NEGOTIABLE INSTRUMENTS

Negotiable instruments were first

recognized not by Parliament or by
Courts but by businessmen. Negotiable
instruments originated as customs of
trade of business people.
The Law relating to Negotiable
Instruments is governed by the Bills of
Exchange Ordinance No.25 of 1927.
The Sri Lanka Bills of Exchange Ordinance
No.25 of 1927.

The Sri Lankan Ordinance is based on the English

Bills of Exchange Act of 1882. Thus it could be said
that the Sri Lankan Statute is a reproduction of the
English Statute.
In Sri Lanka , in 1956 and 1961, there were two
amendments to the Bills of Exchange Ordinance.
The Following Instruments have been recognized
as Negotiable Instruments by Statute or by
business usage or customs.
1.Bills of Exchange 5. Dividend Warrants
2.Cheques 6. Bearer Debentures
3. Promissory Notes 7. Treasury Bills
4. Bank Drafts
 Cheque as a Negotiable Instrument

The cheque is the most popular and commonest

negotiable instrument known to the general public
and bankers. It is the document that banks have to
deal with every day of banking business. It is also
the Negotiable Instrument that the average
customer of a Bank is most conversant with, since
many adults maintain cheque accounts with a
bank.
Sec. 73 of the Sri Lankan Bills of Exchange
Ordinance defines a cheque “as a bill of exchange
drawn on a banker payable on demand”
On the other hand, while all cheques are Bills of
Exchange, All Bills of Exchange are not cheques.
Dual aspects of a cheque

In practice, a cheque plays a dual role. On the one

hand, it is subject to the Bills of Exchange
Ordinance and is considered as a negotiable
instrument.
On the other hand, from a Banker’s stand point, it
is a mandate (the cheque) issued by the Bank’s
customer requiring the Bank to pay a stated
amount to a stated party on or after the date of the
cheque.
 Parties to a Negotiable Instrument.

1. Drawer :- He is the person who draws the Bill or

making the order to pay money on his behalf.
2. Drawee :- The person to whom the instrument is
addressed.
3. Payee :- To whom the money is to be paid.

If the Payee of a Bill drawn to Order may wish to

transfer it to some other person and that is
done by an ‘ENDORSEMENT
Sec 02 of the Ordinance states ‘Endorsement’
means an endorsement completed by delivery. So,
merely signing a Bill of Exchange on it’s back will
not constitute legal endorsement. There must be a
delivery of the Bill after endorsing it.
Endorser ; Endorser is the person who signs
his name on the back of an order bill when he
transfers it to another person. An Endorser can be
payee or any other holder.
Endorsee : Endorsee is the person whose name
is written on the back of the bill by the Endorser.
Different types of Endorsements
01. Blank Endorsement ;
Sec.34(1)- A blank Endorsement is effected by the
simple signature of the Endorser without writing
the name of the Endorsee. After a blank
endorsement the bill becomes payable to bearer.
02. Special Endorsement- A special Endorsement
specifies the person to whom, or to whose order
the bill is to be payable.
03.Restrictive Endorsement -A restrictive
endorsement is one which prohibits further
negotiation on the bill.
04.Conditional Endorsement- A conditional
endorsement is where a condition is attached to
the signature.
 Rules relating to “crossings” on cheques

Crossing on cheques are part of a drawer’s

mandate to his or her Banker. They must
consequently, be clearly indicated. It has been
aptly said that, just as people are urged by the
railway department to “cross railway crossings
cautiously” so should banks request their
customers to “cross cheques carefully”.
 Effect of crossing a cheque

