Chapter 5: NEGOTIABLE INSTRUMENTS

5.1 intro

1. Negotiable instrument are documents with monetary worth that can be negotiated and
utilized to facilitate trade and commerce while also proving a contractual obligation to pay. It
is a particular sort of "contract" for the unconditional payment of money that can be
transferred by negotiation.

2. Negotiable means that it permits the documentary transfer of property or ownership, as

well as the contractual responsibility to pay, from one person to another.

3. Characteristics of negotiability:

(i) the instrument along with the rights that it contains may be transferred by delivery and / or
indorsement

(ii) the person to whom it is negotiated

(iii) the transferee who takes it in good faith for value without actual notice of any defect
obtains a good title to it despite any defect in title of the transferor.

5.2 Bills of Exchange

1. S3(1) BEA 1949 said that a bill of exchange is an unconditional order in writing addressed
by one person to another , signed by the person giving it, requiring the person to whom it is
addressed to pay on demand or at a fixed or determinable future time a sum certain in money
or to the order of a specified person or bearer.

• A Bill of Exchange makes it easier to give a buyer trade credit.

• A Bill of Exchange is a legal document that acknowledges the existence of a debt.

• It may allow the seller to obtain finance.

• In the event of non-payment, it can enable quick access to judicial processes.

2. Drawer is a person who draws the bill i.e issues

Drawee is a person on whom the bill is drawn eg. bank

Payee is the person to whom the bill is made payable

Indorser is the one who signs on the reverse of the bill.

Indorsee is the one to whom the indorsement is addressed in the case of a special
indorsement.

Acceptor is when the Drawee accepts the bill . The Drawee is under no obligation to accept.
Once the bill is drawn, it is sent to the Drawee for acceptance who would write “accepted”
across the face of the bill, sign and date it and return it to the Drawer. The acceptor promises
at that point to pay the bill in accordance with its terms.

If the Drawee refuses to accept, the bill is said to be dishonoured. If it is a demand bill,
payment must be immediate. If it is a sight bill, it is payable at sight or within a specified
number of days. Sight means acceptance.

The drawer then would deposit the accepted bill just as he would a cheque At any time prior
to negotiation, the drawer may transfer the bill by indorsement. This is the act of signing the
bill and delivering it to the new holder

Holder the person in possession of a bill

Holder for value one who has paid for the bill (other than receiving it as a gift)

Holder in due course one who receives an instrument that is

• complete and regular on its face

• before the bill is overdue

• without any knowledge that the bill had previously been dishonoured

• took the bill in good faith and for value, and

• had no notice of any defect in the title of the person who negotiated it
3. Characteristics of a BILL OF EXCHANGE

There are 7 elements on the statutory definition of BEA 1949

i. Unconditional
- S3(3) said that an unqualified order to pay out of a particular fund or statement
or order to pay is unconditional with exception
- Palmer v Pratt said about the order to pay 30 days after arrival of ship
Calcutta.
- Bavins v London and South Western Bank said that the requirement to sign a
particular form of receipt was conditional and could invalidate a cheque.
- In Co-operative Exportverening ‘Vecofa’ UA v Maha Syndicate, the
defendant were acceptors of 3 bills amounting up to RM 69,750.28. the
defendants said that the documents were not bills of exchange because it was
conditional “ at 60 days after sight D/A ( documents released against
acceptance)on arrival of steamer pay”. The court held that the documents were
to be released upon Acceptance, not on the arrival of the vessel, hence they
were not conditional.
ii. In writing
- S3 of Interpretation Act said that writing includes printing, lithography,
photography and any other mode of representing or reproducing words in
visible form. A bill may also be drawn in any language
- In Arab Bank Ltd v Ross, the bill was written in Arabic.
iii. By one person to another
- from Drawer to Drawee.s. s. 3(1) where a bank draws on itself it cannot be a
bill of exchange but under s5(2) holder has an option to treat it either as a bill
of exchange or as a promissory note.
- Persons include ‘natural persons’ as well as ‘legal persons’ eg. Company
iv. Signed
- S23 said that no person is liable as a drawer, indorser or acceptor of a bill
unless it is signed.
v. To pay on demand or a fixed or determinable future time
- s.10(1) Payable on demand where:- a) expressed to be payable on demand /
sight / presentation b) no time for payment is expressed.
 - s.11(1) payable at a determinable future time where – a) at a fixed period after
date or sight b) on or at a fixed period after occurrence of a specified
event ,certain to happen though the time of happening may be uncertain.
- s.11(2) an instrument expressed to be payable on a contingency is not a bill
and the happening of the event will not cure it.
vi. a sum certain in money
- s. 9(1) said that although it may include interest and be paid in installments,
the amount must be certain and fixed.
vii. to or to Order of a specified person or bearer
- s7(1) mentioned that payable to Bearer OR not to Bearer. A Payee must be
named whether payable jointly or separately to two or more people; may also
be payable to the holder of an office for the time being.
- S8(2) said that Bearer Bill is payable to bearer OR where only or last
indorsement is an indorsement in blank
- S8(3) said that the indorsement is a signature on the back.
- A Blank indoresement:- s.34(1) is simply the signature of the indorser
without any instructions or restrictions. Effect is to make it a bearer instrument
i.e. payable to anyone in possession of it even a thief. A thief could also
transfer it to another party P2 who would get good title if he takes for value
without any notice of defect of title i.e. Holder for value in good faith who
could enforce it against the original Drawer or any previous indorser.
- A blank indorsement can also be transformed to a special indorsement by the
subsequent indorsee making it payable to a specific person. Sometimes a Bill
may be made payable to a non- existent person, in such event though the
Payee is specified it becomes a ‘bearer bill’

