

The person who signs the instrument for the purpose of negotiation is called the "endorser" andThe person who signs the instrument for the purpose of negotiation is called the "endorser" and

the person in whose favor the instrument is transferred is called the "endorsee". The endorserthe person in whose favor the instrument is transferred is called the "endorsee". The endorser

may sign either on the face or on the back of the negotiable instrument. But the common usage ismay sign either on the face or on the back of the negotiable instrument. But the common usage is

on the back of the instrument. If the space on the back of the instrument is not sufficient foron the back of the instrument. If the space on the back of the instrument is not sufficient for

additional endorsement, a piece of paper known as "allonge” may be attached with theadditional endorsement, a piece of paper known as "allonge” may be attached with the

instrument.instrument.

A. General Rules regarding the form of EndorsementA. General Rules regarding the form of Endorsement

The appropriateness or otherwise of a particular form of endorsement depends upon the practiceThe appropriateness or otherwise of a particular form of endorsement depends upon the practice

amongst the banker. However, in general, endorsement must be regular and valid in order to beamongst the banker. However, in general, endorsement must be regular and valid in order to be

effective. The following rules are followed in this regard.effective. The following rules are followed in this regard.

1. Signature of the endorser: -1. Signature of the endorser: -The signature on the instrument for the purpose of endorsementThe signature on the instrument for the purpose of endorsement

must be that of the endorser or any other person who is duly authorized to endorse on his behalf.must be that of the endorser or any other person who is duly authorized to endorse on his behalf.

If a cheque is payable to two or more persons, both or all of them should sign in small letters, inIf a cheque is payable to two or more persons, both or all of them should sign in small letters, in

their own handwriting. If endorser signs with block letters, it will not be considered as a regulartheir own handwriting. If endorser signs with block letters, it will not be considered as a regular

endorsement.endorsement.

2. Spelling: -2. Spelling: - The endorser should spell his name in the way his name appears on the instrument The endorser should spell his name in the way his name appears on the instrument

as its payee or endorsee. If his name is misspelt or his designation has been given incorrectly, heas its payee or endorsee. If his name is misspelt or his designation has been given incorrectly, he

should sign the instrument in the same manner as given in the instrument. However, if he likesshould sign the instrument in the same manner as given in the instrument. However, if he likes

to do, he may put his proper signature thereafter; but in the same hand writing. For example, ifto do, he may put his proper signature thereafter; but in the same hand writing. For example, if

Ato Asamere’s name is mis spelt as a payee as “Asemare “, he should write his name in theAto Asamere’s name is mis spelt as a payee as “Asemare “, he should write his name in the

endorsement as “Asemare / Asamere/”.endorsement as “Asemare / Asamere/”.

3. No addition or Omission of initial of the name: - 3. No addition or Omission of initial of the name: - An initial of the name should neither beAn initial of the name should neither be

added nor omitted from the name of the payee or endorsee as given in the cheque. For example,added nor omitted from the name of the payee or endorsee as given in the cheque. For example,

a cheque payable to Habte Georgics should not be endorsed as H/Giorgis because it will bea cheque payable to Habte Georgics should not be endorsed as H/Giorgis because it will be

doubtful for the paying banker to ascertain who the true owner is i.e. whether H/Giorgis is Habtedoubtful for the paying banker to ascertain who the true owner is i.e. whether H/Giorgis is Habte

Giorgis or Haile Giorgis.Giorgis or Haile Giorgis.

4. Prefixes and Suffixes to be excluded. 4. Prefixes and Suffixes to be excluded. The prefixes and suffixes to the name of the payee orThe prefixes and suffixes to the name of the payee or

endorsee need not be included in the endorsement. For example, the words "Ato" W/ro, W/t,endorsee need not be included in the endorsement. For example, the words "Ato" W/ro, W/t,

Major, Dejazamach, Captain, M.D, etc” need not be included in the endorsement given by theMajor, Dejazamach, Captain, M.D, etc” need not be included in the endorsement given by the

endorser; otherwise, the endorsement will not be regular. However, an endorser may indicate hisendorser; otherwise, the endorsement will not be regular. However, an endorser may indicate his

title or rank, etc after his signature. For example, Meles Zenawi (Prime Minister), Fanta Belaytitle or rank, etc after his signature. For example, Meles Zenawi (Prime Minister), Fanta Belay

(Major General) etc.(Major General) etc.

5. Maker or Holder5. Maker or Holder:-The endorsement must be made by the Maker or holder of the instrument.:-The endorsement must be made by the Maker or holder of the instrument.

A stranger cannot endorse it.A stranger cannot endorse it.

6. Delivery6. Delivery:-Endorsement is completed only by delivery-actual or constructive. The endorser:-Endorsement is completed only by delivery-actual or constructive. The endorser

himself must make the delivery. If the delivery is conditional, the endorsement is not completehimself must make the delivery. If the delivery is conditional, the endorsement is not complete

until the condition is fulfilled. until the condition is fulfilled.

7. Special cases7. Special cases

Illiterate personIlliterate person: - If the payee of a negotiable instrument is an illiterate person; he/she may: - If the payee of a negotiable instrument is an illiterate person; he/she may

endorse the instrument by fixing his/her thumb impression on the instrument. However, itendorse the instrument by fixing his/her thumb impression on the instrument. However, it

should be duly witnessed or attested by some body that would give his fall address as follows.should be duly witnessed or attested by some body that would give his fall address as follows.

Thumb impression of AThumb impression of A

Attested or witnessed by ABC, LawyerAttested or witnessed by ABC, Lawyer

P.O. Box ---- Tel. Res. ---- office ---P.O. Box ---- Tel. Res. ---- office ---

City ---------- Country --------City ---------- Country --------

2. Partnership firm2. Partnership firm

In case of a partnership firm, the name of the firm must be signed by a person (partner, managerIn case of a partnership firm, the name of the firm must be signed by a person (partner, manager

etc) who is duly authorized to sign on behalf of the partnership firm. But if the two partners signetc) who is duly authorized to sign on behalf of the partnership firm. But if the two partners sign

without showing that they are the partners in the firm, the endorsement will not be a regular one.without showing that they are the partners in the firm, the endorsement will not be a regular one.

3. Agent: - 3. Agent: -

A person may duly authorize his/her agent to endorse the cheque on his/her behalf. The agentA person may duly authorize his/her agent to endorse the cheque on his/her behalf. The agent

should, therefore, use the words 'for", for and on behalf of ', 'on behalf of ', 'pre-pro' etc in theshould, therefore, use the words 'for", for and on behalf of ', 'on behalf of ', 'pre-pro' etc in the

endorsement. This indicates that he signs the instrument only on his agency authority.endorsement. This indicates that he signs the instrument only on his agency authority.

B. Kinds of EndorsementB. Kinds of Endorsement

According to the Negotiable Instrument Act, the following forms of endorsement are presented.According to the Negotiable Instrument Act, the following forms of endorsement are presented.

They are discussed as follows: - They are discussed as follows: -

1. Blank endorsement or General endorsement: 1. Blank endorsement or General endorsement: An endorsement that bears only the name ofAn endorsement that bears only the name of

the endorser is deemed as a blank endorsement. The name of the endorsee is not included in thethe endorser is deemed as a blank endorsement. The name of the endorsee is not included in the

endorsement and hence the instrument becomes payable to bearer even if it is originated as orderendorsement and hence the instrument becomes payable to bearer even if it is originated as order

instrument. Then it can be negotiated by simple delivery and the holder is entitled to thisinstrument. Then it can be negotiated by simple delivery and the holder is entitled to this

payment.payment.

i. Blank Endorsementi. Blank Endorsement..

Name of bank Account Number Date -------Name of bank Account Number Date -------

Name of branch Name of Account Holder Name of branch Name of Account Holder

Pay Pay Ato ZemedhunAto Zemedhun

To To Ten Thousand only (Br 10,000.00)Ten Thousand only (Br 10,000.00)

____________________

Serial number Serial number ____________ ____________ Signature------ Signature------

Front page of a cheque Front page of a cheque

1. Zemedhun 2. pay to Tarik1. Zemedhun 2. pay to Tarik

Signature Zemedhun Signature Zemedhun

Signature Signature

3. Pay to Abera 3. Pay to Abera

Tarik. Tarik.

Reverse page Reverse page

Any subsequent holder can convert an endorsement in blank into an endorsement in fall. ForAny subsequent holder can convert an endorsement in blank into an endorsement in fall. For

example, in the first endorsement above, which is a blank endorsement, Ato Gemechu becomesexample, in the first endorsement above, which is a blank endorsement, Ato Gemechu becomes

the holder of the instrument (cheque), which is the bearer. Then Ato Gemechu can furtherthe holder of the instrument (cheque), which is the bearer. Then Ato Gemechu can further

endorse it by simply writing the name to whom the instrument is endorsed (an endorsee), as canendorse it by simply writing the name to whom the instrument is endorsed (an endorsee), as can

be shown under the second endorsement Ato Gemechu, then, endorse the instrument to Tarikbe shown under the second endorsement Ato Gemechu, then, endorse the instrument to Tarik

without making himself party in the instrument i.e. he avoids the liability that may arise in thewithout making himself party in the instrument i.e. he avoids the liability that may arise in the

instrument. The second endorsement is a full endorsement made by Zemedhun to Tarik? Theinstrument. The second endorsement is a full endorsement made by Zemedhun to Tarik? The

Third endorsement is a full endorsement made by Tarik to Abera. Third endorsement is a full endorsement made by Tarik to Abera.

2. Full Endorsement/ Special Endorsement2. Full Endorsement/ Special Endorsement

If the endorser, in addition to his name, writes the name of the endorsee or adds a direction toIf the endorser, in addition to his name, writes the name of the endorsee or adds a direction to

pay the amount mentioned in the instrument to or to the order of a specified person, thepay the amount mentioned in the instrument to or to the order of a specified person, the

endorsement is full endorsement. A Blank endorsement can be converted in to full endorsementendorsement is full endorsement. A Blank endorsement can be converted in to full endorsement

by writing the name of the endorsee on top of the name of the previous endorser. Then, the lastby writing the name of the endorsee on top of the name of the previous endorser. Then, the last

endorser will be free from any liability that may arise. In such an endorsement, it is only theendorser will be free from any liability that may arise. In such an endorsement, it is only the

endorsee that can negotiate the instrument by endorsement. Thus, the instrument retains its orderendorsee that can negotiate the instrument by endorsement. Thus, the instrument retains its order

character.character.

3. Partial Endorsement3. Partial Endorsement

It is one, which purports to transfer to the endorsee a part only of the amount payable under theIt is one, which purports to transfer to the endorsee a part only of the amount payable under the

instrument. A partial endorsement does not operate as a negotiation of the bill. The law laysinstrument. A partial endorsement does not operate as a negotiation of the bill. The law lays

down that an endorsement must relate to the whole instrument. Thus, a partial endorsement isdown that an endorsement must relate to the whole instrument. Thus, a partial endorsement is

invalid. invalid.

For instance, if A, the payee of bill for Birr 10,000.00 endorses it in favor of B for Birr For instance, if A, the payee of bill for Birr 10,000.00 endorses it in favor of B for Birr

5, 000.00 and C, for the remaining Br 5,000.00. Since the endorsement is partial, it is invalid and5, 000.00 and C, for the remaining Br 5,000.00. Since the endorsement is partial, it is invalid and

no right of action will arise. But when amount of the instrument has been partly paid, a note tono right of action will arise. But when amount of the instrument has been partly paid, a note to

that effect may be endorsed on the instrument, which may then be negotiated for the balance. that effect may be endorsed on the instrument, which may then be negotiated for the balance.