 The crossing on a cheque is a direction to the

paying bank that the cheque should be paid only
to a another Bank. A Bank can ignore the crossing
and pay a crossed cheque over the counter.
However, if it later turns out that the person paid
was not entitled to receive that payment, the
paying Bank will be liable to the true owner and will
also forfeit the statutory protection of the
Ordinance. This is because payment of a cheque in
contravention of a crossing would be regarded as
negligence by the Bank.
 Duties of a Banker as to payment of crossed
cheques;
 Sec. 79 Ordinance is very important for bankers. It
states that a Banker who pays a crossed cheque
contrary to crossing is liable to the true owner of
the cheque for any loss he has sustained.
However, the Section goes on to give protection to
Banks that pay crossed cheques in the following
cases. It say that the above rule does not apply
where the cheque does not appear to be crossed,
or to have had a crossing which has been
obliterated or altered otherwise than authorized by
the Ordinance, and the Banker has paid in good
faith and without negligence. Sec. 79(2)
 Protection to “paying Bank” and drawer in paying
crossed cheques
 Section 80 of the Ordinance is also important
because of the statutory protection it gives to
paying Banks when they pay crossed cheques. It
says;
Where the Banker on whom a crossed cheque is drawn, in good faith
and without negligence pays it,
(a) If crossed generally, to a Banker, and
(b) If crossed specially, to the Banker to whom it is crossed, or his
agent for collection, being a Banker, the Banker paying the cheque,
and, if the cheque has come into the hands of the payee, the drawer
shall respectively be entitled to the same rights and be placed in the
same position as if payment of the cheque had been made to the
true owner thereof.
 Types of crossings;
Under Sec. 76(1) of the Ordinance, there are
several types of recognized crossings as follows;
 General crossing
Where a cheque bears across its face and addition of –
(a) the words “and Company” or any abbreviation thereof between
two parallel transverse lines, either with or without the words “not
negotiable” or
(b) two parallel lines simply, either with or without the words “not
negotiable” –that addition constitutes a crossing and the cheque is
generally crossed. Section 76(1).
➢ Special Crossing
Where a cheque bears across its face an addition of the name of a
Banker with or without the words, “not negotiable”, that addition
constitutes a crossing and the cheque is crossed specially and to that
Banker. Sec.76(2)
 “Not Negotiable” crossing;
Where a person takes a crossed cheque which
bears on it the words “not negotiable”, he 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 (Sec. 81).
These words do not restrict transferability, but
transfers only the title that the transferor has. For
instance, a person who has taken such a cheque
from a thief cannot retain it against the true owner.
 “Account payee” crossing
This crossing operates as notice to the Banker that
only the account of the payee is to be credited.
However, the Ordinance does not refer to this type
of crossing.
 To or to the order of a specified person or to
bearer
The bill most be payable to
I) specified person
E.g.: ‘Pay X’ or
II) the order of a specified person
E.g.: ‘Pay X or Order’
III) bearer
E.g.: ‘Pay bearer’ or ‘Pay X or bearer’
Of these (I) & (II) are ‘order bill’ and (III) is a bearer
bill
 Consideration
Consideration is a legal concept of English law.
Since English law applies to the Law relating to
banking and cheques in Sri Lanka, the English law
requirement of ‘consideration’ applies to bills of
exchange.
Sec.27(1) of the Bills of Exchange Ordinance
requires ‘valuable consideration’ for bills of
exchange.
In this context, ‘consideration’ means that a
person issuing a bills of exchange must receive
something in return for issuing such bill of
exchange or cheque
Consideration need not always be of monitory value
but it must be something which can be estimated
financial terms.
The decision of the Sri Lankan Supreme Court in
Latchime Vs. Jamison (1913) 16 NLR at Page 286
In that case plaintiff was the defendant’s brother’s
mistress and had two children by him. When the
defendant’s brother was leaving Sri Lanka, the
defendant as a favour, gave a promissory note to the
plaintiff to maintain the children. The defendant did
not receive any consideration from his brother for
making this arrangement and gave the note of his own
accord and not at his brother’s request.
The question before the Court was whether the Plaintiff
could sue the defendant on the Promissory Note.
Held