Clutton v Attenborough

- Mr. Piper, a clerk at Clutton and Co., deceived his boss into writing checks to
a man named "George Brett," who was reportedly a trade creditor. Piper
collected the checks, signed them as Brett, and delivered them to
Attenborough, pawnbrokers who thought he was ‘Brett' and needed to redeem
things. Clutton and Co's bank issued checks. Clutton and Co sued the
 pawnbrokers after Piper was discovered. The court held that Cheque made
payable to fictitious or nonexistent person still considered payable to bearer
although drawer believed it was a real person.

Restrictive indorsement

- to limit what a transferee can do with the bill. An instrument expressed to be

payable on a contingency is not a bill and the happening of the event does not
cure the defect

Undated Bill – s.12

- Any holder may enter the genuine date of issue or acceptance if a Bill
expressed to be payable at a defined period after sight is undated or a specified
term after date of issue is undated. The Bill will not be invalidated if a Holder
inserts an incorrect date in good faith.
- S. 51 said that even where a wrong date is inserted in bad faith if it comes
into the hands of a holder in due course it shall not be invalidated but will
operate to pay on the date inserted as if it had been the true date.

Bills may be inland or foreign bills. The difference is that

- S51
- A Foreign Bill upon dishonor for non- acceptance or non- payment must be
noted and protested i.e. it must be given to a notary Public to be presented
again and if dishonoured a 2 nd . Time it is ‘noted’ by the Notary Public and
protested. Further foreign Bills are drawn in sets of 2 or 3 numbered parts.
Each part is identical and cross refers to the others.
- Inland bill – protesting is optional and is drawn solely. Upon dishonored
banks have to give notice of dishonor to prior parties

5. 3 COLLECTION OF BILLS

The holder of a bill of exchange has certain duties

(i) to present the bill for acceptance and payment

(ii) if the bill is dishonoured by non- acceptance or non- payment to notify prior
parties and where necessary have the Bill noted & protested ( foreign bill).
5.4 ACCEPTANCE OF BILLS

1. Acceptance. The drawee's assent to the drawer's order is indicated by the drawee's
acceptance of a bill:

S17(1) said that an acceptance is invalid unless it complies with the following conditions

a) The drawee must write it on the bill and sign it. The drawee's signature is adequate
without any additional information.
b) it must not express that the drawee will perform his promise by other means than the
payment of money under s17(2)

2. Presentment for Acceptance

S39(1),(2) and (3) is very necessary where:

(i) the bill is payable after sight as this is required to determine the bill's maturity date
(ii) the bill specifically indicates that it must be submitted for acceptance
(iii) the bill is drawn payable somewhere other than the Drawee's residence or place of
business.

3. A Bill is complete when it is presented before a Drawee for acceptance. However

s. 18(1) a bill may also be accepted

(i) before it has been signed by the Drawer OR

(ii) while otherwise incomplete OR

(iv) when it is overdue OR

(v) after it has been dishonoured after a previous refusal to accept OR
(vi) by non- payment

5.5.1 Parties to a bill

A party means a person who is liable on the bill i.e. the drawer, acceptor and indorsers. The
payee (before he indorses the bill) has rights under it and can also be described as a party

2. Order of liability.

a) Before acceptance the drawer is the principal debtor and primarily liable.

b) After acceptance the drawee takes over primary liability.

c) After indorsement the indorser is liable as a surety for the value of the bill.