4. Restrictive Endorsement4. Restrictive Endorsement

A restrictive endorsement gives the endorsee the right to receive payment of the cheque and toA restrictive endorsement gives the endorsee the right to receive payment of the cheque and to

sue any party thereto that his endorser could have sued, but gives him no power to transfer hissue any party thereto that his endorser could have sued, but gives him no power to transfer his

right to an endorsee unless it expressly authorizes him to do so. Hence the instrument will beright to an endorsee unless it expressly authorizes him to do so. Hence the instrument will be

transferable but not negotiable. The endorser restricts further negotiation of the instrument, intransferable but not negotiable. The endorser restricts further negotiation of the instrument, in

express words and excludes the right to negotiate. Here, the endorsee acquires all the rights ofexpress words and excludes the right to negotiate. Here, the endorsee acquires all the rights of

the endorser except the right of negotiation. The endorsement must in express words restrict orthe endorser except the right of negotiation. The endorsement must in express words restrict or

exclude the right of the endorsee.exclude the right of the endorsee.

E.g. pay the contents to C onlyE.g. pay the contents to C only

Pay C for the account of B Pay C for the account of B

The within must be credited to C, etc The within must be credited to C, etc

5. Conditional Endorsement/ Qualified Endorsement5. Conditional Endorsement/ Qualified Endorsement

The liability of the endorser dependent on the happening of a contingent event or may make theThe liability of the endorser dependent on the happening of a contingent event or may make the

right of the endorsee to receive payment in respect of the instrument dependent on the happeningright of the endorsee to receive payment in respect of the instrument dependent on the happening

of such an event. Such conditions may be either conditions precedent or conditions subsequent.of such an event. Such conditions may be either conditions precedent or conditions subsequent.

However, it does not restrict or prohibit the negotiability of the instrument as in the case ofHowever, it does not restrict or prohibit the negotiability of the instrument as in the case of

restrictive endorsement. The endorser gets the following rights under such endorsements. restrictive endorsement. The endorser gets the following rights under such endorsements.

a)a) In the case of a condition subsequentIn the case of a condition subsequent , the right of the endorsee is defeated on the, the right of the endorsee is defeated on the

fulfillment of the condition.fulfillment of the condition.

E. g. “Pay A or order unless before payment, it is countermanded.” E. g. “Pay A or order unless before payment, it is countermanded.”

The endorser may make his liability on the instrument conditional on the happening of a The endorser may make his liability on the instrument conditional on the happening of a

particular event. He will not be liable to the subsequent holder if the specified event doesparticular event. He will not be liable to the subsequent holder if the specified event does

take place before payment. The endorsee in such a case can sue other parties to thetake place before payment. The endorsee in such a case can sue other parties to the

instrument even after the particular event takes place.instrument even after the particular event takes place.

bb) In case of a condition precedent) In case of a condition precedent , the right to recover the amount does not pass on to the, the right to recover the amount does not pass on to the

endorsee until the condition is fulfilled. The endorser may make the right of the endorsee ofendorsee until the condition is fulfilled. The endorser may make the right of the endorsee of

the instrument conditional on the happening of a particular event. the instrument conditional on the happening of a particular event.

E.g. "Pay on his marrying X". The endorsee gets title only if he marries X. If the event does E.g. "Pay on his marrying X". The endorsee gets title only if he marries X. If the event does

not take place or if he cannot marry x, the endorsee can not sue any of the parties. not take place or if he cannot marry x, the endorsee can not sue any of the parties.

c) However, such an endorsement is generally used, and it does not make the instrument non-c) However, such an endorsement is generally used, and it does not make the instrument non-

transferable. A conditional endorsement may take place in any of the following ways.transferable. A conditional endorsement may take place in any of the following ways.

Endorsement "Suns Recourse" Endorsement "Suns Recourse"

An endorser of a negotiable instrument may by express words in the endorsement, exclude hisAn endorser of a negotiable instrument may by express words in the endorsement, exclude his

own liability in the instrument. For example, if ‘A’ endorses a cheque as follows.own liability in the instrument. For example, if ‘A’ endorses a cheque as follows.

i. Pay to ‘B’ or order at his own riski. Pay to ‘B’ or order at his own risk

ii. Pay to ‘B’ without recourse to meii. Pay to ‘B’ without recourse to me

‘A’ will not be liable to ‘B’ or any of the subsequent endorsees, if the bank dishonors the cheque‘A’ will not be liable to ‘B’ or any of the subsequent endorsees, if the bank dishonors the cheque

subsequently. Subsequent endorsees will have the right to sue any prior party except such ansubsequently. Subsequent endorsees will have the right to sue any prior party except such an

endorser. But if an endorser who so excludes his liability after wards becomes the holder of theendorser. But if an endorser who so excludes his liability after wards becomes the holder of the

instrument (If there is negotiation back to ‘A’), all intermediate endorsers are liable to him. Forinstrument (If there is negotiation back to ‘A’), all intermediate endorsers are liable to him. For

example, ‘X’ issue the instrument in favor of ‘Y’, then ‘Y’ endorses it to ‘A’, ‘A’ transfer it toexample, ‘X’ issue the instrument in favor of ‘Y’, then ‘Y’ endorses it to ‘A’, ‘A’ transfer it to

B’s favor with ‘suns recourse endorsement’. ‘B’ again endorses it to ‘C’, ‘C’ to ‘D’ and ‘D’ backB’s favor with ‘suns recourse endorsement’. ‘B’ again endorses it to ‘C’, ‘C’ to ‘D’ and ‘D’ back

to ‘A’. Here all parties i.e. X, Y, B, C and D will be liable to the last holder; A. to ‘A’. Here all parties i.e. X, Y, B, C and D will be liable to the last holder; A.

Facultative Endorsement Facultative Endorsement

When the endorser waves some of his rights or increases his liabilities intentionally in theWhen the endorser waves some of his rights or increases his liabilities intentionally in the

instrument, it is said to be facilitative endorsement. For example,” pay Alemu or order, notice ofinstrument, it is said to be facilitative endorsement. For example,” pay Alemu or order, notice of

dishonor waived “,dishonor waived “, is a facilitative endorsement. In this case, the endorser has waived notice ofis a facilitative endorsement. In this case, the endorser has waived notice of

dishonor, but will remain liable for non-payment. dishonor, but will remain liable for non-payment.

‘Sans Fraise' Endorsement ‘Sans Fraise' Endorsement

The endorser does not want any expenses to be incurred on his account on the bill by theThe endorser does not want any expenses to be incurred on his account on the bill by the

endorsee or subsequent holder of negotiable instrument.endorsee or subsequent holder of negotiable instrument.

Liability dependent upon a contingency Liability dependent upon a contingency

When an endorser makes his liability dependent up on the happening of a specified event, whichWhen an endorser makes his liability dependent up on the happening of a specified event, which

may or may not happen, the liability of the endorser will take place only on the happening of thatmay or may not happen, the liability of the endorser will take place only on the happening of that

event. For instance, an endorser may write, “pay A or order on his marriage” or “pay A or orderevent. For instance, an endorser may write, “pay A or order on his marriage” or “pay A or order

on the arrival of goods safely”. Here, the endorser will not be liable to make payment until theon the arrival of goods safely”. Here, the endorser will not be liable to make payment until the

marriage takes place or the said goods arrived safely, as the case may be.marriage takes place or the said goods arrived safely, as the case may be.

C. Effect of EndorsementC. Effect of Endorsement

The endorsement of a negotiable instrument followed by delivery transfers to the endorsee theThe endorsement of a negotiable instrument followed by delivery transfers to the endorsee the

property therein with right to further negotiation; but the endorsement may, by express words,property therein with right to further negotiation; but the endorsement may, by express words,

restrict or exclude such right, or may merely constitute the endorsee an agent to endorse therestrict or exclude such right, or may merely constitute the endorsee an agent to endorse the

instrument or to receive its contents for the endorser, or for some other specified person. instrument or to receive its contents for the endorser, or for some other specified person.

IllustrationIllustration

Ato Kemal signs the following endorsements on different negotiable instruments payable toAto Kemal signs the following endorsements on different negotiable instruments payable to

bearer:-bearer:-

a)a) “Pay the contents to Chaltu only.”“Pay the contents to Chaltu only.”

b)b) “Pay chaltu for my use”“Pay chaltu for my use”

c)c) “Pay chaltu or order for the account of Kemal.”“Pay chaltu or order for the account of Kemal.”

d)d) “The within must be credited to Kemal.”“The within must be credited to Kemal.”

These endorsements exclude the right of further negotiation by Chaltu These endorsements exclude the right of further negotiation by Chaltu

e)e) “Pay Chaltu.”“Pay Chaltu.”

f)f) “Pay Chaltu value in account with CBE.”“Pay Chaltu value in account with CBE.”

These endorsements do not exclude the right of further negotiation by Chaltu.These endorsements do not exclude the right of further negotiation by Chaltu.

D. Endorsement of cheques payable to: fictitious, impersonal or imaginary personsD. Endorsement of cheques payable to: fictitious, impersonal or imaginary persons..

Cheques made out in the names of impersonal payees have been held not to be cheques, as theyCheques made out in the names of impersonal payees have been held not to be cheques, as they

do not satisfy the essential requisites of a cheque. The bank in case makes the payment, shoulddo not satisfy the essential requisites of a cheque. The bank in case makes the payment, should

obtain a duty stamped receipt from the receiver of such payment. It is customary to treat suchobtain a duty stamped receipt from the receiver of such payment. It is customary to treat such

cheques as bearer cheques, and, therefore, no endorsement is required in such cases.cheques as bearer cheques, and, therefore, no endorsement is required in such cases.

E. Endorsement; by legal representative.E. Endorsement; by legal representative.

The legal representative of a deceased person cannot negotiate by delivery only, a negotiableThe legal representative of a deceased person cannot negotiate by delivery only, a negotiable

instrument payable to order and indorsed by the deceased but not delivered. He will have to re-instrument payable to order and indorsed by the deceased but not delivered. He will have to re-

indorse the instrument and deliver it there after. indorse the instrument and deliver it there after.

F. Effect of an intentional Cancellation of Endorsement F. Effect of an intentional Cancellation of Endorsement

When the holder of a negotiable instrument intentionally strikes off the endorsement with theWhen the holder of a negotiable instrument intentionally strikes off the endorsement with the

object of discharging the person liable to make payment from liability, such a party will beobject of discharging the person liable to make payment from liability, such a party will be

discharged from liability to holder and to all parties claiming title under such holder. discharged from liability to holder and to all parties claiming title under such holder.

E.g.’ A’ indorses to ‘B’.’B’ indorses to ‘C’ and ‘C’ indorses to ‘D’. ‘D’ by his own intentionE.g.’ A’ indorses to ‘B’.’B’ indorses to ‘C’ and ‘C’ indorses to ‘D’. ‘D’ by his own intention

cancels the name of ‘B’ as an endorsee. The liability of ‘B’ as well as that of ‘C’ comes to ancancels the name of ‘B’ as an endorsee. The liability of ‘B’ as well as that of ‘C’ comes to an

end. end.

G. Negotiation Back G. Negotiation Back

It may sometimes happen during the course of negotiation that the instrument comes back to theIt may sometimes happen during the course of negotiation that the instrument comes back to the

same person who had, indorsed it previously. The process under which an endorser comes againsame person who had, indorsed it previously. The process under which an endorser comes again

to the endorser is known as “negotiation back”. to the endorser is known as “negotiation back”.

In such a case, none of the intermediate endorsers are liable to him. But when an endorserIn such a case, none of the intermediate endorsers are liable to him. But when an endorser

excludes his liability and afterwards becomes the holder of the instrument, all intermediateexcludes his liability and afterwards becomes the holder of the instrument, all intermediate

endorsers are liable to him. endorsers are liable to him.

E.g. A indorses the instrument to B. ‘B’E.g. A indorses the instrument to B. ‘B’ C C D D EE’B’. ’B’.

