The Negotiable Instruments Act, 1881 13. "Negotiable instrument".

A "negotiable instrument" means a promissory note, bill of exchange or cheque payable either to order or to bearer. Explanation (i).- A promissory note, bill of exchange or cheque is payable to order which is expressed to be so payable to a particular person, and does not contain words prohibiting transfer or indicating an intention that it shall not be transferable. Explanation (ii).- A promissory note, bill of exchange or cheque is payable to bearer which is expressed to be so payable or on which the only or last endorsements is an endorsement is an endorsement in blank. Explanation (iii) Where a promissory note, bill of exchange or cheque, either originally or by endorsement, is expressed to be payable to the order of a specified person, and not to him or his order, it is nevertheless payable to him or his order at his option.] (2) A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one or two, or one or some of several payees.] 1.Substituted by Act 8 of 1919, sec. 3, for sub-section (1). 2. Ins. by Act 5 of 1914, sec. 2.

Negotiable Instruments Law relating to promissory notes, bills of exchange, cheques and other negotiable instruments is codified in India under the Negotiable Instruments Act, 1881. It defines promissory note, bill of exchange, cheque, foreign instrument and negotiable instrument. As per the provisions of this Act, in India, every person capable of contracting, according to the law to which he is subject, may bind himself and be bound by making, drawing, accepting, endorsing, delivering and negotiating of a promissory note, bill of exchange or cheque and every person capable of binding himself or of being bound, may so bind himself or be bound by a duly authorized agent acting in his name. The act provides for the liability of an agent, legal representative, drawer, drawee, maker and acceptor of a bill, endorser, holder in due course, suretyship, etc. As per the provisions laid down in the said act, a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer and when a promissory note, bill of exchange or cheque is transferred to any person so as to constitute the person, the holder thereof the instrument is to be negotiated. Detailed provisions have been made in the Act concerning presentment, payment, interest, discharge from liability, notice of dishonour, noting and protest, reasonable time for payment, acceptance and payment for honour and reference in case of need, compensation, special rules of evidence, providing for certain presumptions and estoppels, cross cheques, bills in sets, etc.

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 countrys law. In most countries, the scope of negotiable instruments is limited to commercial papers. i.e. to instrument other than cash, entitling the holder or the person whose name is specified on the paper, the payment of money. In this sense, negotiable instruments may be classified as order to pay [ Bills of exchange and cheque] and promises to pay (promissory notes). In the first class the person issuing the instrument (the drawer) gives a clear order to another 3rd party (Drawee) to make payment to holder or specified person on the instrument. In the second category there is no order to be given, but the maker of the instrument (promissor) binds himself and promises the beneficiary (the promisee) to pay a specified amount of money.

Negotiable instruments may also be classified as either demand instruments or time instruments. A demand instrument is payable on demand i.e. the moment it is presented to the drawee. An instrument will be payable an demand (1) if it states that it is payable on demand or at sight (2) if it does not state any time of payment. All cheques are

demand instruments, because by definition, they must be payable on demand. Generally, A demand instrument is payable immediately after it is issued. Here the term issue refers to the first delivery of an instrument by the maker or drawer, to the payee or holder, for the purpose of giving rights on the instrument to any person. A time instrument is payable at a definite future time. For instance, an instrument payable 3 months after date is payable 3 months after the date written on its face. An instrument written on Meskerem 19,2000 may state that it is payable on Tahsas 24, 2000. This instrument is a time instrument because the holder has to wait until Tahsas 24,2000 to be entitled to collect the specified amount. Lastly negotiable instruments may be classified as order instruments and bearer instruments. Order instruments entitle the payee or any other person to whom order is given in his favor. for example an instrument which states payable to Ahmed Dawed or order/ payable to the order of Ahmed Dawed is payable to Ahmed dawed or any other person in whose favor order is given by Ahmed Dawed. In other words, Ahmed Dawed can directly collect payment on the instrument or transfer it to another person. Hence this person will be entitled to collect payment, if he does not want to cash it, he may also give further order to another person, and so on. Bearer instruments without specifying the person entitled to collect, simply give right to any person who happens to be holder or in possession of the instrument. In this case any person by simply

becoming the holder of the instrument will be entitled to whatever amount of money is stated on the instrument. For example if an instrument reads simply pay , Payable to bearer or pay to cash will entitle the holder the right emanating from the instrument. With respect to identifying the types of instrument, as stated above it better is to refer to the specific legislation of the country giving recognition to specific types of instruments. For instance under Indian law only three kinds of instruments are recognized as negotiable instruments. These are Bills of exchange, promissory notes and cheque. In America, the uniform commercial code (here in after referred to as UCC), which is adopted by most states, specifies four types of negotiable instruments, these are: drafts (Bills of exchange), cheques, promissory notes and certificates of deposit (CDs). Ethiopian law has adopted a very broad definition and types of negotiable instruments. Art 715, after defining negotiable instruments, states that the law in particular recognizes three types of instruments as negotiable; these are a) b) c) commercial instruments transferable securities Document of title to goods

The three main types of negotiable instruments mentioned in art 715(2) should first be defined and classified to understand their exact nature and meaning.

