RFBT – NEGOTIABLE INSTRUMENTS
1. Instrument
An instrument, in the legal context, refers to
a document containing some legal right or
obligation. Examples include contracts, bonds,
promissory notes, and others.
2. Negotiability
It refers to the instrument’s capability of
being transferred from its current holder to another.
3. Negotiable Instrument
It is a written instrument signed by the
maker/drawer that contains an unconditional
promise or order to pay a certain sum of money
which must be payable on demand or at a fixed or
determinable future time.
Functions and Importance of Negotiable
Instruments
5. As a Substitute for Money
Although they do not constitute legal tender,
and are not money, they are used as a substitute
for money in a way that they can be passed freely
from hand to hand in the commercial markets.
However, in contrast with money, the value of
negotiable instruments depends upon the financial
ability of the parties to them.
6. As a Medium of Exchange for Most Commercial
Transactions
Negotiable instruments, particularly checks,
are more commonly used to facilitate the sale,
purchase or trade of goods between parties. They
thus increase the purchasing medium in circulation.
7. As a Medium of Credit Transactions
Men, even without cash, are enabled by
means of credit to conduct and carry to completion
business and other economic activities.
Requisites of Negotiability
9. In Writing and Signed by the Maker or Drawer
The maker refers to the issuer of a
promissory note. While, the drawer refers to the
issuer of a bill of exchange or check.
10. Contains an Unconditional Promise or Order to
Pay a Sum Certain in Money
A promise applies to a promissory note.
While an order is applicable to a bill of exchange.
11. Payable on Demand, or at a Fixed or
Determinable Future Time
An example of fixed future time is
December 20, 2021. An example of determinable
future time is 90 days from the date of the issuance
of the instrument.
12. Payable to Order or to Bearer
These are the so-called badges of
negotiability. Payable to order means that the
instrument is payable to a specified person or his
assignee unless negotiated properly by that person
to another. Payable to bearer means that whoever
holds the instrument can receive the funds due on
it.
13. If Addressed to a Drawee, He Must Be Named
or Otherwise Indicated with Reasonable Certainty
The drawee refers to the person being
ordered to pay the sum due by the drawer in a bill of
exchange (drawee may be any person whether
natural or juridical) or check (drawee is always a
bank).
Kinds of Negotiable Instruments
14. Promissory Note
It is an unconditional promise in writing
made by one person (maker) to another (payee),
signed by the maker, engaging to pay on demand,
or at a fixed or determinable future time, a sum
certain in money to order or to bearer.
15. Bill of Exchange
It is an unconditional order in writing
addressed by one person (drawer) to another
(drawee) signed by the person giving it (drawer),
requiring the person to whom it is addressed
(drawee) to pay on demand or at a fixed or
 RFBT – NEGOTIABLE INSTRUMENTS

determinable future time a sum certain in money to

order or to bearer. ***

16. Check 25. Parties to a Bill of Exchange Need Not Be

It is a special form of bill of exchange where
the drawee always refers to a bank where the funds
to be paid are in deposit.
***
17. Non-Negotiable Instrument
An instrument is said to be non-negotiable if
the same does not meet the requirements laid
down to qualify an instrument as a negotiable one,
or an instrument which in its inception was
negotiable but has lost its qualify of negotiability. A
non-negotiable instrument may not be negotiated
but it may be assigned or transferred.
Original Parties to a Promissory Note
19. Maker
He is the one who makes the promise and
signs the instrument.
20. Payee
He is the one to whom the promise of
payment is to be made. He may seek payment
personally or further negotiate the instrument.
Original Parties to a Bill of Exchange
Distinct Persons
The drawer may draw on himself payable to
his own order that is, the two parties to the bill can
be the same person (drawer-drawee or drawer-
payee).
26. Idea and Purpose of Bill of Exchange
The fundamental idea and purpose of a bill
of exchange is that the drawer has funds in the
hands of the drawee which the former desires to be
paid to the payee.
27. Liability of Drawee for Non-Payment
If the drawee refuses to accept when he has
funds for the purpose, he becomes liable to the
drawer (not to the payee) for the resulting damages
and harm done to the latter’s credit.
28. Understanding If the Drawer Has No Funds in
the Hands of the Drawee
It is at least presumed that the former must
have made arrangements with the latter so that he
will honor the bill. In such a case, the drawee must
look to the drawee for reimbursement and not to a
bona fide holder.

22. Drawer
He is the person who issues and draws the
order bill.

23. Drawee
He is the party upon whom the bill is drawn.
To state it differently, he is the person to whom the
bill is addressed and who is ordered and expected
to pay.

24. Payee
He is the party in whose favor the bill is
originally issued or is payable.