‘B’ can recover the amount of the instrument from C, D, or E or from all of them jointly and‘B’ can recover the amount of the instrument from C, D, or E or from all of them jointly and

severally, but he himself being a prior party, is liable towards all of them. Thus, ‘B’ comes to hisseverally, but he himself being a prior party, is liable towards all of them. Thus, ‘B’ comes to his

original position and he can only sue ‘A’ or any party prior to him. ‘B’ can cancel theoriginal position and he can only sue ‘A’ or any party prior to him. ‘B’ can cancel the

endorsements of C, D and E and negotiate the instrument further-such a transaction is calledendorsements of C, D and E and negotiate the instrument further-such a transaction is called

“taking up of a bill”.“taking up of a bill”.

If B at the first endorsement expressly excludes his personal liability, by ‘suns recourse’If B at the first endorsement expressly excludes his personal liability, by ‘suns recourse’

endorsement, he is not liable to C, D and E rather they will be liable to him. He can recover theendorsement, he is not liable to C, D and E rather they will be liable to him. He can recover the

amount from all or any of them. amount from all or any of them.

4.5.4 Payment of Cheques4.5.4 Payment of Cheques

One of the stationary obligations of a banker towards his customer is to honor the cheques drawnOne of the stationary obligations of a banker towards his customer is to honor the cheques drawn

by the latter on the former. The paying banker is responsible to his customer and is under a dutyby the latter on the former. The paying banker is responsible to his customer and is under a duty

to make payments to the right person in accordance with the instructions of the drawer. If heto make payments to the right person in accordance with the instructions of the drawer. If he

honors the cheques carelessly and negligently in a manner inconsistent with the instructions of ahonors the cheques carelessly and negligently in a manner inconsistent with the instructions of a

drawer, he subjects himself to heavy liability. Not only shall he lose the money so paid, but hedrawer, he subjects himself to heavy liability. Not only shall he lose the money so paid, but he

shall be liable to pay damages or compensation to his customer and also to the true owner of theshall be liable to pay damages or compensation to his customer and also to the true owner of the

cheque. The duty of a paying banker is of great responsibility and calls for great care, caution,cheque. The duty of a paying banker is of great responsibility and calls for great care, caution,

prudence and presence of mind on his part.prudence and presence of mind on his part.

4.5.4.1 Precautions to be taken by the paying banker4.5.4.1 Precautions to be taken by the paying banker

The paying banker should ensure that the cheque is regular in all respects and should take theThe paying banker should ensure that the cheque is regular in all respects and should take the

following precautions while making payment of his customer's. However, if the banker paysfollowing precautions while making payment of his customer's. However, if the banker pays

cheques with out proper identification, it will take all the liabilities associated with the payment.cheques with out proper identification, it will take all the liabilities associated with the payment.

A. Precaution regarding the form of the chequeA. Precaution regarding the form of the cheque

No law prescribes the form of a cheque. The banker should, therefore, not dishonor a chequeNo law prescribes the form of a cheque. The banker should, therefore, not dishonor a cheque

drawn on a piece of paper provided that it carries an unconditional order to the banker and fulfilsdrawn on a piece of paper provided that it carries an unconditional order to the banker and fulfils

other requisite of a cheque. However, the banking practice requires that a cheque drawn on aother requisite of a cheque. However, the banking practice requires that a cheque drawn on a

baker to be on a printed format supplied by the concerned bank. The printed forms used by abaker to be on a printed format supplied by the concerned bank. The printed forms used by a

banker are desirable because of the following advantages.banker are desirable because of the following advantages.

-- It is convenient for the drawer to draw a cheque. He\She need not take necessaryIt is convenient for the drawer to draw a cheque. He\She need not take necessary

precautions while drafting a cheque as per the requirements of the act. The chances ofprecautions while drafting a cheque as per the requirements of the act. The chances of

dishonor of the cheques, due to this case, are thus minimized. dishonor of the cheques, due to this case, are thus minimized.

-- The counterfoils of the cheques (check stabs) serve the purpose of record for futureThe counterfoils of the cheques (check stabs) serve the purpose of record for future

reference.reference.

-- Countermanding will be convenient. He can use the date, amount, name of payee, andCountermanding will be convenient. He can use the date, amount, name of payee, and

serial number from the check stub. serial number from the check stub.

-- Chances of forgery can be minimized, if the customer keeps the cheque book safely andChances of forgery can be minimized, if the customer keeps the cheque book safely and

carefully. The serial numbers of cheque forms issued to a customer are recorded by thecarefully. The serial numbers of cheque forms issued to a customer are recorded by the

banker, who verifies at the time of presentation, that the cheque is drawn by a person tobanker, who verifies at the time of presentation, that the cheque is drawn by a person to

whom the relevant cheque book is issued.whom the relevant cheque book is issued.

B. Precaution Regarding Date; B. Precaution Regarding Date;

The banker must refuse payment of undated cheque. Because the mandate of the customer to theThe banker must refuse payment of undated cheque. Because the mandate of the customer to the

banker given in the cheque becomes legally effective on the date mentioned on the cheque andbanker given in the cheque becomes legally effective on the date mentioned on the cheque and

expires as six months pass from same date. expires as six months pass from same date.

The drawer of a cheque fills in the date before the cheque is issued, but if he has not done so, theThe drawer of a cheque fills in the date before the cheque is issued, but if he has not done so, the

instrument does not become invalid. The payee of the cheque or any subsequent holder theretoinstrument does not become invalid. The payee of the cheque or any subsequent holder thereto

may fill in the date. But if an undated cheque is presented for payment, the baker must refuse itsmay fill in the date. But if an undated cheque is presented for payment, the baker must refuse its

payment. The date should not be incomplete, that is, it must include besides the year, the name ofpayment. The date should not be incomplete, that is, it must include besides the year, the name of

the month and the number of the day. For example, a cheque bearing “January 2004” orthe month and the number of the day. For example, a cheque bearing “January 2004” or

“December 31, 200-.” is not a complete dated cheque; as such the banker must refuse its“December 31, 200-.” is not a complete dated cheque; as such the banker must refuse its

payment. If a cheque dated March 15, 2004 is presented on March 15 and after, must be paid. payment. If a cheque dated March 15, 2004 is presented on March 15 and after, must be paid.

i) Stale cheques (Cheques presented after the expiry date).i) Stale cheques (Cheques presented after the expiry date).

If the drawer mentions a date earlier to the date of writing the cheque, it is called antedatedIf the drawer mentions a date earlier to the date of writing the cheque, it is called antedated

cheque. For example, a cheque issued on 15cheque. For example, a cheque issued on 15 thth November 2003 may bear the date of 10 November 2003 may bear the date of 10thth

November 2003. The banker shall have no objection in making payment of such cheques. But ifNovember 2003. The banker shall have no objection in making payment of such cheques. But if

a cheque is not presented for payment within a reasonable period after the date it bears, it isa cheque is not presented for payment within a reasonable period after the date it bears, it is

called a stale cheque. The expiry date is usually after six months from the date of the chequecalled a stale cheque. The expiry date is usually after six months from the date of the cheque

ii) Post-dated chequesii) Post-dated cheques..

If the drawer (or any holder) mentions a date on the cheque, which is subsequent to the date onIf the drawer (or any holder) mentions a date on the cheque, which is subsequent to the date on

which it is drawn, it is called a post-dated cheque. For example, if a cheque drawn on 30which it is drawn, it is called a post-dated cheque. For example, if a cheque drawn on 30 thth

November 2003 bears the date of 20November 2003 bears the date of 20 thth December 2003, it is a post-dated cheque. Such a cheque December 2003, it is a post-dated cheque. Such a cheque

though not invalid, becomes effective only on the date mentioned there in (20though not invalid, becomes effective only on the date mentioned there in (20thth December 2003). December 2003).

The banker should, therefore, not make payment of the post-dated cheque before the dateThe banker should, therefore, not make payment of the post-dated cheque before the date

mentioned therein, otherwise he will be liable as follows:-mentioned therein, otherwise he will be liable as follows:-

a)a) If the drawer instructs the banker, before the date mentioned in the cheque, not to makeIf the drawer instructs the banker, before the date mentioned in the cheque, not to make

payment of the post-dated cheque, the banker can not debit his account with the amountpayment of the post-dated cheque, the banker can not debit his account with the amount

of the cheque. In case the banker had honored the cheque before the receipt of theof the cheque. In case the banker had honored the cheque before the receipt of the

countermand order. Such payment is deemed as payment made without the authority ofcountermand order. Such payment is deemed as payment made without the authority of

the drawer.the drawer.

b)b) If, as a consequence of payment of a post-dated cheque by the banker, any other chequeIf, as a consequence of payment of a post-dated cheque by the banker, any other cheque

issued by the drawer is dishonored on the ground of insufficiency of funds, the drawerissued by the drawer is dishonored on the ground of insufficiency of funds, the drawer

will be entitled to clime damages for its dishonor. will be entitled to clime damages for its dishonor.

c)c) If the customer dies, becomes insolvent, or insane after the banker has made theIf the customer dies, becomes insolvent, or insane after the banker has made the

payment but before the date mentioned in the cheque, the amount can not be debited topayment but before the date mentioned in the cheque, the amount can not be debited to

the customer’s account because the latter’s mandate becomes ineffective on thethe customer’s account because the latter’s mandate becomes ineffective on the

occurrence of any of these events.occurrence of any of these events.

d)d) Payment of a post-dated cheque, before the date of the cheque, is not considered asPayment of a post-dated cheque, before the date of the cheque, is not considered as

payment in due course. The banker, therefore, can not avail of the statutory protection.payment in due course. The banker, therefore, can not avail of the statutory protection.

But its payment on or after the date of the cheque shall be valid and the banker willBut its payment on or after the date of the cheque shall be valid and the banker will

bear no liability in this regard. bear no liability in this regard.

iii) Precaution Regarding Amount of the Cheque;iii) Precaution Regarding Amount of the Cheque;

The amount of the cheque must be certain and expressed both in words and figures. In case ofThe amount of the cheque must be certain and expressed both in words and figures. In case of

discrepancy between the amount expressed in words and figures, the amount in words shall bediscrepancy between the amount expressed in words and figures, the amount in words shall be

the amount undertaken or order to be paid. The banker may, therefore, pay the amount written inthe amount undertaken or order to be paid. The banker may, therefore, pay the amount written in

words without incurring any liability for the same. However, in practice the banker send back thewords without incurring any liability for the same. However, in practice the banker send back the

cheque to the drawer with the remark “amount in words and figures differ.” And ask forcheque to the drawer with the remark “amount in words and figures differ.” And ask for

necessary rectification by the drawer. necessary rectification by the drawer.

If the amount is written in words only, the banker may pay the cheque. But if the amount isIf the amount is written in words only, the banker may pay the cheque. But if the amount is

written in figures only, it should send back to the drawer for necessary correction because therewritten in figures only, it should send back to the drawer for necessary correction because there

is every possibility of manipulation of the amount stated in figures. is every possibility of manipulation of the amount stated in figures.

D. Precaution regarding “Funds” of the customer;D. Precaution regarding “Funds” of the customer;

The banker is under an obligation to pay his customer’s cheques, if the customer’s accountThe banker is under an obligation to pay his customer’s cheques, if the customer’s account

shows sufficient credit balance. But if the fund in the customer’s account is insufficient to payshows sufficient credit balance. But if the fund in the customer’s account is insufficient to pay

the cheque, the banker is not bound to honor the cheque or even to pay the balance in the amountthe cheque, the banker is not bound to honor the cheque or even to pay the balance in the amount

to the presenter of the cheque. Cheques are to be paid in full and not in part. For example, if ato the presenter of the cheque. Cheques are to be paid in full and not in part. For example, if a

cheque for Birr 10,000.00 is presented for payment to a banker while the drawers account has thecheque for Birr 10,000.00 is presented for payment to a banker while the drawers account has the

credit balance of Birr 9,999.00 only, the banker is not bound to honor the cheque or to make partcredit balance of Birr 9,999.00 only, the banker is not bound to honor the cheque or to make part

payment to the extent of Birr 9,999.00 because the cheque contains the order of the drawer topayment to the extent of Birr 9,999.00 because the cheque contains the order of the drawer to

pay a specified sum of money.pay a specified sum of money.

