Chapter Five: Law of Negotiable Instruments

The word negotiable means ‘transferable by

delivery,’ and the word instrument means ‘a written
document by which a right is created in favor of
some person.’
Thus, the term “negotiable instrument’ literally
means ‘a written document transferable by delivery.
A negotiable instrument could be formally defined as
“A signed writing that contains an unconditional
promise or order to pay an exact sum of money on
demand or at an exact future time to a specific
person or order, or to bearer.”
 Function

Generally speaking, instruments function in two ways:-

1. as a substitute for money
2. as a credit device
Debtors sometimes use currency, but for convenience and
safety they often use instruments instead.
An instrument is being used as a form of payment when a
debt is paid by a cheque.
Instruments may also represent an extension of credit.
When a buyer gives a seller a promissory note, the terms
of which provided that it is payable within sixty days, the
seller has essentially extended sixty days of credit to the
buyer.
 Types of Negotiable instruments

The types of Negotiable instruments are largely

determined based upon the scope of definition given
to negotiable instruments and specification of the
instruments legally recognized as negotiable in that
country’s law.
Our law recognizes three types of instruments as
negotiable; these are
1. Commercial instruments - Bills of exchange, promissory notes,
cheques and warehouse goods deposit certificates
2. Transferable securities -
3. Document of title to goods
 Requirements

A. Written Form - Negotiable instruments must be in

written form.
Clearly an oral order or promise can create the danger of
fraud or make it difficult to determine liability.
Negotiable instruments must possess the quality of certainty
only formal, written expression can give.
The mode of writing can be handwritten, typed or printed.
(True/False)
B. Signature - it is very important in the law of negotiable
instrument, because it has varying implication for each
party starting from issuance of the instrument to each
successive stages of the negotiation.
 Firstly, signature by the maker or drawer makes the instrument
valid and binding creating duties on the person who initiates it
and immediately creating rights upon delivery to the holder.
 Secondly, it has to be emphasized that the key to liability on a
negotiable instrument is a signature. Every party who signs a
negotiable instrument is either primarily or secondly liable for
payment of that instrument when it comes due.
C. Unconditional promise or order to pay - For an
instrument to be negotiable, it must contain an express order or
promise to pay.
 A promise is simply a pledge to transfer money. For the purpose
of negotiable instruments a promise must be express and
unconditional.
 A mere acknowledgement of debt, which might logically imply
a promise, is not sufficient to constitute valid promise. The
promis must be an affirmative, not acknowledgment.
D. A Fixed Amount of money - The amount of money to be
paid by a negotiable instrument should be fixed and stated
with certainty.
 If the instruments’ value were stated in terms of goods or
services, it would be too difficult to ascertain the market value
of those goods and services at the time the instrument was to
be paid.
E. Payable on Demand or at a definite time - to ascertain
the value of a negotiable instrument it is necessary to know
when the maker, drawee or accepter is required to pay.
It is also necessary to know when the obligations of secondary
parties will arise.
Further it is necessary to know when an instrument is due, in
order to calculate interest (if any) and also to determine when
the period of limitation may apply.
F. Payable to order or Bearer - The very essence of a
negotiable instrument lies in its transferability.
Its payment is not limited to the one whose name is specified but
extends to any other person designated by the first specified
person.
So as To assure proper transfer, the instrument must be “payable
to order or to bearer “at the time it is issued or first comes into
the possession of the holder.