The holder can therefore enforce the bill against the drawer, the acceptor (primarily)
and any indorsers. He can sue any one or he can sue any combination of them, and each
is liable for the full value of the bill

3. The Drawer’s liability. He engages that

a) on due presentment it will be paid according to its tenor

b) if dishonoured, he will compensate the holder or any indorser who has suffered loss
thereby

4. The Drawee / Acceptor’s liability

S53 said that the person who will receive the order. He is not liable for the bill unless and
until he accepts it, at which point he becomes the principal liable (and is then called the
acceptor). He promises to pay the bill when it is presented for payment according to its tenor.
Indorsers are persons who indorse an order bill in order to transfer it (including the payee).

They engage that on due presentment the bill will be accepted and paid according to its tenor
and that if it is dishonoured they will compensate the holder or any indorser who is compelled
to pay it provided necessary proceedings for dishonour are taken.

The Acceptor is precluded from denying to a holder in due course

(i) The existence of the Drawer, the genuiness of his signature and his capacity and
authority to draw the Bill
(ii) Where bill is payable to Drawer’s order then capacity of the Drawer to indorse but not
the validity or genuineness of his indorsement,
(iii) Where bill is payable to the order of a Third Person where the existence of the Payee,
and his then capacity to indorse but not the validity of his indorsement.

5. Accommodation Party.

This is a person who signed a bill as a drawer, acceptor, or indorser without receiving
anything in return. On the bill, an accommodation party is liable for value to any holder, but
not to the person who he has accommodated.

6. Capacitv of the parties – minors

S22 said that the capacity to incur liability as a party to a bill is co - extensive with capacity
to contract. If a bill is drawn or indorsed by a minor then the drawing or indorsement entitles
the holder to receive payment of the bill and to enforce it against any other party (s.22(2)
Bills of Exchange Act 1882) but not against the minor (even if the bill was given in return for
necessaries)

7. Signatures

No person is liable as drawer, indorser, or acceptor of a bill who has not signed it as such
provided that

a) A person who signs a bill under a trade or assumed name is liable on it as if he had signed
it in his own name

b) A person who signs a bill under a trade or assumed name is liable on it as if he had signed
it in his own name of all persons in such firm who are accountable as partners

c) A procuration signature serves as notification that the agent has only limited authority to
sign, and the principal is only bound by such a signature if the agent was acting within the
true boundaries of his authority when he signed it in s25 . If the agent does not operate within
the scope of his authority, the principal may either ratify the signing or sue the agent for
damages for breach of guarantee of authority.

Forged or unauthorised signature.

s.24 a forged or unauthorised signature does not convey title in a bill. It is totally inoperative.
However, in accordance with the principle that a holder in due course must be able to take a
bill at its face value, such a holder may recover the value of the bill from persons who
become parties to it after a forged or unauthorised signature was put on it but not from a
person whose signature was forged or who signed it before a forged or unauthorised signature
was put on it. Material alteration.

s.64(1) examples of alterations that constitute material alterations to a bill include: the date,
the sum payable, the place of payment, etc. A material alteration to a bill discharges any party
who did not make or assent to it but it will bind subsequent indorsers.

* However current banking practice in Malaysia is that NO alterations are allowed. A bank is
entitled to dishonour a bill that has been altered
5.6 Acceptance

1. General and Qualified acceptance.

s.19(1) a general acceptance assents without qualification ( conditions) to the order of the
Drawer

s.19(3) drawee or his agent, may qualify the acceptance in a number of ways :-

a) conditional i.e. makes payment by the acceptor dependent on the fulfilment of a condition
therein stated;

b) partial: acceptance to pay part only of the amount the bill is drawn for;

c) local said an acceptance to pay only at a particular specified place,

d) alternate dating by specifying a time for payment different from that expressed in the bill.
s. 44(1) - holder refuses to take a qualified acceptance -the Bill – treated as dishonoured by
non- acceptance

s. 44(2) where a qualified acceptance is taken where the Drawer or indorser has not expressly
or impliedly authorized the holder to do so and does not subsequently assent thereto such
Drawer or indorser is discharged from his liability on the bill. However this does not
apply to a partial acceptance where due notice of it has been given.

Where a foreign bill has been accepted in part, it must be protested as to the balance.

Where a Drawer or Indorser of a bill receives notice of qualified acceptance of the bill
and does not within a reasonable time express his dissent / objection to the holder, he is
deemed to have assented to it.