While considering sufficient funds in the drawer’s account, the following points should be borneWhile considering sufficient funds in the drawer’s account, the following points should be borne

in mind by the banker.in mind by the banker.

If the banker has already agreed to grant a loan or overdraft to the customer up to a certainIf the banker has already agreed to grant a loan or overdraft to the customer up to a certain

account, cheques in excess of the credit balance in the account but within the limit of the loan ofaccount, cheques in excess of the credit balance in the account but within the limit of the loan of

the overdraft must be honored by the banker in the usual course. For example, if the bankerthe overdraft must be honored by the banker in the usual course. For example, if the banker

agrees to grant Mr. X an overdraft facility up to Birr 50,000.00 he should honor cheques issuedagrees to grant Mr. X an overdraft facility up to Birr 50,000.00 he should honor cheques issued

by Mr. X till the debit balance reaches the limit of 50,000.00. If, subsequently, the bankerby Mr. X till the debit balance reaches the limit of 50,000.00. If, subsequently, the banker

decides to reduce the overdraft limit, say only Birr 20,000.00, he should not stop honoring thedecides to reduce the overdraft limit, say only Birr 20,000.00, he should not stop honoring the

customer’s cheques immediately. For this purpose he should give due notice to the customer andcustomer’s cheques immediately. For this purpose he should give due notice to the customer and

cheques drawn thereafter in excess of debit balance of Birr 20,000.00 be dishonored after thecheques drawn thereafter in excess of debit balance of Birr 20,000.00 be dishonored after the

service. service.

If a number of cheques are received by a banker in a day, the banker generally must pay in theIf a number of cheques are received by a banker in a day, the banker generally must pay in the

chronological order of their receipt. It means that the cheque first received by the banker on anchronological order of their receipt. It means that the cheque first received by the banker on an

account will be paid first, and so on. Serial number and date of issue are not significant for thisaccount will be paid first, and so on. Serial number and date of issue are not significant for this

purpose. When a number of cheques are received by the banker simultaneously for paymentpurpose. When a number of cheques are received by the banker simultaneously for payment

through mail or clearing house, but there is no sufficient fund in his account, the banker has thethrough mail or clearing house, but there is no sufficient fund in his account, the banker has the

following options. For example, three cheques of Birr 1,000.00, Birr 4,000.00 and Birr 500.00following options. For example, three cheques of Birr 1,000.00, Birr 4,000.00 and Birr 500.00

are received by a banker for payment while the drawer’s account shows a credit balance of Birrare received by a banker for payment while the drawer’s account shows a credit balance of Birr

5,000.00 only. There may be the following options in such a situation: 5,000.00 only. There may be the following options in such a situation:

-- The banker may treat all the cheques as constituting one demand and henceThe banker may treat all the cheques as constituting one demand and hence

dishonor all for short of fund. But this is not fair to the drawer because it affectsdishonor all for short of fund. But this is not fair to the drawer because it affects

his reputation greatly while funds are sufficient to honor at least two of them.his reputation greatly while funds are sufficient to honor at least two of them.

-- A cheque for a bigger amount is paid first, in practice. ‘The highest first and theA cheque for a bigger amount is paid first, in practice. ‘The highest first and the

lowest last’ principle works.lowest last’ principle works.

-- If the cheque with smaller amount is paid to the tax authorities etc. it may beIf the cheque with smaller amount is paid to the tax authorities etc. it may be

honored first.honored first.

-- If all cheques are of equal amounts, the banker is free to honor any of them. If all cheques are of equal amounts, the banker is free to honor any of them.

E. Precaution Regarding Material Alterations.E. Precaution Regarding Material Alterations.

Any alteration or correction on a cheque, to be valid, must be made by, or with the consent of theAny alteration or correction on a cheque, to be valid, must be made by, or with the consent of the

drawer and confirmed by his full signature. The banker should be very careful in this regard anddrawer and confirmed by his full signature. The banker should be very careful in this regard and

should not pay for cheques that bear an alteration especially, material alterations, withoutshould not pay for cheques that bear an alteration especially, material alterations, without

confirmation by the drawer. An alteration is considered as material alteration if; a) it affects theconfirmation by the drawer. An alteration is considered as material alteration if; a) it affects the

operation of the instrument substantially; and b) the liability of the parties concerned is changedoperation of the instrument substantially; and b) the liability of the parties concerned is changed

significantly.significantly.

Examples of material alterationsExamples of material alterations

a.a. Alteration of the date of cheque. A fraudulent holder can secure payment of a post-datedAlteration of the date of cheque. A fraudulent holder can secure payment of a post-dated

cheque or a stale cheque, which a banker is not authorized to make. Alteration of amount ofcheque or a stale cheque, which a banker is not authorized to make. Alteration of amount of

cheque.cheque.

b.b. Alteration in the names of the parties.Alteration in the names of the parties.

c.c. Substituting the word “bearer” in place of ‘order’ in the cheque.Substituting the word “bearer” in place of ‘order’ in the cheque.

d.d. Alteration of the crossing on a cheque.Alteration of the crossing on a cheque.

A material alteration makes a material or significant change in the mandate given in the cheque.A material alteration makes a material or significant change in the mandate given in the cheque.

If an addition or alteration does not affect the mandate of the drawer or the position of the partiesIf an addition or alteration does not affect the mandate of the drawer or the position of the parties

materially or significantly, it will not be called a material alteration. Examples of immaterialmaterially or significantly, it will not be called a material alteration. Examples of immaterial

alterations or alterations that do not significantly change the position of the parties in thealterations or alterations that do not significantly change the position of the parties in the

instrument.instrument.

i.i. Conversion of an endorsement in lank into an endorsement in full.Conversion of an endorsement in lank into an endorsement in full.

ii.ii. Grossing of an open cheque by the holder.Grossing of an open cheque by the holder.

iii.iii. Conversion of general into special crossingConversion of general into special crossing

iv.iv. Conversion of bearer in to order. Conversion of bearer in to order.

F. Precaution regarding drawer’s signature F. Precaution regarding drawer’s signature

The paying banker is not given any protection under law if he pays cheques with a forgedThe paying banker is not given any protection under law if he pays cheques with a forged

signature of the drawer, however, cleverly the forgery is made and it was difficult to detect itsignature of the drawer, however, cleverly the forgery is made and it was difficult to detect it

with reasonable degree of care and scrutiny. He cannot debit the balance of his customerswith reasonable degree of care and scrutiny. He cannot debit the balance of his customers

account for such types of cheques and suffer all the loss himself. Therefore, he has to ascertainaccount for such types of cheques and suffer all the loss himself. Therefore, he has to ascertain

the genuinety of the signature on the cheque, by comparing the signature on the cheque againstthe genuinety of the signature on the cheque, by comparing the signature on the cheque against

the signature on the specimen signature card, given by the customer while opening the account.the signature on the specimen signature card, given by the customer while opening the account.

The cheque must be signed by the drawer on its face and not on its back. The account holder mayThe cheque must be signed by the drawer on its face and not on its back. The account holder may

change his specimen signature any time and supply to the banker his fresh specimen signature.change his specimen signature any time and supply to the banker his fresh specimen signature.

The banker is bound to accept the new specimen signature with effect from a specified date.The banker is bound to accept the new specimen signature with effect from a specified date.

If the signature on the cheque differs from the specimen signature of the drawer or the former isIf the signature on the cheque differs from the specimen signature of the drawer or the former is

a forged one, the banker must refuse payment of the cheque. Because a cheque with forgeda forged one, the banker must refuse payment of the cheque. Because a cheque with forged

signature of the drawer is a nullity and it gives no mandate to the banker to make any payment.signature of the drawer is a nullity and it gives no mandate to the banker to make any payment.

Payment of a cheque with forged signature of the drawer is deemed as payment without thePayment of a cheque with forged signature of the drawer is deemed as payment without the

authority of the customer and hence a breach of the implied contract between a banker and hisauthority of the customer and hence a breach of the implied contract between a banker and his

customer. customer.

However, the customer is under an obligation to protect the banker in this regard. The customerHowever, the customer is under an obligation to protect the banker in this regard. The customer

should not be negligent in observing the necessary precautions to save the banker from theshould not be negligent in observing the necessary precautions to save the banker from the

losses, which may arise because of his won acts. The customer may under certain caseslosses, which may arise because of his won acts. The customer may under certain cases

personally a loser, if it fails to do its part correctly.personally a loser, if it fails to do its part correctly.

Example:Example:

a)a) If a banker is in doubt about the signature of the drawer and seeks confirmation of the drawerIf a banker is in doubt about the signature of the drawer and seeks confirmation of the drawer

and the customer expressly states that the signature is his own. Later on the customer has noand the customer expressly states that the signature is his own. Later on the customer has no

right to deny the validity of his signature on the cheque.right to deny the validity of his signature on the cheque.

b)b) If the signature on the cheque differs from his specimen signature, but he writes to the bankerIf the signature on the cheque differs from his specimen signature, but he writes to the banker

about his issuing a cheque bearing his different signature, the customer will have no right toabout his issuing a cheque bearing his different signature, the customer will have no right to

deny the validity of the signature on the cheque, even if, the consecutive cheques bear adeny the validity of the signature on the cheque, even if, the consecutive cheques bear a

different signature. Because such information will amount to confirmation of his signature ondifferent signature. Because such information will amount to confirmation of his signature on

the cheque.the cheque.

c)c) If the customer fails to inform the banker that his signature, on a cheque has been forged, andIf the customer fails to inform the banker that his signature, on a cheque has been forged, and

the banker loses his right of action against the forger, the customer is stopped from denyingthe banker loses his right of action against the forger, the customer is stopped from denying

the genuiness of his signature.the genuiness of his signature.

Example: If serial No 0101 cheque leaf is stolen and forged and serial No 0102 cheque leaf isExample: If serial No 0101 cheque leaf is stolen and forged and serial No 0102 cheque leaf is

written by the customer without notice of such lose of a cheque by the customer, willwritten by the customer without notice of such lose of a cheque by the customer, will

eliminate his right against the banker’s action. eliminate his right against the banker’s action.

d)d) In case of joint account, both or all the signatures on the cheque must be signed by everyIn case of joint account, both or all the signatures on the cheque must be signed by every

drawer and must be genuine. If one of the signatures is a forged one, the banker should notdrawer and must be genuine. If one of the signatures is a forged one, the banker should not

make payment. Otherwise he can not debit his customer’s account. If one of the joint accountmake payment. Otherwise he can not debit his customer’s account. If one of the joint account

holder forces the signature of the other one and the banker makes payment of the cheque, heholder forces the signature of the other one and the banker makes payment of the cheque, he

will be liable to the other one. will be liable to the other one.

e)e) If the customer comes to know or has reasonable ground to believe that a cheque with hisIf the customer comes to know or has reasonable ground to believe that a cheque with his

forged signature is going to be presented for payment, he is under duty to inform the bankerforged signature is going to be presented for payment, he is under duty to inform the banker

immediately to avoid loss to the banker. In such a case he is stopped from denying theimmediately to avoid loss to the banker. In such a case he is stopped from denying the

validity of the cheque.validity of the cheque.

G. Precaution regarding mutilated chequesG. Precaution regarding mutilated cheques

A mutilated cheque is one, which is torn into two or more pieces. The banker should examine itA mutilated cheque is one, which is torn into two or more pieces. The banker should examine it

carefully to ascertain if the cheque was mutilated with the intention to cancel it, just beforecarefully to ascertain if the cheque was mutilated with the intention to cancel it, just before

making payment for mutilated cheque. If such intention is evident or if the main contents of themaking payment for mutilated cheque. If such intention is evident or if the main contents of the

cheque are illegible, the banker should not pay the cheque, without customer’s confirmation. Hecheque are illegible, the banker should not pay the cheque, without customer’s confirmation. He

may pay a cheque, which is torn at the corner, and no material fact is erased or cancelled. may pay a cheque, which is torn at the corner, and no material fact is erased or cancelled.