A) commercial instruments Commercial instruments usually referred to as commercial papers could be shortly defined as instruments other than cash, entitling the payee or the holder payment of a specified amount of money. A closer definition is given in Art 732(1) of the commercial code which reads: Commercial instruments are negotiable instruments setting out an entitlement consisting in the payment of a sum of money From Both definitions one can clearly understand the exact scope of commercial papers. The right contained in a commercial instrument is always payment of money and money only. An instrument entitling the holder to property rights or any other right than a sum of money could not qualify as a commercial paper. Even though Art 732 (1) clearly indicates the true nature of commercial papers i.e. their entitlement of the holder to payment of a sum of money, contradicts itself by the wider recognition it gives to the

different types of commercial instruments in Art 732 (2). This Article, enumerating the types of commercial instruments states Bills of exchange, promissory notes, cheques, travelers cheques and warehouse goods deposit certificates shall be considered as commercial instruments under the code. A travelers cheque is a different type of cheque hence, the classification can be reduced to four categories i.e. bills of exchange, promissory notes, cheques and warehouse goods deposit certificates. Bills of exchange, promissory notes and cheques are regarded as commercial papers in most jurisdictions. A definition and a specimen of these in strummers is given herein below. The best way to define any negotiable instrument is through the basic elements constituting its validity. The commercial code without providing any formal definition, enumerates the basic requirements of bills of exchanges, promissory notes and cheques in art 735, 825 and 827 respectively. At this stage without going to the detail requirements of each instrument we shall summarize each element and attempt to generally provide common requirements. Bill of exchange (draft)

A bill exchange (called draft in some jurisdictions) can be defined as

any instrument drawn on drawee that orders the drawee to pay a certain sum of money usually to a third party (the payee) on demand or at a definite future time Section op 5 of the Indian Negotiable instrument act of 1881 also defines it similarly in the following way. A Bill of exchange is an instrument in writing containing an unconditional order, signed by maker, directing a certain person to pay sum of money only to, or to the order of a certain person or to the bearer of the instrument Blacks law dictionary also defines a Bill of exchange as An unconditional written order signed by one person (the Drawer) directing another person (the drawee or payer) to pay a certain sum of money on demand or at a definite time to third person (the payee) or order.

Draft. A draft is a three-party instrument in which one person (the drawer) orders a second person (the drawee) to pay a sum certain in money to a third person (the payee) either on demand or at a definite future date. The drawee is normally someone who owes money to the drawer, and through the use of the draft the drawer uses his or her credit with the drawee to discharge a debt owed to the payee. In some cases, the drawee, rather than immediately paying the payee, may merely sign his or her name across the front of the instrument. This is known as "acceptance," and by this act the drawee is obligated to pay the amount of the draft when it becomes due and payable. Check. A check is a special kind of draft. It is a draft drawn on a bank as drawee and which is payable on demand (as opposed to some specified time in the future as an ordinary draft may be). Promissory note. A promissory note is a very simple form of commercial paper in which one person (the maker) promises to pay a sum certain in money to a second person (the payee) either on demand or at a definite future date. Certificate of deposit. A certificate of deposit is an acknowledgment of the receipt of money by a bank along with a promise to repay the money in the future.

TYPES OF NEGOTIABLE INSTRUMENTS Promissory Notes Sec. 6. Definition. Negotiable instruments are of two types negotiable promissory notes and bills of exchange. Their classification depends upon the particular language used and the number of parties necessary for the creation of the instruments. A negotiable promissory note, as defined by the Uniform Negotiable Instruments Act, is "an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time a sum certain in money to order, or to bearer." l This type of instrument has two parties, the one making the promise, called the maker, and the person to whom the promise is made, called the payee. Sec. 7. Classification of promissory notes. Promissory notes may be classified with respect to the kind of security given by the maker to support his promise to pay money. A simple promissory note carries only the personal security of the maker. Business convenience often requires a high degree of certainty that the money will be paid by the maker on the day it is due. Consequently the personal promise of the maker to pay money is often supported by another contract, appearing sometimes upon the face of the instrument and sometimes in separate agreement. This contract may be called a security contract. This additional source from which the payee or holder of the

note may secure his money may be security, or another person, called a comaker, or an accommodation party.

