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Negotiable Instruments

Take, for example, Simon has done some online writing for Peter and upon the day of collecting his payment, he is handed down a paper/document to present before the Finance Department of the organization at a later date in order to get his money, of which he agrees.

So, will that document suffice as an authority towards getting the money?

Secondly, what is that document, or rather what do we refer to it as?

Lastly, what should happen in the event that the document is dishonored?

1.0 Analysis

Negotiable Instruments are documents that contain orders or undertakings that guarantee payment of monies from the payor to the payee.

These Instruments are set in a manner that can either be cashed in on notice or monies to be paid at a later stage. Their main characteristic comes from the name, being that they can be transferred from one person to another hence a new owner will have full legal rights. As such they are different from non-negotiable instruments.

Other characteristics include;

  1. Title passes by delivery – This though must be in compliance with section 3 of the Law of Contract Act
  2. No notice is necessary to the debtor This is different from other contracts as mandated by section 3 of the law of contract act or the rule in Dearle v. Hall(1823) 3 Russ 1.
  3. The holder can sue in his own name
  4. A bona fide transferee for value is free from the encumbrances that may be caused by the transferor’s title.

Furthermore, these documents contain key features such as; the amount for consideration, interest rates if any, the name of the payee, and a confirmation symbol

Examples of Negotiable Instruments include;

A. Certificates of Deposit

B. Cheques; Personal and Travelers

C. Money Orders

D. Promissory Notes


A. Certificate of Deposit.

This is a document offered by financial institutions; banks, microfinance, etc. that allows a person to deposit some amount of money for a period of time with ascertainment of getting back the money after the stipulated period has lapsed and with an increment accrued from Interests.

Often, a penalty is charged in the event of early withdrawal as such it is not encouraged.

The Interest rates vary from institution to institution but are an attractive investment especially if they boast of security and stable growth.


B. Cheques

i). Personal Cheques

In understanding what a personal cheque is, we first need to know of the parties to a personal cheque.

These are.;

  1. The Drawer – This is the person/company/organization, whose account is being drawn from in order to effect the payment.
  2. The Payee – This is the person/company/organization, who is expected to receive the consideration from the cheque.
  3. The Drawee – This is the person/financial institution that is holding the amount for the Drawer and is expected to effect the cheque.

Therefore, in defining it, a cheque can be said to be a document signed by a Drawer to the Drawee for the benefit of the Payee.

Nevertheless, because of their slow processing nature, they are not a popular means of exchange of money

In the event of alterations, the burden of proof is on the plaintiff suing. See Fakri Stores Ltd v. London Confirmers Ltd (1965) E.A. 159.


ii). Travelers Cheques

This is a form of payment intended to be used by people going out on vacation. The documents are issued by banks/financial institutions and already have a prepaid amount. They are to enable travelers to move easily without the worry of carrying around large sums of money with them.

Having such a cheque, one is to present it to an authorized institution of the foreign currency and upon proof of authenticity, the money shall be disbursed immediately.


C. Money Orders

These are documents issued to persons by financial Institutions/ Governments and act just like cheques in that, upon submission to the relevant authority, you will receive the said sum. The difference between this and cheques is that there is usually a cap on the maximum amount of money orders.

They don’t require so much information; simply the name of the recipient and address, and are a popular means of transferring money between people in different countries.


D. Promissory Notes

These are documents that are exchanged between parties, usually the payor and the payee, acting as an assurance of monies to be paid later. Just like the other promissory notes, relevant personal information has to be given with a signature/stamp affixed for formalities.

These notes can be used to obtain loans from financial institutions, as they are often found to be binding and proper guarantees.


2.0 Liability

  1. Before acceptance the drawer is the principal debtor and primarily liable.
  2. After acceptance, the drawee takes over primary liability and  the drawer merely becomes a surerity.
  3. After endorsement, the endorser becomes liable as a surety for the value of the bill.

In the event of breach, a holder can sue any of them  or he can sue any combination of them, and each is liable for the full value of the bill.

It is of note that, the doctrine of estoppel applies and so the principle of good faith should subsist.


3.0 Statutory Underpinnings to Negotiable Instruments.

Law of Contract Act Cap 23,

Under section 3, a suit can only be brought forth, not upon any special promise to answer for the debt but rather, if the same is in writing and signed by the party.

The effect of this section is that, for negotiable instruments to be considered as forming a binding agreement, basic formalities; in writing and signed/stamped, have to be taken into account. Thereby in the event of a suit, section 3 will apply as such.

Generally, negotiable instruments fall under the ambits of the Bills of Exchange Act cap 27. Cheques not only fall under the same act but also under the Cheques Act cap 35, with the former taking precedence over the latter.


Bills of Exchange Act cap 27

Section 3, defines a bill of exchange as 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 to or to the order of a specified person or to bearer.

A similarity in the definition with the negotiable instruments. As such explaining the underpinning authority of the act, in respect.

Section 5(2), states that in the event of the drawer and drawee being the same legal person ; a branch office and a head office, then the order is not strictly a bill of exchange, but a promissory note in favor of the payee.

Section 55, holds that, the drawer of a bill ascertains that on due presentment of an instrument it will be paid.

Section 76 to 83, lays out the underpinnings of Cheques.

Section 84, lays out the underpinnings of Promissory notes


4.0 Recommendations

  1. The Bills of Exchange act should be amended in a bid to have more sections on various types of negotiable instruments that are not catered for so as to minimize reliance on case law.
  2. There should be an open-minded view over the use of such instruments as they are binding.


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