St.

mary’s university
Business and company law Binnyam

=07]9e LESSON 8

LAW OF NEGOTIABLE INSTRUMENTS

A negotiable instrument as defined under the commercial code is

a. Any document- hence there is no oral negotiable instrument

b. Incorporating a right to an entitlement- the document must bear a certain right to the holder.
c. In such a manner that it is not possible to enforce/transfer the right separately from the
instrument- whosoever wants to benefit from the right in the document for his own purpose or
for the interest of another by transferring his entitlement must always use the document as the
right and the use cannot be effected in the absence of the document.

The basic obligation that arises out of a negotiable instrument is it provides the holder an entitlement as
stated in the instrument when presented to the debtor. Delivery of the instrument is an essential condition
to benefit from a negotiable instrument. The debtor is released from any obligation under the instrument
by payment made at maturity to the creditor under the instrument.

Yet the obligation to pay upon presentment is not without a restriction. The law has provided reasons that
can be validly set up against a creditor of a negotiable instrument and this is

a. Defense based on the personal relationship of holder of instrument and the debtor i.e. the debtor
may claim he has a debt to be paid by the holder hence can hold up on payment
b. Defense on the non fulfillment of form and text of the negotiable instrument- example the
negotiable instrument is forged or does not bear the necessary/authorized person/s signature
c. Defense based on falsification of signature
d. Defense on lack of capacity of the holder( please refer lesson 3)

The holder of a negotiable instrument who follows the entire due course is treated with high protection
that no claim of recovery can be made form a holder in due course.

One of the core reasons the business world and the law create negotiable instruments is the concept of
transfer. Negotiable instruments can freely transfer in the market from one hand to the other hence
facilitates the commercial undertaking as the entitlements and rights are also willingly transferred in the
economy. The law has provided forms for the transfer of negotiable instruments.

FORMS OF TRANSFER

To bearer- blank negotiable instruments which entitle anyone who holds them to a right in the document

In a specified name – only the person whose name is stated in the instrument as beneficiary is treated as
creditor

In a specified name or to order- the person whose name is stated in the document or the person to
whom he orders can benefit from the instrument

When we examine the means of transfer an instrument to bearer shall be transferred by delivery and the
sole fact of presentment to the debtor establishes his right. Holders of an instrument in a specified name

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St.mary’s university
Business and company law Binnyam

establish his right by the fact that he is designated as beneficiary. Holders of instrument to order establish
their right by an uninterrupted series of endorsement. Here it is essential to talk on the concept of
endorsement.

Endorsement has the effect of transferring all the rights on the instrument to another person. If Mr Ababe
endorses a negotiable instrument he holds to Ms.Marta it simply means the rights that Abebe was entitled
as the holder of the instrument will transfer to Marta. An endorsement in law is required to be in writing
in the instrument and signed by the endorser. It shall be unconditional as well as full (partial endorsement
is invalid)

The endorsee is the person to whom the instrument is being transfer and the endorser is the person who
signed and transfers the right. While endorsing the endorser may write the name of the endorsee (named
endorsement) or just sign and leave the name (blank or bearer endorsement)

Types of negotiable instruments

Depending up on the entitlement that the document bears negotiable instruments can be divided in to
various groups. As to the Ethiopian case the instruments recognized by law as negotiable comprise

1. Commercial instruments- cheque/travelers cheque/bill of exchange/promissory note

2. Transferable securities-share certificates/debentures/insurance policies
3. Documents of title to good-bill of lading/airway bill

A commercial instrument entitles the holder of the instrument to a payment of money while a transferable
securities encompass incorporeal rights on top of payment of money as the right to participate in meetings
in case of share certificates while documents of title to good give the holder a right to an entitlement on
goods.

 State negotiable instruments recognized in other jurisdiction( than Ethiopia)

 Explain the purpose of negotiable instruments
 What is a holder in due course of a negotiable instrument
 Explain the concept of presentment and acceptance in negotiable instrument