NEGOTIABLE

INSTRUMENTS
Mdm Siti Fatimatuz Zahra Hussin
DPB 3023

Course Outline

Part I : Determine Negotiable Instruments

Definition

Features

Types

Part II: Bills of Exchange

Definition

Characteristics

Negotiations

Accepting BOE

Endorsements

Delivery

Part III: Cheques

Definition

Types

Crossing of cheques

Protections to banks (Collecting & Paying banks)

Alterations on cheques & its effects

Termination on bankers authority to pay

Part I : Determine Negotiable Instruments

Definition
Features
Types

Definition
A negotiable instrument is a document containing an undertaking to pay a definite sum of
money which may be transferred by delivery, or by endorsement and delivery.

Features
-

The title to it passes on delivery or delivery plus endorsement

The holder who is in possession of it can sue in his own name

Notice of assignment need not be given to the debtor

- The transferor of a negotiable instrument can give a better title

than he himself has.

Types of Negotiable instruments

1) anorder to pay (encompasses drafts and checks)

a) Draft (or a bill of exchange):INVOLVES 3 PARTIES:An
unconditional writtenorderto pay by which the party creating the
draft (thedrawer)orders another party (thedrawee),typically a bank,
to pay money to a third party (thepayee)--e.g., a check.(firsttype
of negotiable instrument)
b) Cheques: writer of the check is the drawer, the bank on which the
check is written is the drawee, and the person to whom it is payable is
the payee. (second type of negotiable instrument)

Types of Negotiable instruments

1) anorder to pay (encompasses drafts and checks)
a) Draft (or a bill of exchange):INVOLVES 3 PARTIES:An unconditional
writtenorderto pay by which the party creating the draft
(thedrawer)orders another party (thedrawee),typically a bank, to pay
money to a third party (thepayee)--e.g., a check.(firsttype of negotiable
instrument)
b) Cheques: writer of the check is the drawer, the bank on which the check is
written is the drawee, and the person to whom it is payable is the payee.
(second type of negotiable instrument)

2) promises to pay
(promissory notes and CDs).
a) Promissory Note: A written promise made by one person
(themaker)to pay a fixed sum of money to another person (thepayee)on
demandorat a specifiedfuturetime.(thirdtype of negotiable instrument)

b) Certificate of Deposit: Anote by which a bank or similar financial

institution acknowledges the receipt of money from a partyandpromises to
repay the money, plus interest, to the party or the partys designee, on a
certain date.Known for high interest rates (J). (fourthtype of negotiable
instrument)

Part II: Bills of Exchange

Definition
Characteristics
Negotiations
Accepting BOE
Endorsements
Delivery

Definition

Bill of exchange enables a seller of goods or services to receive his money as soon
as possible while enabling his buyer to defer payment for a period.

Section 3 (1):
a)

an unconditional order in writing

b)

addressed by one person to another

c)

signed by the person giving it

d)

requiring the person t whom it is addressed to:

- at a fixed or determinable future time

e)

a certain sum of in money

f)

to the order of a specified person or to bearer

- pay on demand or

Characteristics
1)

There are three parties to a bill

2)

The bill must be an order to pay

3)

The bill must be in writings to another

4)

The bill must be addressed by one person or body of person

5)

The bill must be signed

6)

The bill must order payment of a sum certain in money and not in goods or services

7)

The bill must be payable on demand or at a fixed or determinable future time

8)

The bill must be payable to or to the order of a specific person or to bearer.

Negotiations of a Bill of Exchange

Definition:

Transferof abill of exchangefrom itscurrentholderto another who

becomes the new holder.

thetransferofacheck,promissorynote,billofexchangeorother
negotiableinstrumenttoanotherformoney,goods,servicesorotherb
enefit

Accepting BOE
Definition and requisites of acceptance
Section 17(1)
The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer.
(2) An acceptance is invalid unless it complies with the following conditions, namely:
a)

it must be written on the bill and be signed by the drawee. The mere signature of the drawee
without additional words is sufficient

b)

it must not express that the drawee will perform his promise by any other means than the
payment of money.

