NEGOTIABLE

INSTRUMENTS
PRESENTED BY
SEHRISH TAHIR 18227
KANZA NUSRAT KHAN 16053
Chapter 10 Negotiable
instrument law
1 OVERVIEW
2 ISSUE OF THE NEGOTIABLE INSTRUMENTS
3 ENDORSEMENT
4 ACCEPTANCE
5 GUARANTEE
6 PAYMENT
7 DISHONOR AND RIGHT OF RECOURSE
8 PROTECTION OF LOST-INSTRUMENT HOLDERS
9 STATUTE OF LIMITATIONS
 Overview

1.1 Concept
Means of payment
Constitute independent contract embodying a payment
obligation and distinct from that of other contracts or
transactions by virtue of which such instruments are issued
Parties to bill of exchange

A B C D
Drawer Payee Endorsee Endorsee
Endorser Endorser Bearer

P
Drawee E
Guarantor Right-holder
Secondary
debtor
Primary
debtor
Parties to promissory note
A B C D
Drawer Payee Endorsee Endorsee
Endorser Endorser Bearer

E
Guarantor Right-holder

Primary Secondary
debtor debtor
Parties to cheque
A B C D
Drawer Payee Endorsee Endorsee
Endorser Endorser Bearer

P (Banks)
Drawee
Right-holder

Secondary
debtor
 Negotiable instrument relations in bill of exchange
and cheque

A B C D
Drawer Payee Endorsee Endorsee
Endorser Endorser Bearer

Negotiable instrument relation

P
Drawee Non-negotiable instrument relation
 Negotiable instrument relations in promissory note

A B C D
Drawer Payee Endorsee Endorsee
Endorser Endorser Bearer

Negotiable instrument relation

Non-negotiable instrument relation

Classification
Types of negotiable instruments

Bill of exchange
(1) unconditional
(2) a written order
(3) signed by the drawer
(4) addressed to the drawee
(5) pay a specified sum of money
(6) pay either on demand, or at a determinable future time
Promissory note
(1) an unconditional promise
(2) made in writing
(3) signed by the maker of the note
(4) pay a specified sum of money
(5) addressed to the payee or the bearer
(6) pay on demand

Cheque
(1) a bill
(2) payable on demand
(3) for a specified sum of money
(4) always drawn against a bank or other non-bank financial
institutions
(5) unconditional
Comparison
Comparison among bill of exchange, promissory note and cheque

Promissory
Bill of exchange Cheque
note
Nature Entrusted payment Self payment Entrusted payment
Drawer & Drawer, drawee,
Basic parties Drawer, drawee, payee
payee payee
Payers
No restriction Drawer Banks
qualification
Primary debtor Acceptor Drawer No
On demand
Maturity On demand On demand
Determinable future time
Acceptance
Issue of the negotiable
instruments
Drawers
qualification
Bill of exchange: drawer must have genuine
payment relationship with the payer who has reliable
funds to pay for the sum specified in it.
Bill of exchange without consideration: prohibited.

Promissory note: drawer must have reliable funds to

pay for the sum specified in the note
Cheque: drawer must use his genuine name to open
the
1. bank account
2. reliable credibility and deposit certain amount
of money in that account
Formalities
Formalities of the negotiable instruments
Draft Promissory note Cheque
PBOCs uniform format
Words indicating specific type Draft Promissory note Cheque
Unconditional payment
Sum certain
Drawees name
Payees name
Issuance date
Drawers signature
Default rules
Draft
General presumptions:
(1) payable at sight
(2) place of payment: business premises, domicile or habitual residence of drawee
(3) place of issue is business premises, domicile or habitual residence of drawer

2.3.2 Promissory note

General presumptions:
(1) place of payment: business premises, domicile or habitual residence of drawer
(2) place of issue: business premises, domicile or habitual residence of drawer

2.3.3 Cheque
General presumption:
(1) place of payment: business premises of drawee
(2) place of issue:business premises, domicile or habitual residence of drawer
Endorsement
Negotiability
of the remaining parties Assignment is distinguished from
ordinary assignments:
(1) negotiable instruments may be assigned from one bearer to
another without any notice on payer about each new holder
(2) assignee may sometimes acquire better right to sue on the
instrument than his predecessor had
(3) bearer may sue in his own name any other party liable on the
instruments without joining any

