NEGOTIABLE INSTRUMENTS.
These are promissory instruments used to pay transaction present or in
the future.
Example
Bank Notes-cash
Checks-cheques-
Treasury bills
Bond
Debentures
So negotiable instrument is a formal, signed written document that
guarantees payment of a fixed amount of money either on demand or at
specified future date, to a designated person or bearer. It saves as
transferrable financial instrument functioning essentially as a specialized
IOU (I owe you).
CHARACTERISTCS OF NEGOTIABLE INSTRUMENTS
1. Transferability: the ownership of the negotiable instrument can be
transferred from one person to another usually either by delivery (if
payable to bearer) or by endorsement by delivery (if payable to
order). This makes them flexible medium for conducting payment.
2. Unconditional payment: the instrument promises or orders
payment of a fixed sum without additional conditions.
3. Signature: Must be signed by the insurer (maker or drawer) to
validate the instruments.
4. Payee named or bearer: The instrument specifies a payee or is
made payable to bearer.
5. Certainty of sum: The amount to be paid is fixed and certain.
6. Legal title: The holder in due course gains good title to the
instrument free from many defects in prior ownership.
TYPES OF NEGOTIABLE INSTRUMENTS
Order to pay: an order from one party to another to pay a sum.
Example: Checks and Drafts
Promise to pay: a written promise by one party to pay another.
Examples: Promissory notes, Money (cash), certificates of deposit
(CD).
Common examples.
1. Personal cheques
Is a written order from an individual to their bank to pay a specific
amount of money to the person or organization named on the
cheque (checks).
2. Cashiers’ cheques
Is a cheque issued by a bank drawn on the banks own funds and
guaranteed by the bank.
3. Money orders
Is a financial instrument used for making payments similar to a
cheque but prepaid and guaranteed.
4. Promissory note
Is a written promise to pay a specific amount of money to another
party usually with interest (credit instrument).
5. Traveler’s cheques.
Are prepaid cheques that can be used to make purchases or
exchange for cash while travelling.
6. Certificates of deposit.
Is a time deposit offered by banks with fixed interest rate and
maturity (fixed deposit).
7. Drafts
Is a type of a negotiable instrument that is an order from one party
(the drawer) to another party (the drawee) to pay a specific amount
of money to a third party (the payee).
FUNCTIONS AND BENEFITS OF NEGOTIABLE INTSRUMENTS
Facilitates the transfer of value in business and personal
transactions making payment easy and secure.
Provide a marketable instrument that can be traded or used as a
financial collateral.
Simplify payment processes without needing complex paperwork or
formalities in transfers. It doesn’t need a lot of paperwork.
Under certain role like uniform commercial code (UCC) in the USA,
orders in due course are protected against many claims or defenses
giving negotiable instruments special legal status.
RISKS AND DRAWBACKS
Vulnerable to loss or theft with risk of financial loss if the instrument
is lost.
Subject to disowner if the party obligated to pay refuses or fails to
do so. The problem will arise If the owner refuses to pay.
Risk of forgery and fraud because transfer and enforcement depend
on signature verification.
LEGAL FRAMEWORK
Negotiable instruments are gathered by statutory laws such as the bills of
exchange acts in commonwealth countries. The negotiable instruments
acts 1881 in India and article 3 of uniform commercial code (UCC) in the
United States. These laws define the rights of the parties involved and the
requirements for negotiability.
CASES.
BILLY MILIMBO T/A (trade as) DBM construction vs Airtel Malawi
Ltd and Standard bank of Malawi
Bishop Daniel Nkhungwe vs National bank of Malawi (civil course
number 2702 of 2000)
This case involved the securing of the debts, where the property was
charged (used as collateral) and transferred by default.
While primarily a property charge case it references the connection
between debt instruments, bank security and negotiable instruments
facilitating lending.
Dimon Malawi ltd vs NBS (2006 MLR 107)
Provided guidance on liability and procedures relating to the handling and
enforcement of negotiable instruments, such as promissory notes or bills
of exchange in Malawi.