H. Precaution regarding banking hours.H. Precaution regarding banking hours.

A cheque must be presented to the paying banker for payment within the banking hours. BankingA cheque must be presented to the paying banker for payment within the banking hours. Banking

hours mean the period of time when a banker transacts banking business with the public. Suchhours mean the period of time when a banker transacts banking business with the public. Such

hours are fixed by the banker and notified to the customers by a general notice. Differenthours are fixed by the banker and notified to the customers by a general notice. Different

banking hours may be fixed by different banks and by the same bank in different cities orbanking hours may be fixed by different banks and by the same bank in different cities or

localities to suit the conveniency of the local people. The banker should make payment of thelocalities to suit the conveniency of the local people. The banker should make payment of the

cheques presented to him during the banking hours only. Actual payment might be made aftercheques presented to him during the banking hours only. Actual payment might be made after

the banking hours of the day, if it could not be finished within the banking hours. For example,the banking hours of the day, if it could not be finished within the banking hours. For example,

cheque received at 3:55 P.M (that is five minutes before the close of banking hours at 4:00 P.M)cheque received at 3:55 P.M (that is five minutes before the close of banking hours at 4:00 P.M)

might be made, say at 4:15 P.M. But a cheque presented after the banking hours are paid say,might be made, say at 4:15 P.M. But a cheque presented after the banking hours are paid say,

4:20 PM, such payment will not be considered as payment in due course. 4:20 PM, such payment will not be considered as payment in due course.

If the banker pays a cheque presented to him after the banking hours, he shall incur a great risk.If the banker pays a cheque presented to him after the banking hours, he shall incur a great risk.

In fact, the amount of such a cheque cannot be debited to the drawer’s account till the opening ofIn fact, the amount of such a cheque cannot be debited to the drawer’s account till the opening of

the bank on the next day. In the meantime, if any of the following events happen payment will bethe bank on the next day. In the meantime, if any of the following events happen payment will be

invalid. invalid.

a.a. if the customer countermands payment of such a chequeif the customer countermands payment of such a cheque

b.b. If garnishee order is served on the banker restraining him from making paymentIf garnishee order is served on the banker restraining him from making payment

out of the drawer’s account. out of the drawer’s account.

c.c. if death of the drawer is reportedif death of the drawer is reported

d.d. If insolvency of the drawer is reported.If insolvency of the drawer is reported.

I. Precaution Regarding EndorsementI. Precaution Regarding Endorsement

Regularity and validity of endorsement are important aspects from the view point of payingRegularity and validity of endorsement are important aspects from the view point of paying

banker. The paying banker should see whether the cheque is a bearer cheque or an order one. Hebanker. The paying banker should see whether the cheque is a bearer cheque or an order one. He

need not require the presenter’s endorsement on an open cheque payable to bearer and presentedneed not require the presenter’s endorsement on an open cheque payable to bearer and presented

over the counter. However, in practice, banks ask the presenter to sign on the back of the chequeover the counter. However, in practice, banks ask the presenter to sign on the back of the cheque

in order to be useful later in identifying the person to whom the payment was made. In case ofin order to be useful later in identifying the person to whom the payment was made. In case of

order cheque, he should see whether the endorsements on the cheque are regular or not; but needorder cheque, he should see whether the endorsements on the cheque are regular or not; but need

not dilate with the verification of the genuineness or validity of the endorsement, as he does notnot dilate with the verification of the genuineness or validity of the endorsement, as he does not

have the specimen signature of endorsers. So he is granted statutory protection in case of forgedhave the specimen signature of endorsers. So he is granted statutory protection in case of forged

endorsements.endorsements.

J. Precaution regarding crossingJ. Precaution regarding crossing

A paying banker should always observe not to pay cash for a generally crossed cheque, accept aA paying banker should always observe not to pay cash for a generally crossed cheque, accept a

specially crossed cheque to another bank or the restrictive endorsement made to payee.specially crossed cheque to another bank or the restrictive endorsement made to payee.

Therefore, the banker should confirm the nature of the crossing and effect according to its trueTherefore, the banker should confirm the nature of the crossing and effect according to its true

intention. Other wise such payment is not a payment in due course.intention. Other wise such payment is not a payment in due course.

When the banker must refuse payment of cheques? When the banker must refuse payment of cheques?

The banker must refuse payment of cheques under any of the following conditions. If he paysThe banker must refuse payment of cheques under any of the following conditions. If he pays

violating these conditions, he will incur liability by himself.violating these conditions, he will incur liability by himself.

A. When the drawer countermands paymentA. When the drawer countermands payment

A cheque is an unconditional order of the drawer to the banker. The drawer is competent toA cheque is an unconditional order of the drawer to the banker. The drawer is competent to

cancel or withdraw his order of payment at any time before its payment is made. He need notcancel or withdraw his order of payment at any time before its payment is made. He need not

explain the reason for stopping payment of a cheque. The banker has to comply with theexplain the reason for stopping payment of a cheque. The banker has to comply with the

countermand order issued by the drawer without inquiring the reason. The following pointscountermand order issued by the drawer without inquiring the reason. The following points

worth discussion in this connection:worth discussion in this connection:

I) The right to countermand payment of a cheque is vested in its drawer onlyI) The right to countermand payment of a cheque is vested in its drawer only , not to the, not to the

payee or the endorsee, as there is no contractual obligation on the banker toward the payee or thepayee or the endorsee, as there is no contractual obligation on the banker toward the payee or the

holder. However, the payee or the endorsee may report to the banker that the cheque has beenholder. However, the payee or the endorsee may report to the banker that the cheque has been

lost by him. Such notice is deemed sufficient to put the banker on enquiry about the validity oflost by him. Such notice is deemed sufficient to put the banker on enquiry about the validity of

the title of the person presenting the cheque. This report made by the payee or endorsee shouldthe title of the person presenting the cheque. This report made by the payee or endorsee should

be supported by a stop payment order issued by the drawer. If in the mean while, the cheque isbe supported by a stop payment order issued by the drawer. If in the mean while, the cheque is

presented for payment, the banker must postpone its payment till the instruction of the drawer ispresented for payment, the banker must postpone its payment till the instruction of the drawer is

received. received.

II. The stop payment order may be given verbally, through telephone, or in writingII. The stop payment order may be given verbally, through telephone, or in writing . If the. If the

drawer communicates such notice through telegram and verbal the banker should postponedrawer communicates such notice through telegram and verbal the banker should postpone

payment till he gets its confirmation from the customer in writing. If the notice is given verballypayment till he gets its confirmation from the customer in writing. If the notice is given verbally

to any officer of the bank outside the bank premises, the notice will be effective only if the saidto any officer of the bank outside the bank premises, the notice will be effective only if the said

officer communicates it to the bank before the cheque is presented. In such circumstances theofficer communicates it to the bank before the cheque is presented. In such circumstances the

officer is deemed to be the agent of the drawer till the notice is communicated in a properofficer is deemed to be the agent of the drawer till the notice is communicated in a proper

manner to the concerned official or clerk. manner to the concerned official or clerk.

III. The stop payment order must be signed by the drawer of the chequeIII. The stop payment order must be signed by the drawer of the cheque . In case of a firm,. In case of a firm,

joint account or joint stock company, any of the persons authorized to sign on the cheque mayjoint account or joint stock company, any of the persons authorized to sign on the cheque may

stop payment. It is not necessary that the countermand order must be signed by all those personsstop payment. It is not necessary that the countermand order must be signed by all those persons

who had signed the cheque concerned. But, if the countermand is to be cancelled, all the personswho had signed the cheque concerned. But, if the countermand is to be cancelled, all the persons

authorized to operate the account must sign such letter. For example, if any two directors of aauthorized to operate the account must sign such letter. For example, if any two directors of a

company are authorized to sign cheques along with secretary of a company, the countermandcompany are authorized to sign cheques along with secretary of a company, the countermand

order way be issued by any two of the directors, not necessarily the same two who had signed theorder way be issued by any two of the directors, not necessarily the same two who had signed the

cheque if questioncheque if question

IV. The stop payment order must contain full and correct details of the cheque to beIV. The stop payment order must contain full and correct details of the cheque to be

countermanded. countermanded. Full and correct means, the order should contain the number and date of theFull and correct means, the order should contain the number and date of the

cheque, name of the payee and the amount. If the drawer informs the banker wrong number ofcheque, name of the payee and the amount. If the drawer informs the banker wrong number of

the cheque even by mistake, and as a consequence the cheque intended to be stopped is paid bythe cheque even by mistake, and as a consequence the cheque intended to be stopped is paid by

the banker, the banker cannot be held liable for the payment which was made because of thethe banker, the banker cannot be held liable for the payment which was made because of the

mistake on the part of the drawer.mistake on the part of the drawer.

V. The stop payment order to be served before paymentV. The stop payment order to be served before payment . To bind the banker, the stop. To bind the banker, the stop

payment order must be duly served to the banker before the payment of the cheque is made. Thepayment order must be duly served to the banker before the payment of the cheque is made. The

time of receipt of such order is very important. It must be received by the banker before hetime of receipt of such order is very important. It must be received by the banker before he

actually makes payment of the cheque. Any such order given after payment will have no effect.actually makes payment of the cheque. Any such order given after payment will have no effect.

If due to oversight the payment is made after the receipt of the countermand order, the bankerIf due to oversight the payment is made after the receipt of the countermand order, the banker

shall be liable to the drawer. Even if such a cheque is dishonored after the receipt of the stopshall be liable to the drawer. Even if such a cheque is dishonored after the receipt of the stop

payment order for want of sufficient funds, the banker will be held liable. payment order for want of sufficient funds, the banker will be held liable.

Payment of a cheque is deemed as made when money is actually laid on the counter of thePayment of a cheque is deemed as made when money is actually laid on the counter of the

cashier and the person receiving it extends his hand over it. If a banker receives a stop paymentcashier and the person receiving it extends his hand over it. If a banker receives a stop payment

order after the cheque is entered in the book and it is passed for payment but before money couldorder after the cheque is entered in the book and it is passed for payment but before money could

actually be handed over, the order shall be binding on the banker. If the cheque is presentedactually be handed over, the order shall be binding on the banker. If the cheque is presented

through clearing, the countermand order shall be binding if it is received by the banker within thethrough clearing, the countermand order shall be binding if it is received by the banker within the

time allowed or returning back the dishonored cheques; but not there after. But if a cheque istime allowed or returning back the dishonored cheques; but not there after. But if a cheque is

presented through the post and its payment has been sent by draft, the stop payment order shallpresented through the post and its payment has been sent by draft, the stop payment order shall

not be binding on the banker if the remittance draft has actually been mailed. not be binding on the banker if the remittance draft has actually been mailed.

VI. The banker shall be liable to the drawer if he pays the cheque even by over sight afterVI. The banker shall be liable to the drawer if he pays the cheque even by over sight after

the receipt of countermand orderthe receipt of countermand order. If the banker has made the payment of the cheque after or. If the banker has made the payment of the cheque after or

before the banking hours of any working day and in the mean while the customer countermandsbefore the banking hours of any working day and in the mean while the customer countermands

such payment, the banker shall be liable for the same amount, as the amount of such chequesuch payment, the banker shall be liable for the same amount, as the amount of such cheque

cannot be debited for the customer’s account.cannot be debited for the customer’s account.

Moreover, if another cheque of the customer is dishonored as a result of the payment of theMoreover, if another cheque of the customer is dishonored as a result of the payment of the

countermand cheque, the banker shall, in addition, be liable to the drawer for the damages incountermand cheque, the banker shall, in addition, be liable to the drawer for the damages in

respect of the wrongful dishonor of the normal cheque. The notice to stop payment may berespect of the wrongful dishonor of the normal cheque. The notice to stop payment may be

served to the banker anytime and not necessarily within the banking hours only. It shall beserved to the banker anytime and not necessarily within the banking hours only. It shall be

binding if it is actually received by the banker. binding if it is actually received by the banker.