Time for acceptance

Section 18 : A bill may be accepted
c)

before it has been signed by the drawer, or while otherwise incomplete

d)

when it is overdue, or after it has been dishonoured by a previous refusal to accept, or by nonpayment.

Endorsements
An endorsement is a signature on the back of thebill of exchangeby
which the person to whom the note is payable transfers it by thus making
the note payable to the bearer or to a specific person.
Delivery

Section 21:

Every contract on a bill of exchange is considered as incomplete and

revocable, until the delivery of the instrument to its intended parties.

Part III: Cheques

Definition
Types
Crossing of cheques
Protections to banks (Collecting & Paying banks)
Alterations on cheques & its effects
Termination on bankers authority to pay

Definition
Section 73: Bill of Exchange Act 1949
Cheque is a bill of exchange drawn on a banker and payable on
demand.
Characteristics of cheques
1)

it is an unconditional order in writing

2)

it is signed by the drawer

3)

it is drawn on a banker (drawee)

4)

it orders the banker to pay a certain sum of money on demand.

5)

it is drawn in favor of a specified person (payee) or to his order or in favor of a bearer

Types
1) Undated Cheques
Section 3 (4) (a)
A bill is not invalid by reason that it is not dated although a banker need not honour it.
Section 12 and 20 allow a holder of an undated cheque to fill in the true date of its issue
but must do so within a reasonable time.
2) Overdue or stale cheques
A cheque is overdue if it has been in circulation for an unreasonable length of time [section
36 (3)]. The onus of proving that a cheque is overdue is on the person trying to avoid
liability on it.

3) Ante dated and post-dated cheques

Section 13 (2):
A cheque which is dated may be ante dated, post dated or Sunday dated.
Ante-dated cheque
This type of cheque bears a date earlier than the date of actual issue. It is
back-dated
Post-dated cheque
It is post-dated if it bears a date in the future, that is, a date later than the
date of issue.

4) Crossed cheque and open cheque

Crossed cheque
Difficult for an unauthorized person to obtain payment across the
counter.
It can only be paid through a bank, and therefore the person
presenting the cheque would have a bank account.
Section 78: A crossing is a material part of the cheque and it
cannot be altered by anyone in any way except as authorized under
section 77.

Crossing is an instruction to a bank as the mode of payment, the bank will be liable for
payment made in contravention of the crossing [section 79 (2)]
It is to minimize fraud by conveying instructions that payment should be made
only to, or through a bank or other instructions as to the manner of payment.
Open cheque
It can be exchanged for cash across the counter even before the loss is discovered
by the owner.

Crossing of cheques
A cheque is a negotiable instrument. During the process of circulation, a cheque may be
lost, stolen or the signature of payee may be done by some other person for endorsing it.
Under these circumstances the cheque may go into wrong hands.
Crossing is a popular device for protecting the drawer and payee of a cheque. Both bearer
and order cheques can be crossed. Crossing prevents fraud and wrong payments. Crossing
of a cheque means "Drawing Two Parallel Lines" across the face of the cheque. Thus,
crossing is necessary in order to have safety. Crossed cheques must de presented through
the bank only because they are not paid at the counter.
Types:

General crossing

Special crossing

Not negotiable crossing

Account payee only crossing

1) General crossing
generally, cheques are crossed when
1)There are two transverse parallel lines, marked across its face or
2) The cheque bears an abbreviation "& Co."between the two parallel lines or
3) The cheque bears the words "Not Negotiable" between the two parallel lines or
4) the cheque bears the words "A/c. Payee" between the two parallel lines.
A crossed cheque can be madebearer chequeby cancelling the crossing and writing that the crossing is cancelled and
affixing the full signature of drawer.

2) Special crossing

When a particular bank's name is written in between the two parallel lines the
cheque is said to be specially crossed.

Not negotiable crossing

The words 'not negotiable' can be added to general-crossing as well as special-crossing and a
crossing with these words is known asnot negotiablecrossing.
The effect of such a crossing is that it removes the most important characteristic of a
negotiable instrument
the transferee of such a crossed cheque cannot get a better title than that of the transferor
(cannot become a holder in due course) and cannot convey a better title to his own transferee,
but the instrument remains transferable.