7 requirements for negotiability:

(1) order or promise must be in writing
(2) obligation must be for a money payment
(3) sum on the face of the instruments must be for a certain fixed sum
(4) order or promise must be unconditional
(5) instruments must be payable upon demand or at determinable
future time
(6) complete sum, not just a part must be negotiated
(7) instruments must be signed by payer or drawer
Endorsement
Must be on the reverse side of the instruments, or
allonge
First endorser on the allonge must sign or affix seal on
the adhesion area between the instrument and
allonge.
Should be successive
Once endorsed, endorser shall ensure the instrument
in the hands of the subsequent bearer is accepted or
paid. If dishonored, endorser shall reimburse bearer
stated amount and relevant expenses.
Any exclusion clause designed to exempt endorsers
liability: null and void.
 Acceptance
Acceptance: only applies to bill of exchange.
Presentation: precondition for acceptance by
drawee, except for sight draft
Payer should decide whether to accept such draft
within three days from the receipt of it.
If accepted, indicate the date of acceptance and
such express words as "acceptance" on the face of
the draft, and affix the signature or seal on it.
Draft payable at a fixed date after sight: date of
payment must be indicated on it.
 Guarantee

Applies to: draft and promissory note

Guarantor must indicate:
(1) having such words as guarantee
(2) name and domicile of the guarantor
(3) name of the principal debtor
(4) date of guarantee
(5) signature or seal of the guarantor
Payment
Presentation of the instrument by bearer
Draft: payer should make payment upon maturity date after acceptance
Sight draft: bearer should request payer to do so within 1 month from the date
of issue
Time draft: bearer should do so within 10 days after the date of maturity of the
fixed day or fixed period after the date of issue or presentation

Promissory note: time for the payment is 2 months

Cheque: bearer shall do so within 10 days from the date of issue (same place)

Effect of payment and liabilities for wrongful

payment
Payers obligations:
examine continuity of the endorsement on the instrument
check identity and other valid documents of parties presenting the instrument
make full make full payment
No partial payment is allowed
Drawee must act faithfully and may not dishonor the instrument without
reasonable cause
Dishonor and right of
recourse
Occurrence dishonor
Occurrence and certificate of dishonor

Occurrence Certificate
Upon maturity Non-payment Certificate of refusal
Prior to maturity Non-acceptance Certificate of refusal
Drawee or acceptors death or Bankruptcy order
disappearance Administrative decision
Drawee or acceptors
bankruptcy
Drawee or acceptors closure
Notice of dishonor
Bearer shall inform the previous parties:
within 3 days from receipt of certificate of
dishonor or rejection of acceptance

Upon receipt of such notice by the predecessor, he shall

inform his next immediate predecessor within 3 days.

Notice: contain major written items of the instrument and

explanation for rejection
Effects
Drawer, endorser, acceptor and guarantor:
jointly and severally liable to bearer
Bearer does not have to follow sequence of
debtors on instrument.
Bearer may recourse against any or all of them.

Specific request includes:

(1) full amount of the debt dishonored
(2) interest on the such amount according to interest rate
formulated by the PBOC from the maturity or presentation
date to date of payment
(3) expenses incurred in obtaining written evidence of rejection
of the instrument and issuing rejection notices
 Protection of lost-instrument
holders
If lost before payment is due, lost-instrument holder may
notify drawee to suspend payment.

Within 3 days of giving the notice for suspension of

payment or after the loss of the instrument, lost-instrument
holder may apply to court for publication of public
notice for assertion of claims

Holder other than the lost-instrument holder comes

forward to claim the rights during the foregoing
withholding period, the litigation method shall be utilized
 Statute of limitations

Statute of limitations

Limitation period Running from

Bearers rights against drawer & acceptor 2 years Maturity date
Sight draft and promissory note 2 years Issuance date
Cheques bearer against drawer 6 months Issuance date
Bearers recourse against predecessor 6 months Date of rejection
Right of re-recourse against predecessors 3 months Payment date or
date being sued