VII. The stop payment order remains effective until it is revoked by the drawer or there isVII. The stop payment order remains effective until it is revoked by the drawer or there is

an agreement limiting its period.an agreement limiting its period. Generally banks take all the necessary precautions up to a Generally banks take all the necessary precautions up to a

period of six months from the date of the cheque. Thereafter, the cheque becomes stale (out ofperiod of six months from the date of the cheque. Thereafter, the cheque becomes stale (out of

date) and its payment is refused on that base. If the cheque is an open cheque, all mechanismsdate) and its payment is refused on that base. If the cheque is an open cheque, all mechanisms

should be employed to safe guard the interest of the customer.should be employed to safe guard the interest of the customer.

Note that, the banker, as soon as receiving the countermanding, he should put a note on theNote that, the banker, as soon as receiving the countermanding, he should put a note on the

ledger by writing all the details. This could help the banker to follow the countermanded chequeledger by writing all the details. This could help the banker to follow the countermanded cheque

and as well it helps the employees of the banker to take necessary precautions. and as well it helps the employees of the banker to take necessary precautions.

B. Death of the drawerB. Death of the drawer

On the receipt of reliable information or notice about the death of the customer, the banker mustOn the receipt of reliable information or notice about the death of the customer, the banker must

stop payment of the cheques singed by him because the order of the customer to the bankerstop payment of the cheques singed by him because the order of the customer to the banker

ceases to operate on the occurrence of his death. The notice of death of the customer should beceases to operate on the occurrence of his death. The notice of death of the customer should be

served on the same branch where the customer has an account and not to any other branch. Theserved on the same branch where the customer has an account and not to any other branch. The

bank should make sure that the news about customer’s death is reliable. bank should make sure that the news about customer’s death is reliable.

C. Insolvency of the drawerC. Insolvency of the drawer

If a debtor commits an act of insolvency as defined in the insolvency law; either he or any of hisIf a debtor commits an act of insolvency as defined in the insolvency law; either he or any of his

creditors may present a petition in the court of law, for an order of adjudication. When the courtcreditors may present a petition in the court of law, for an order of adjudication. When the court

issues an order of adjudication, the whole property of the insolvent person vests in the court or anissues an order of adjudication, the whole property of the insolvent person vests in the court or an

official receiver and becomes available for distribution among the creditors. official receiver and becomes available for distribution among the creditors.

The banker must stop payment from customer’s account as soon as he receives the informationThe banker must stop payment from customer’s account as soon as he receives the information

that an insolvency petition has been filed by or against the customer. Payments made before suchthat an insolvency petition has been filed by or against the customer. Payments made before such

time are protected under the law but if the banker pays cheque, after being aware of thetime are protected under the law but if the banker pays cheque, after being aware of the

insolvency petition, such payment will be made at his own risk and shall have to make suchinsolvency petition, such payment will be made at his own risk and shall have to make such

amount available to the official receiver. After an order of adjudication has been passed by theamount available to the official receiver. After an order of adjudication has been passed by the

court, the banker must close the account of the insolvent customer and communicate to hiscourt, the banker must close the account of the insolvent customer and communicate to his

official receiver the balance to the credit of the customer. official receiver the balance to the credit of the customer.

D. Insanity of the customerD. Insanity of the customer

The banker is not bounded to honor his customer’s cheques on receipt of notice that the customerThe banker is not bounded to honor his customer’s cheques on receipt of notice that the customer

has become absolutely insane or of unsound mind. But as long as the customer acts rationallyhas become absolutely insane or of unsound mind. But as long as the customer acts rationally

and understands properly, his cheques should not be refused. The banker must have confirmedand understands properly, his cheques should not be refused. The banker must have confirmed

information from reliable sources about the insanity of the customer before he refuses paymentinformation from reliable sources about the insanity of the customer before he refuses payment

on this base. The banker can insist on formal information and certification to the effect that hison this base. The banker can insist on formal information and certification to the effect that his

customer has gone insane. customer has gone insane.

E. Notice of assignment of credit balanceE. Notice of assignment of credit balance

The credit balance on the account of a customer may be assigned or transferred by him toThe credit balance on the account of a customer may be assigned or transferred by him to

another person or purpose. On receipt of a notice of such assignment, the banker must stopanother person or purpose. On receipt of a notice of such assignment, the banker must stop

payment of the cheques drawn by an assignor, as the latter cases to be the owner of such funds.payment of the cheques drawn by an assignor, as the latter cases to be the owner of such funds.

However, if the credit balance is greater than the amount assigned for another person or purpose,However, if the credit balance is greater than the amount assigned for another person or purpose,

the banker can honor cheques up to that amount.the banker can honor cheques up to that amount.

F. Receipt of Garnishee OrderF. Receipt of Garnishee Order

A banker is bound to comply with the order issued by the court refraining him from paying theA banker is bound to comply with the order issued by the court refraining him from paying the

money from a customer’s account. He must refuse payment of the cheque presented after themoney from a customer’s account. He must refuse payment of the cheque presented after the

receipt of a Garnishee order or any other order of the court attaching the customer’s money. Ifreceipt of a Garnishee order or any other order of the court attaching the customer’s money. If

the court’s order attaches a part of the credit balance of the customer, the banker can utilize thethe court’s order attaches a part of the credit balance of the customer, the banker can utilize the

remaining balance to honor the cheques issued by the customer. remaining balance to honor the cheques issued by the customer.

G. Breach of trustG. Breach of trust

If the banker comes to know that the customer, who is operating a trust account, contemplates toIf the banker comes to know that the customer, who is operating a trust account, contemplates to

use the funds of the trust account in breach of trust, the banker must stop payment of the chequesuse the funds of the trust account in breach of trust, the banker must stop payment of the cheques

drawn on such account.drawn on such account.

H. Defective title of the partyH. Defective title of the party

If any person presenting a cheque has defective title to the cheque and the banker is aware of thisIf any person presenting a cheque has defective title to the cheque and the banker is aware of this

fact, he can refuse to honor such a cheque without any risk, because if he makes payment to suchfact, he can refuse to honor such a cheque without any risk, because if he makes payment to such

person, it will not be made in good faith and the payment will not be deemed as payment in dueperson, it will not be made in good faith and the payment will not be deemed as payment in due

course. course.

I. The bank will also be justified in refusing payment of the cheques for other valid reasonsI. The bank will also be justified in refusing payment of the cheques for other valid reasons

too, liketoo, like

-- When the credit balance of the customer’s account is insufficient to meet the chequeWhen the credit balance of the customer’s account is insufficient to meet the cheque

issued by the customer and he has no overdraft arrangement with the banker.issued by the customer and he has no overdraft arrangement with the banker.

-- When the customer closes the account before the cheque is presented for encashment. When the customer closes the account before the cheque is presented for encashment.

-- When the cheque bears forged signatures of the drawer.When the cheque bears forged signatures of the drawer.

-- When the banker has a claim of or the set off on the funds of the customer and the chequeWhen the banker has a claim of or the set off on the funds of the customer and the cheque

is in excess of the balance above the claim.is in excess of the balance above the claim.

-- When the cheques are issued against the cheques sent for clearance.When the cheques are issued against the cheques sent for clearance.

-- When some discrepancy appears on the face of the cheque which creates suspicion as toWhen some discrepancy appears on the face of the cheque which creates suspicion as to

the its genuineness the its genuineness

-- When a cheque is not properly drawn i.e. it is irregular, ambiguous, drawn in a form ofWhen a cheque is not properly drawn i.e. it is irregular, ambiguous, drawn in a form of

doubtful legality, signature on the cheque does not tally with the specimen signaturedoubtful legality, signature on the cheque does not tally with the specimen signature

given to the banker, or the account in words differs from the account in figures. Ingiven to the banker, or the account in words differs from the account in figures. In

practice, the banker makes payment of the account in words when there is difference inpractice, the banker makes payment of the account in words when there is difference in

the amount shown in words and figures. the amount shown in words and figures.

-- When the funds are not properly applicable to the payment of a cheque. Example,When the funds are not properly applicable to the payment of a cheque. Example,

personal cheques cannot be paid out of out of trust accounts. personal cheques cannot be paid out of out of trust accounts.

-- When the customer informed the bank about the loss of the cheque.When the customer informed the bank about the loss of the cheque.

-- When the cheque is post –dated and is presented for payment before its ostensible date When the cheque is post –dated and is presented for payment before its ostensible date

In general, to protect forgery and fraud, customer’s attention is necessary on the followingIn general, to protect forgery and fraud, customer’s attention is necessary on the following

points:points:

i.i. All blank cheques should be kept in a safe place under lock and key.All blank cheques should be kept in a safe place under lock and key.

ii.ii. All cheques should be written in inkAll cheques should be written in ink

iii.iii. The amounts in words and figures should begin closer to the printingThe amounts in words and figures should begin closer to the printing

iv.iv. Any alteration on the cheque should be confirmed by the full signature of the drawer. Any alteration on the cheque should be confirmed by the full signature of the drawer.

4.5.4.3. Answers given by the banker in case of dishonored cheques4.5.4.3. Answers given by the banker in case of dishonored cheques

In case a cheque is dishonored, the bank should return it with a slip disclosing the reason forIn case a cheque is dishonored, the bank should return it with a slip disclosing the reason for

dishonor. Generally, banks keep a printed slip called “Return memo” which contains a list ofdishonor. Generally, banks keep a printed slip called “Return memo” which contains a list of

reasons for dishonoring the cheque. The relevant reason is tick-marked on the slip and the slip isreasons for dishonoring the cheque. The relevant reason is tick-marked on the slip and the slip is

attached with the cheque returned.attached with the cheque returned.

Some of the reasons for dishonor and the abbreviations used by the bankers are: Some of the reasons for dishonor and the abbreviations used by the bankers are:

a. Refer to drawer (R.D)a. Refer to drawer (R.D)

The banker puts such a note in those cases where; a) the drawer does not have sufficientThe banker puts such a note in those cases where; a) the drawer does not have sufficient

funds with bank, or b) there is reasonable ground for suspecting that a cheque has beenfunds with bank, or b) there is reasonable ground for suspecting that a cheque has been

tempered with (it is more appropriate for the second reason). When a bank does not wish totempered with (it is more appropriate for the second reason). When a bank does not wish to

reveal the current position as to why a cheque has been dishonored, it may tick this mark. reveal the current position as to why a cheque has been dishonored, it may tick this mark.

b. ‘Not sufficient’, ‘No effects’ or ‘No funds’ (N.S., N.E., or N.F.)b. ‘Not sufficient’, ‘No effects’ or ‘No funds’ (N.S., N.E., or N.F.)

Used in those cases where the drawer does not have sufficient funds with the bank.Used in those cases where the drawer does not have sufficient funds with the bank.

c. Not arranged for (N.A.)c. Not arranged for (N.A.)

This phrase is used in a case where payment of cheque will result in an overdraft which hasThis phrase is used in a case where payment of cheque will result in an overdraft which has

not been approved by the bank. The customer may apply for an overdraft facility andnot been approved by the bank. The customer may apply for an overdraft facility and

assuming that it is approved writes a cheque. In such cases, the banker uses this response.assuming that it is approved writes a cheque. In such cases, the banker uses this response.

d. Endorsement Irregular (E.I.)d. Endorsement Irregular (E.I.)