The Supreme Court held that since this was an

action based on a promissory note, the English Law
applied and under English law, consideration was a
requirement.
Thus, that the plaintiff could not sue on the note
because it was not given for valuable consideration
Different types of Holders of Bills of Exchange

A ‘holder’ of a bill of exchange is the Payee or

endorsee of a bill who is in possession of it or the
bearer thereof. Any person in possession of a
bearer bill is a holder of it, but to be a holder of an
order bill, the person in possession must also
either be,
i) the original payee or
ii) a person to whom the bill has been
endorsed(that is, an endorsee)
 Holder in due Course

A Holder in due course is a holder who has

received a bill of exchange, in good faith by giving
valuable consideration, from a person who does
not have any title to it or who has a defective title.
He takes the bill free from all defects. He can
therefore, acquire a better title to the bill than that
was held by the transferor.
 Sec 29(1) of the Ordinance states;
“A holder in due course is a holder who has taken a
bill, complete and regular on the face of it, under
the following conditions, namely ;
(a) That he became the holder of it before it was
overdue, and without notice that it had been
previously dishonoured, if such was the fact
(b) That he took the bill in good faith and for value
and that at the time the bill was negotiated to him
he had no notice of any defect in the title of the
person who negotiated it”
 Stipulated requirements to treat as a Holder in Due
Course
 The bill should be complete and regular on the
face of it.
 The holder must have taken the bill before it was
overdue.
 If it had been previously dishonoured, the holder
must have no notice of such previous dishonour.
 The holder must have taken in good faith.
 Holder himself must have given value for the bill
 At the time the Bill was negotiated to him, the
holder must have no notice of any defect of the
title of the person who negotiated it to him.
 Rights of holder in due course.

 He can sue in his own name against any prior party

to the bill.
 He can transfer his right to anybody.
 He takes the Bill from equities. He can defeat any
defences arising from defects of title or from the
dealing between prior parties to the bill. He can
therefore, acquire a better title to the bill than that
held by his transferor.
 Case Law
In the Case of Nagoor Pitchai Vs. Kanapathi Pillai
(1963) 66 NLR 207, the Supreme Court held that
under Sec. 81 of the Bills of Exchange Ordinance a
person who takes a crossed cheque bearing the
words “not negotiable” does not take and is not
capable of giving a better title to the cheque than
that which the person from whom he hold it had.
According to the Supreme Court what is meant by
a better title to the cheque is that the holder of the
cheque is not entitled to any better rights upon the
cheque than what the who endorsed the cheque to
him had.
 In Nagoor Pitchai’s Case the First defendant who
was a dealer in produce drew a cheque for Rs.
500/- in favour of the Second defendant and gave
it to him as an advance on condition that the
Second defendant should deliver certain goods to
him. The cheque was crossed “not negotiable”. The
Second defendant failed to deliver the goods and
the first defendant wrote to his Bank stopping
payment on the cheque. But unknown to the first
defendant and before he had stop payment, the
Second defendant endorsed the cheque and gave it
to the plaintiff who paid him consideration(Rs.
500/-) But when the Plaintiff presented the cheque
at the Bank for payment, it was dishonoured as the
First defendant(the drawer) had stopped payment.
 The plaintiff then sued both the first defendant (as
drawer) and the Second defendant (as endorser) for
the value of the cheque (Rs. 500/-). The Supreme
Court held that although the Second defendant was
liable, the first defendant was not liable on the
cheque. The reasoning of the Supreme Court was
as follows;
“the plaintiff is not entitled to any better title upon this cheque than
what the second defendant who endorsed it him to had. The plaintiff
in this case will not be in any better position than the second
defendant if he was suing on this cheque, and as the second
defendant had not supplied the goods on account of which he had
obtained this cheque, an action by him on this cheque would have
definitely failed for want of consideration. That same defence is open
to the first defendant as against the plaintiff. The plaintiff’s action
against the first defendant must therefore fail”.
See also Mohamed Lebbe Vs. Ibrahim (1930) 8
Times law report Page 27