Account payee only crossing

this crossing can be made in both general and special crossing by adding the words 'account payee' or 'A/C payee only'.
In this type of crossing, the collecting banker is supposed to credit the amount of the cheque to the account of the payee
the name mentioned only.
The cheque remains transferable but the collecting banker has more liability if he credits the cheque proceeds to someone
other than the payee and the endorsement in favour of the last payee is proved forged.
Thus, the collecting banker must first investigate the title of the last endorsee from the original payee named in the
cheque, before collecting

Protections to banks (Collecting & Paying banks)

Collecting Bankers Protection:

A Collecting Banker is one who undertakes to collect various types of instruments

representing money in favour of his customer or his own behalf from the drawers
of these instruments.

Section 85 : the collecting banker is not liable to the true owner of a cheque or a
bankers draft if his title to the instrument proves defective provided the cheque
or draft was one crossed generally or specially to himself and collected for a
customer is good faith and without negligence.

conditions:
i) The cheque he collected is a crossed cheque.
ii) He collected such crossed cheque only for his customer as an agent & not as a holder for
value.
iii) He collected such crossed cheque in good faith and without negligence.

Paying Bankers Protection:

Protection of bankers paying unindorsed or irregularly indorsed cheques, etc.

Section 82. (1) Where a banker in good faith and in the ordinary course of business pays a
cheque drawn on him which is not indorsed or is irregularly indorsed, he does not, in doing
so, incur any liability by reason only of the absence of, or irregularity in, indorsement, and
he is deemed to have paid it in due course.

(2) Where a banker in good faith and in the ordinary course of business pays any such
instrument as the following, namely:

a)

a document issued by a customer of his which, though not a bill of exchange, is intended
to enable a person to obtain payment from him of the sum mentioned in the document;

b)

a draft payable on demand drawn by him upon himself, whether payable at the head
office or some other office of his bank, he does not, in doing so, incur any liability by
reason only of the absence of, or irregularity in, indorsement, and the payment
discharges the instrument.

Alterations on a cheque & its effects

Section 64 (1):
If a bill of exchange or a cheque has been materially altered without the drawers
authority, he drawer is discharged from liability and the drawee bank cannot debit
the drawers account if he had paid such a bill or cheque
Section 64 (2):
A cheque is materially altered if there are changes to date, amount, name of
payee or any crossing or any change which alter the business effect of the cheque.

Customers duty of care against fraudulent alterations

-

part of the implied terms of the contract between a customer and a banker.

A customer must exercise due care in drawing cheques so as not to facilitate fraud. The
banker is protected if there is a fraud due to the customers negligence.
It protects paying bankers from loss caused by the drawers carelessness, provided
that alteration is non-apparent and a natural and direct result of the negligence of the
drawer in drawing the cheque.

London Joint Stock Bank v Macmillan and Arthur [1918] AC 777.

General rule:

Termination on bankers authority to

pay

A banker is under a duty to honour his customers cheques up to the

amount of his credit balance and any agreed overdraft. If the banker
wrongly refuses to honour a cheque, the customer can sue the bank.
When the bank has no authority to pay?

Chartered Bank v Yong Chan [1974] 1 MLJ 157

1)

By countermand of payment, that is where the customer instructs the bank to stop
payment on a cheque drawn [Section 75 (a)]

2)

By notice of the customers death [Section 75 (b)]

3)

By notice of the customer having become insane

4)

By service of a garnishee order or other court order attaching or dealing with the
customers monies in the hands of the banker

5) Where there is a defect in the presenters title, knowledge that:

-

the customer has committed an act of bankruptcy under the Bankruptcy Act
1967

a bankruptcy petition has been presented against the customer

a receiving order has been made against the customer

6) Knowledge that the customer, in drawing the cheque is intending to commit a breach of
trust where the funds affected are trust funds.
7) When the customer assigns the credit balance of his account to another person
8)

When the customer has insufficient funds to cover the amount of the cheque

9) On a receipt of a notice from the customer closing his account