This phrase is used in those cases where endorsement is not in order. E.g. the spelling of theThis phrase is used in those cases where endorsement is not in order. E.g. the spelling of the

payee’s name as given on the face of the cheque differs from that in the endorsement.payee’s name as given on the face of the cheque differs from that in the endorsement.

e. Effects not cleared (E.N.C.) Please present againe. Effects not cleared (E.N.C.) Please present again

This phrase is used in those cases where the drawer has given certain cheques, drafts, etc., forThis phrase is used in those cases where the drawer has given certain cheques, drafts, etc., for

collection and the same have not been collected yet and, therefore the banker is not in acollection and the same have not been collected yet and, therefore the banker is not in a

position to meet the cheque drawn on account of insufficiency of funds in the drawers’position to meet the cheque drawn on account of insufficiency of funds in the drawers’

account at the moment.account at the moment.

f. Drawer Deceased (D.D)f. Drawer Deceased (D.D)

Where the banker receives information that the drawer has expired and, therefore, it hasWhere the banker receives information that the drawer has expired and, therefore, it has

stopped payment of cheques. His account will be stopped until legal representatives or hairsstopped payment of cheques. His account will be stopped until legal representatives or hairs

apply to the bank with the necessary evidence that may be given by the court.apply to the bank with the necessary evidence that may be given by the court.

g. Words and figures differ (W. & F.D.)g. Words and figures differ (W. & F.D.)

This is used on cases where the reason for dishonor is differing of amount of cheque in wordsThis is used on cases where the reason for dishonor is differing of amount of cheque in words

and figures. If the banker wants to pay such cheques, he can pay only the amount written inand figures. If the banker wants to pay such cheques, he can pay only the amount written in

words. He will not be liable thereafter. However, banks usually return such cheques unpaid.words. He will not be liable thereafter. However, banks usually return such cheques unpaid.

4.5.5. Collection of Cheques4.5.5. Collection of Cheques

A banker is under no legal obligation to collect his customer’s cheques but collection of chequesA banker is under no legal obligation to collect his customer’s cheques but collection of cheques

has now-a-days become an important function of a banker with the growth of banking habit andhas now-a-days become an important function of a banker with the growth of banking habit and

with a wider use of crossed cheques, which are invariably to be collected through a banker only.with a wider use of crossed cheques, which are invariably to be collected through a banker only.

One of the most important services provided by the commercial banks to their customers is theOne of the most important services provided by the commercial banks to their customers is the

collection of cheques, bills of exchange, and other instruments on behalf of their customers.collection of cheques, bills of exchange, and other instruments on behalf of their customers.

When a customer or a banker receives a cheque drawn on any other banker he has two options ofWhen a customer or a banker receives a cheque drawn on any other banker he has two options of

collection.collection.

1.1. To receive its payment personally or through his agent at the counter of the drawee bank,To receive its payment personally or through his agent at the counter of the drawee bank,

drawers bank or paying bank.drawers bank or paying bank.

2.2. To send to his banker for the purpose of collecting from the drawee bank.To send to his banker for the purpose of collecting from the drawee bank.

Here the banker which receives cheques for collection will be referred as a collecting bank andHere the banker which receives cheques for collection will be referred as a collecting bank and

the banker that pays the value of the cheque is known as the paying bank or drawee bank orthe banker that pays the value of the cheque is known as the paying bank or drawee bank or

drawer’s banker. In other ways this bank is the bank where the drawer’s account is maintained.drawer’s banker. In other ways this bank is the bank where the drawer’s account is maintained.

While collecting his customer’s cheques, the collecting banker acts either, (1)As a holder forWhile collecting his customer’s cheques, the collecting banker acts either, (1)As a holder for

value or (2) As an agent of a customervalue or (2) As an agent of a customer

i. A collecting banker as a holder for valuei. A collecting banker as a holder for value

If the collecting banker pays to the customer the amount of the cheque or credits such amount toIf the collecting banker pays to the customer the amount of the cheque or credits such amount to

his account and allows him to draw it, before the amount of the cheque is actually realized fromhis account and allows him to draw it, before the amount of the cheque is actually realized from

the drawee banker, the collecting banker is deemed to be its ‘holder for value’. The bankerthe drawee banker, the collecting banker is deemed to be its ‘holder for value’. The banker

receives an undertaking from the customer in return’. A banker becomes its holder for value byreceives an undertaking from the customer in return’. A banker becomes its holder for value by

giving its value to the customer in any of the following ways:giving its value to the customer in any of the following ways:

a)a) By lending further on the strength of the cheque.By lending further on the strength of the cheque.

b)b) By paying over the amount of the cheque or part of it in cash or in account before it isBy paying over the amount of the cheque or part of it in cash or in account before it is

cleared.cleared.

c)c) By agreeing either then or earlier, or as a course of business, that customer may drawBy agreeing either then or earlier, or as a course of business, that customer may draw

before the cheque is cleared.before the cheque is cleared.

d)d) By accepting the cheque for reduction of an existing overdraft.By accepting the cheque for reduction of an existing overdraft.

e)e) By giving cash over the counter for the cheque at the time it is paid in for collection. By giving cash over the counter for the cheque at the time it is paid in for collection.

ii. Collecting banker as an agent of a customerii. Collecting banker as an agent of a customer

If the banker credits the customer's account with the amount of the cheque after the amount isIf the banker credits the customer's account with the amount of the cheque after the amount is

realized from the drawee banker and allow the customer to draw the amount only thereafter. Therealized from the drawee banker and allow the customer to draw the amount only thereafter. The

banker thus acts as an agent of the customer and charges from him a commission for collectingbanker thus acts as an agent of the customer and charges from him a commission for collecting

the amount from outstation banks. the amount from outstation banks.

As an agent of his customer, the collecting banker does not possess title to the cheque better thanAs an agent of his customer, the collecting banker does not possess title to the cheque better than

that of the customer. If the customer has no title, or his title is defective, the collecting bankerthat of the customer. If the customer has no title, or his title is defective, the collecting banker

can not have good title to the cheque. In case the cheque collected by him did not belong to hiscan not have good title to the cheque. In case the cheque collected by him did not belong to his

customer, he will be held liable for 'conversion of money', that is, illegally interfering with thecustomer, he will be held liable for 'conversion of money', that is, illegally interfering with the

rights of the true owner of the cheque. The bank incurs a fiduciary responsibility to account forrights of the true owner of the cheque. The bank incurs a fiduciary responsibility to account for

and pay the amount to his principal or to any one else according to his direction.and pay the amount to his principal or to any one else according to his direction.

4.5.5.1. Statutory Protection to the Collecting Banker4.5.5.1. Statutory Protection to the Collecting Banker

The Negotiable Instruments Act provides statutory protection to the collecting banker against theThe Negotiable Instruments Act provides statutory protection to the collecting banker against the

risk of conversion involved in the collection of cheques because otherwise no banker will berisk of conversion involved in the collection of cheques because otherwise no banker will be

prepared to provide the service of collecting cheques on behalf of his customer unless he is veryprepared to provide the service of collecting cheques on behalf of his customer unless he is very

sure that the customer is the true owner of the cheques. Conversion is a legal term signifyingsure that the customer is the true owner of the cheques. Conversion is a legal term signifying

wrongful interference with another person’s right of property, which is inconsistent with the rightwrongful interference with another person’s right of property, which is inconsistent with the right

of possession. Conversion applies only to tangible property and not to debts. of possession. Conversion applies only to tangible property and not to debts.

A banker who has in good faith and without negligence received payment for a customer of aA banker who has in good faith and without negligence received payment for a customer of a

cheque crossed generally or specially to himself shall not, incase the little to the cheque provescheque crossed generally or specially to himself shall not, incase the little to the cheque proves

defective, incur any liability to the true owner of the cheque by reason only of having receiveddefective, incur any liability to the true owner of the cheque by reason only of having received

such payment. The statutory protection provided to the collecting banker is very valuable, but issuch payment. The statutory protection provided to the collecting banker is very valuable, but is

available only when the following conditions are fulfilled:-available only when the following conditions are fulfilled:-

1. Payment must be received in good faith and without negligence.1. Payment must be received in good faith and without negligence.

The collecting banker must act in good faith and without negligence. By good faith we mean The collecting banker must act in good faith and without negligence. By good faith we mean

that the bank should act honestly and by negligence, we mean that the bank has failed in its dutythat the bank should act honestly and by negligence, we mean that the bank has failed in its duty

to take care. The bank should act honestly and must take reasonable degree of care to protect theto take care. The bank should act honestly and must take reasonable degree of care to protect the

interest of the true owner. The degree of care that a banker should take will depend up on theinterest of the true owner. The degree of care that a banker should take will depend up on the

circumstances of each case. If the bank does not take the required degree of care, it will be heldcircumstances of each case. If the bank does not take the required degree of care, it will be held

negligent and will lose the statutory protection. A thing is deemed to be done in good faithnegligent and will lose the statutory protection. A thing is deemed to be done in good faith

when it is in fact done honestly whether negligently or not. An important test of negligence iswhen it is in fact done honestly whether negligently or not. An important test of negligence is

whether the payment considered in the light of the circumstances antecedent and present, sowhether the payment considered in the light of the circumstances antecedent and present, so

much out of ordinary course that ought to have arrived doubt in banker’s mind and caused him tomuch out of ordinary course that ought to have arrived doubt in banker’s mind and caused him to

make enquiries. make enquiries.

For instance, the banking history of a customer creates suspicion. In such a case, a chequeFor instance, the banking history of a customer creates suspicion. In such a case, a cheque

collected on behalf of a customer who had forged the endorsement of the real ownercollected on behalf of a customer who had forged the endorsement of the real owner ;; the banker the banker

made some enquiries. But, not as much as the past history of the customer, whose cheques hadmade some enquiries. But, not as much as the past history of the customer, whose cheques had

been frequently dishonored, required. Hence, the bank was guilty of negligence. been frequently dishonored, required. Hence, the bank was guilty of negligence.

Other examples of the banker’s negligence could be determined and depend on the bankingOther examples of the banker’s negligence could be determined and depend on the banking

practices of other banks and circumstances. Some of them can be discussed as follows:practices of other banks and circumstances. Some of them can be discussed as follows:

-- Opening of an account without proper introduction: If the person opens an accountOpening of an account without proper introduction: If the person opens an account

without proper introduction; only for the purpose of cheque collection and if his titlewithout proper introduction; only for the purpose of cheque collection and if his title

on the cheque is found absent or defective the banker will not get the legal protection.on the cheque is found absent or defective the banker will not get the legal protection.

-- Not verifying the correctness of endorsements.Not verifying the correctness of endorsements.

-- No proper inquiry being made in doubtful case.No proper inquiry being made in doubtful case.

-- Failure to take note of not negotiable crossing”Failure to take note of not negotiable crossing”

-- Collection of “account payee” cheque for person other than payee mentioned there in,Collection of “account payee” cheque for person other than payee mentioned there in,

etc.etc.

2. The payment must be received for a customer2. The payment must be received for a customer:-:-

The Negotiable Instrument Act requires that the banker should collect the cheque on behalf of aThe Negotiable Instrument Act requires that the banker should collect the cheque on behalf of a

customer. If a bank allows the facility of collection to a person who is not its customer, it will docustomer. If a bank allows the facility of collection to a person who is not its customer, it will do

so at his own risk, A customer means a person who has an account with the bank and hisso at his own risk, A customer means a person who has an account with the bank and his

dealings with the bank are in the nature of banking business. dealings with the bank are in the nature of banking business.

It is equally significant that the bank should receive payment as the agent of the customer andIt is equally significant that the bank should receive payment as the agent of the customer and

not in any other capacity. The protection is restricted to the case where the collecting banker actsnot in any other capacity. The protection is restricted to the case where the collecting banker acts

only as an agent for collection of the customer and will not extend to the case where the bank is aonly as an agent for collection of the customer and will not extend to the case where the bank is a

holder for value. If a banker becomes the holder of the cheque and receives payment in itsholder for value. If a banker becomes the holder of the cheque and receives payment in its

capacity as the holder, it will lose the protection granted for a collecting banker as an agent. Acapacity as the holder, it will lose the protection granted for a collecting banker as an agent. A

bank will not become the holder of a cheque if it credits the customer account after receiving thebank will not become the holder of a cheque if it credits the customer account after receiving the

crossed cheque but does not allow him to withdraw the amount till the proceeds are collected. crossed cheque but does not allow him to withdraw the amount till the proceeds are collected.