Sec. 12. Certificate of deposit. The classification of different types of promissory notes is sometimes controlled by the character of the maker. This is true of the certificate of deposit and of the bond. A certificate of deposit is a promissory note given by a bank to a depositor, as a receipt for the deposit, promising to pay the amount to the order of the depositor. Care must be taken to distinguish this type of certificate of deposit from the usual receipt given by the bank when a depositor deposits sums to his checking account. There is no uniformity in the former type of paper. The language used in many instances does not satisfy the requirements for negotiable paper; consequently, many such certificates are not negotiable. Sec. 13. Bond. A bond may be said to be a promissory note under seal, issued by a corporation, public or private. Bonds are formal instruments and in general are so worded as to satisfy the requirements for negotiability, but, owing to additional language referring to the separate security contract supporting the promise in the bond or owing to requirements for registration, their negotiability is impaired. Bonds are either coupon bonds or registered bonds. Coupon bonds have attached coupons which are promissory notes, payable either to order or to bearer, in amounts representing the interest due from time to time upon the bond. In general, coupons are negotiable. Registered bonds are bonds payable

to a payee whose name is registered upon the books of the maker corporation, and are transferable only by the registration of the party's name to whom transferred. Bonds are secured by a mortgage given to a trustee who holds the mortgage in trust for the TYPES OF NEGOTIABLE INSTRUMENTS 147 benefit of the bondholders. Otherwise, a separate security contract or mortgage would have to be created for each bondholder. Sec. 14. Nature of bills of exchange. A bill of exchange as defined by the Uniform Negotiable Instruments Act is "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, of at a fixed or determinate future time, a sum certain in money to order or to bearer." 5 This type of instrument has three parties: the party drawing the paper, the drawer; the party to whom the instrument is addressed, the drawee; and the party to whom payable, the payee. When the paper is accepted by the drawee, he then becomes the acceptor. The acceptor's liabilities are similar to the liabilities of a maker of a promissory note. A bill of exchange differs from a promissory note in that it is a three-party paper and contains an order instead of a promise. A further difference lies in the actual situation which gives rise to the instrument. A bill of exchange presupposes the existence of a debtor-creditor relationship between the drawer and the drawee. This being true, the drawer-creditor merely orders the drawee-

debtor to pay the money to a third party, the payee. Sec. 15. Classification of bills of exchange. Bills of exchange may be classified with respect to situations in which they are used. The bill of exchange in most general use is the check. It is an order addressed to the bank-drawee by the depositor-drawer to pay the payee the sum indicated. It is a demand bill of exchange. Sec. 16. Bank draft. A bank draft is a banker's check; that is, it is a check drawn by one bank on another bank, payable on demand. Sec. 17. Trade acceptance. Another type of bill of exchange, used largely by manufacturers and merchants, is the trade acceptance. A trade acceptance is taken by the seller as payment for goods purchased at the time of the sale. The seller draws on the purchaser to his own order for the goods sold. When the draft is accepted by the purchaser, it becomes his primary obligation. The seller usually discounts trade acceptances at the bank, or uses them as collateral for loans. The buyer, having acknowledged the debt by his acceptance, cannot later dispute the debt as against a holder of the trade acceptance. Sec. 18. Banker's acceptance. A banker's acceptance is a draft accepted by a bank according to a previous arrangement made with the bank by a buyer of goods. The seller of goods often refuses to deliver goods to the buyer upon the buyer's credit alone ; or the

seller of the goods may wish to secure in payment for his goods a

Requirements of an Negotiable Instrument Negotiable instruments need to bear certain elements in order to be treated under law and the Uniform Commercial Code as negotiable instruments. First, the writing form required for negotiable instruments to be considered as such must have many important stipulations. For example, in order for a contract to be a negotiable instrument, the transfer of money must be unconditional. This means that the transfer of payment in a negotiable instrument must not be made conditional on the quality of the goods, for instance. The payer cannot refuse payment to the payee, though the payer can delay payment to the payee until certain conditions are met. Another example includes the fact that all negotiable instruments must have a clear and specific monetary amount involved. Though the negotiable instrument can have certain variables involved in the amount of money being exchanged, there must be a clear formula for determining that amount at any given time; this is how loans can function as negotiable instruments.

Secondly, negotiable instruments have certain rules which must be obeyed regarding signatures. Signatures from involved parties must be included on the negotiable instruments, and new parties can be introduced to the negotiable instrument through the addition of further signatures. Finally, negotiable instruments must be either promises to pay or orders to pay, with each of those two types having its own specific qualities.