law of negotiable instruments 1881

8/4/2019 Law of Negotiable Instruments 1881

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Law of Negotiable Instruments1881

Presented By:

Dilawar Ramzan 7135Tariq Aziz Khan 7335


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Introduction

Exchange of goods and services is thebasis of every business activity. Goods arebought and sold for cash as well as on

credit. All these transactions require flow of cash

either immediately or after a certain time.

In modern business, large number oftransactions involving huge sums ofmoney takes place everyday.


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Cont

It is quite inconvenient as well as risky foreither party to make and receive paymentsin cash.

Therefore, it is a common practice forbusinessmen to make use of certaindocuments as means of making payment.

Some of these documents are callednegotiable instruments.


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NEGOTIABLE INSTRUMENT ACT

According to section 13 of theNegotiable Instruments Act, 1881,

a negotiable instrument means promissory

note, bill of exchange, or cheque, payableeither to order or to bearer.


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Cont

The purpose of the Act was to present anorderly and authoritative statement ofleading rules of law relating to the

negotiable instruments. The main object of the Negotiable

Instruments Act is to legalize the systemby which instruments contemplated by itcould pass from hand to hand bynegotiation like any other goods.


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NEGOTIABLE INSTRUMENT

A NEGOTIABLE INSTRUMENT is adocument that meets the requirements forcirculation without reference to other

sources.

The amount must be clearly specified orcapable of being calculated.


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Types of Negotiable Instruments

According to the Negotiable InstrumentsAct, 1881 there are just three types ofnegotiable instruments.

1. Promissory Note.

2. Bill of Exchange.

3. Cheque.


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Promissory Note

Section 4 of the Negotiable InstrumentsAct, 1881 defines a promissory note as an

instrument in writing (not being a bank

note or a currency note) containing anunconditional undertaking, signed by themaker, to pay a certain sum of money only

to or to the order of a certain person or tothe bearer of the instrument.


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Parties to a Promissory Note

There are primarily two parties involved in a promissory note.1. The Maker or Drawer the person who makes the note and

promises to pay the amountstated therein. In the abovespecimen, Tariq is the maker or drawer.

2. The Payee the person to whom the amount is payable. In the

above specimen it isMohsin.

In course of transfer of a promissory note by payee and others,the parties involved may be -

1. The Endorser the person who endorses the note in favor ofanother person. In the above specimen if Mohsin endorses it in

favor of Ejaz and Ejaz also endorses it in favor of Muneeb, thenMohsin and Ejaz both are endorsers.2. The Endorsee the person in whose favor the note is

negotiated by endorsement. In the above, it is Ejaz and thenMuneeb.


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Bill of Exchange

Section 5 of the Negotiable InstrumentsAct, 1881 defines a bill of exchange as an

instrument in writing containing an

unconditional order, signed by the maker,directing a certain person to pay a certainsum of money only to or to the order of a

certain person, or to the bearer of theinstrument.


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Parties to a Bill of Exchange

There are three parties involved in a bill ofexchange.

1. The Drawer The person who makes theorder for making payment. In the above

specimen,Malik is the drawer.2. The Drawee The person to whom the order

to pay is made. He is generally a debtor ofthe drawer. It is Samie in this case.

3. The Payee

The person to whom thepayment is to be made. In this case it isAbuzar.


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Cheques

The Negotiable Instruments Act, 1881 defines acheque as a bill of exchange drawn on aspecified banker and not expressed to be

payable otherwise than on demand.

Actually, a cheque is an order by the accountholder of the bank directing his banker to pay ondemand, the specified amount, to or to the order

of the person named therein or to the bearer.


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Types of Cheque

Broadly speaking, cheques are of fourtypes.

a) Open cheque.

b) Crossed cheque.

c) Bearer cheque.

d) Order cheque.


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Features of NegotiableInstruments

A negotiable instrument is freely transferable.The ownership is changed by mere deliverywhen payable to the bearer or by validendorsement and delivery when payable toorder.

Negotiability confers absolute and good title onthe transferee.

A negotiable instrument must be in writing. Thisincludes handwriting, typing, computer print outand engraving, etc.


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Cont

In every negotiable instrument there must be anunconditional order or promise for payment.

The instrument must involve payment of a

certain sum of money only and nothing else. Forexample, one cannot make a promissory noteon assets, securities, or goods.

The time of payment must be certain. It meansthat the instrument must be payable at a timewhich is certain to arrive.


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Cont

The payee must be a certain person. It meansthat the person in whose favor the instrument ismade must be named or described withreasonable certainty.

A negotiable instrument must bear the signatureof its maker. Without the signature of the draweror the maker, the instrument shall not be a validone.

Delivery of the instrument is essential. Anynegotiable instrument like a cheque or apromissory note is not complete till it is deliveredto its payee.


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Conclusion

law of negotiable instruments 1881

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