3. The cheque must be a Crossed one.3. The cheque must be a Crossed one.

The statutory protection is available to the banker only in case of crossed cheques only and theThe statutory protection is available to the banker only in case of crossed cheques only and the

crossing must have been done before the cheque come into the hands of the collecting banker.crossing must have been done before the cheque come into the hands of the collecting banker.

He cannot avail himself of this protection in case of an uncrossed cheque or an uncrossed chequeHe cannot avail himself of this protection in case of an uncrossed cheque or an uncrossed cheque

which is crossed by the collecting banker himself after receiving it. Therefore, it is essential thatwhich is crossed by the collecting banker himself after receiving it. Therefore, it is essential that

the cheque is crossed one before it is deposited with the bank for collection, otherwise the bankerthe cheque is crossed one before it is deposited with the bank for collection, otherwise the banker

will be liable for collection, if the title of the customer proves to be defective or the endorsementwill be liable for collection, if the title of the customer proves to be defective or the endorsement

thereon is forged. thereon is forged.

4. Receipt of Payment. 4. Receipt of Payment.

The statutory protection granted is limited to the receipt of payment which takes place at the timeThe statutory protection granted is limited to the receipt of payment which takes place at the time

of clearing when the amount is credited in the books of the clearing house. The collecting bankerof clearing when the amount is credited in the books of the clearing house. The collecting banker

does not lose the statutory protection, if he credits his customer’s account with the amount of thedoes not lose the statutory protection, if he credits his customer’s account with the amount of the

cheque its actual realization and the customer is allowed to draw the amount only after itscheque its actual realization and the customer is allowed to draw the amount only after its

realization.realization.

4.5.5.2. Duties of a Collecting Banker 4.5.5.2. Duties of a Collecting Banker

A collecting banker has certain responsibilities in the collection of cheques for his customers. AsA collecting banker has certain responsibilities in the collection of cheques for his customers. As

his customer’s agent, the collecting banker is expected to act with due care and diligence in thehis customer’s agent, the collecting banker is expected to act with due care and diligence in the

collection of cheques given to him. If he fails in his duty, he will be liable to the customer forcollection of cheques given to him. If he fails in his duty, he will be liable to the customer for

any loss that may arise as a direct consequence of his negligence. The duties of a collectingany loss that may arise as a direct consequence of his negligence. The duties of a collecting

banker may be disused as belowbanker may be disused as below:-:-

1. Presentment of cheques for payment within a reasonable time 1. Presentment of cheques for payment within a reasonable time

The collecting banker should prove due-care and diligence in the collection of cheques within aThe collecting banker should prove due-care and diligence in the collection of cheques within a

reasonable time. The collecting banker should present the cheques received for collection to thereasonable time. The collecting banker should present the cheques received for collection to the

drawee banks within a reasonable time. He must use only the recognized channels for collection;drawee banks within a reasonable time. He must use only the recognized channels for collection;

presentment need not be made at the premises of the drawer bank but may be made through thepresentment need not be made at the premises of the drawer bank but may be made through the

clearing house. Payment through post is also recognized. clearing house. Payment through post is also recognized.

If the collecting banker does not present the cheque for collection through proper channel withinIf the collecting banker does not present the cheque for collection through proper channel within

a reasonable time, customer, may suffer losses. The customer may also suffer damages owninga reasonable time, customer, may suffer losses. The customer may also suffer damages owning

to dishonor of certain cheques issued by him in anticipation of the realization of the cheques paidto dishonor of certain cheques issued by him in anticipation of the realization of the cheques paid

in. Reasonable time for presentment depends upon the facts and circumstances of each case.in. Reasonable time for presentment depends upon the facts and circumstances of each case.

1. When the cheque is drawn on a bank in the same place, the banker should present it1. When the cheque is drawn on a bank in the same place, the banker should present it

the day after he receives it. the day after he receives it.

2. When the cheque is drawn on a bank in another place, it should be presented or2. When the cheque is drawn on a bank in another place, it should be presented or

forwarded in the day after receipt.forwarded in the day after receipt.

3. When the collecting branch is also the drawer branch, then it is a mere question of fact3. When the collecting branch is also the drawer branch, then it is a mere question of fact

whether the cheque is presented for payment or deposited for collection. However,whether the cheque is presented for payment or deposited for collection. However,

the banker may not credit the customer’s account on the very same day he receives itthe banker may not credit the customer’s account on the very same day he receives it

for collection.for collection.

After the expiry of a reasonable time the customer paying in the cheque for collection is entitledAfter the expiry of a reasonable time the customer paying in the cheque for collection is entitled

to presume that the cheque has been collected and the proceeds thereof have been credited to histo presume that the cheque has been collected and the proceeds thereof have been credited to his

account. account.

The customer can, therefore, draw a cheque for an amount not exceeding the amount to beThe customer can, therefore, draw a cheque for an amount not exceeding the amount to be

collected. If the bank has failed to collect the cheque in the meantime, it cannot dishonor thecollected. If the bank has failed to collect the cheque in the meantime, it cannot dishonor the

cheque on the ground of shortage of funds, if he dishonors the cheque on this ground, thecheque on the ground of shortage of funds, if he dishonors the cheque on this ground, the

customer can recover damages for wrongful dishonor.customer can recover damages for wrongful dishonor.

2. Serving Notice of Dishonor2. Serving Notice of Dishonor

In case a cheque is dishonored and returned back by the paying banker without payment for oneIn case a cheque is dishonored and returned back by the paying banker without payment for one

reason or the other, the banker must serve a notice of dishonor on his customer to enable thereason or the other, the banker must serve a notice of dishonor on his customer to enable the

latter to claim the amount from previous parties including the drawee. If the banker fails to servelatter to claim the amount from previous parties including the drawee. If the banker fails to serve

notice of dishonor to the customer it will be liable to the customer for any loss that the customernotice of dishonor to the customer it will be liable to the customer for any loss that the customer

might have suffered on account of such failure. It is to be noted that a cheque is deemed to bemight have suffered on account of such failure. It is to be noted that a cheque is deemed to be

dishonored, when the paying banker refuses its payment. In case a cheque is returned by thedishonored, when the paying banker refuses its payment. In case a cheque is returned by the

drawer bank for confirmation of endorsement, it is not dishonored. In such a case also the noticedrawer bank for confirmation of endorsement, it is not dishonored. In such a case also the notice

should be given to the customer. If such notice is not given and the cheque is returned for theshould be given to the customer. If such notice is not given and the cheque is returned for the

second time and the customer suffers a loss, the collecting banker may be held liable for the loss.second time and the customer suffers a loss, the collecting banker may be held liable for the loss.

The bank generally conveys the notice of dishonor by returning the cheque to the customer alongThe bank generally conveys the notice of dishonor by returning the cheque to the customer along

with the reason of dishonor. The bank can also debit the account of the customer with the amountwith the reason of dishonor. The bank can also debit the account of the customer with the amount

of the cheque if it had already given credit prior to collection.of the cheque if it had already given credit prior to collection.

3. Agent for Collocation3. Agent for Collocation

If the cheque is drawn on a place where the banker is not a member of the clearing house, heIf the cheque is drawn on a place where the banker is not a member of the clearing house, he

may employ another banker who is a member in it for the purpose of collecting the cheque. Inmay employ another banker who is a member in it for the purpose of collecting the cheque. In

such a case, the latter banker becomes a substituted agent.such a case, the latter banker becomes a substituted agent.

4. Remittance of Proceeds to the Customer 4. Remittance of Proceeds to the Customer

When a cheque is realized by a collecting banker, he should pay the proceed to the customer asWhen a cheque is realized by a collecting banker, he should pay the proceed to the customer as

soon as practicable in accordance with the customers directions. Usually, the amount is creditedsoon as practicable in accordance with the customers directions. Usually, the amount is credited

to the customer’s account. At the request of the customer, the proceeds of the cheque collectedto the customer’s account. At the request of the customer, the proceeds of the cheque collected

may be remitted to him by a demand draft. As soon as the draft for the proceeds of the chequemay be remitted to him by a demand draft. As soon as the draft for the proceeds of the cheque

collected is forwarded in accordance with the customer’s instructions, the relationship ofcollected is forwarded in accordance with the customer’s instructions, the relationship of

principal and agent comes to an end and that of debtor and creditor commences.principal and agent comes to an end and that of debtor and creditor commences.

Check Your Progress QuestionsCheck Your Progress Questions

1.1. What is meant by negotiable instrument? Explain its characteristics.What is meant by negotiable instrument? Explain its characteristics.

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2.2. Discuss about the presumptions as to negotiable instruments.Discuss about the presumptions as to negotiable instruments.

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3.3. Identify and define negotiable instruments.Identify and define negotiable instruments.

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4.4. Discuss the similarities and difference between and among promissory notes, bills ofDiscuss the similarities and difference between and among promissory notes, bills of

exchange and cheque exchange and cheque

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5.5. What is negotiation? How is it effected and how does it differentiate from assignment andWhat is negotiation? How is it effected and how does it differentiate from assignment and

discounting.discounting.

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6.6. What is an endorsement? Explain and illustrate the different kinds of endorsements.What is an endorsement? Explain and illustrate the different kinds of endorsements.

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7.7. Explain the precautions, which the paying banker should take before making payment of aExplain the precautions, which the paying banker should take before making payment of a

cheque.cheque.

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8.8. State and explain the statutory protections available under the negotiable instruments act toState and explain the statutory protections available under the negotiable instruments act to

the paying banker.the paying banker.

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9.9. When must a bank reject the payment of a cheque? Discuss.When must a bank reject the payment of a cheque? Discuss.

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10.10. What are the duties and responsibilities of a banker in the collection of a cheque? Explain.What are the duties and responsibilities of a banker in the collection of a cheque? Explain.

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4.6. SUMMARY4.6. SUMMARY

Every document which entitles a person to a sum of money and which is transferable by deliveryEvery document which entitles a person to a sum of money and which is transferable by delivery

is a negotiable instrument. It is one the property in which is acquired by any one who takes itis a negotiable instrument. It is one the property in which is acquired by any one who takes it

bona fide and for value, notwithstanding any defect of title in the person from whom he took. Itbona fide and for value, notwithstanding any defect of title in the person from whom he took. It

includes promissory notes, bills of exchange and cheques.includes promissory notes, bills of exchange and cheques.

Easy transferability is one of the important characteristics of a negotiable instrument. AnEasy transferability is one of the important characteristics of a negotiable instrument. An

instrument may be transferred through; a) Assignment, and b) Negotiation.instrument may be transferred through; a) Assignment, and b) Negotiation.

Banks take different precautions in accepting negotiable instruments. They have to treat them inBanks take different precautions in accepting negotiable instruments. They have to treat them in

a right manner so as not to affect the benefits of parties in the instrument. One of he importanta right manner so as not to affect the benefits of parties in the instrument. One of he important

modern services of banks to their customers is collection of cheques and as the collector ofmodern services of banks to their customers is collection of cheques and as the collector of

customer’s cheques; they take either a holder in due course or an agent for collection position.customer’s cheques; they take either a holder in due course or an agent for collection position.

The collecting banker should take the necessary precautions so as to get legal protection. The collecting banker should take the necessary precautions so as to get legal protection.

5.8 ANSWERS TO CHECK YOUR PROGRESS QUESTIONS5.8 ANSWERS TO CHECK YOUR PROGRESS QUESTIONS

1. Refer section 4.21. Refer section 4.2 5. Refer section 4.3(b)5. Refer section 4.3(b)

2. Refer section 4.3.12. Refer section 4.3.1 6. Refer section 4.5.36. Refer section 4.5.3

3. Refer section 4.43. Refer section 4.4 7. Refer section 4.5.4.17. Refer section 4.5.4.1

4. Refer section 4.44. Refer section 4.4 8. Refer section 4.5.5.18. Refer section 4.5.5.1

9. Refer section 4.5.4.29. Refer section 4.5.4.2

10.Refer section 4.5.5.2.10.Refer section 4.5.5.2.