3. Negotiable Instruments
3.1. Negotiable Instruments
All negotiable Instruments are governed by the provisions of our Bills of Exchange Ordinance of
1927. This Ordinance is a verbatim reproduction of the English Bills of Exchange Act of 1882
which is globally regarded as one of the best drafted statutes.
Legal nature of the Negotiable Instrument
The following is a famous definition of a negotiable instrument as given in the English case of
Crouch v Credit Foncier of England Ltd (1873) LR 8 QB 374.
“where an instrument is by the custom of trade transferable like cash, by delivery, and is
also capable of being sued upon by the person holding it, it is entitled to the name of a
negotiable instrument, and the property in it passes to a transferee who has taken it for
value and in good faith.”
From the above judicial definition, it will be seen that the following are essential features of a
negotiable instrument.
i. The property and rights in the negotiable instrument passes by delivery alone, or by
delivery and endorsement. No further evidence of transfer is required.
ii. The holder of the instrument can sue on it in his own name.
iii. No notice need to be given to the debtor (that is the person who is liable to pay) in respect
of the instrument.
iv. Valuable consideration is presumed to have been given for the instrument. Since English
law applies, “Valuable consideration” which is not a requirement in Roman Dutch Law,
is a requirement in negotiable instruments. However, the law presumes it in the case of a
negotiable instrument.
v. A negotiable instrument is transferred “free of equities”. This means that a transferee
obtains a good title to the instrument although the transferor’s title may have been
defective. For example, the transferee is not affected by defenses such as fraud.
However, it is only a transferee who has received the instrument in good faith for value
who enjoys this privilege.
Negotiability contrasted with Transferability
The term ‘negotiability’ and ‘transferability’ are often regarded as being synonymous. This is a
common misunderstanding. In fact, to appreciate the concept of negotiability, it may be
contrasted with transferability. All negotiable instruments are transferable but not all transferable
1|Page
, instruments are negotiable. While transferability refers to the process of passing title in an
instrument, negotiability usually refers to the quality of the title of the instrument that is passed.
As previously noted, ‘negotiability’ has a strict legal meaning and the difference between
negotiation and transfer may be illustrated by considering the examples of a watch and a
banknote. The ownership of the watch can only pass from one person to another if there is the
element of intention. Possession is not sufficient and, if the watch is lost or stolen and passed on
through several hands, the original true owner of the watch at no time loses ownership and may
claim possession from the present holder. The watch is a non-negotiable article; title does not
transfer by delivery alone; nor does it pass ‘free of equities’.
A banknote on the other hand, is a negotiable instrument. If the note is lost or stolen and comes
into the possession of a person who takes it in good faith and for the value and is innocent of the
defect in title of the transferor, he or she becomes the true owner of the banknote and no amount
of effort on the part of the person who lost the banknote will avail. Miller v Race (1758) 1 Burr
425. Both the watch and banknote are transferable, but only the banknote has the quality of
negotiability.
Examples of Negotiable Instruments
The following instruments have been recognized as negotiable instruments by statute or by
business usage or custom.
1. Bills of Exchange
2. Cheques
3. Promissory notes
4. Bank Drafts
5. Dividend Warrants
6. Bearer Debentures
7. Treasury Bills
Example of Non-negotiable Instruments
Although they look like negotiable instruments the courts have refused to recognize the
following as negotiable.
1. Money Orders
2. Postal orders
3. Fixed Deposit Receipts issued by Banks
4. Certificates of Deposit
5. Share Certificates
6. Letter of Credit
7. IOUs
8. Bills of Lading
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3.1. Negotiable Instruments
All negotiable Instruments are governed by the provisions of our Bills of Exchange Ordinance of
1927. This Ordinance is a verbatim reproduction of the English Bills of Exchange Act of 1882
which is globally regarded as one of the best drafted statutes.
Legal nature of the Negotiable Instrument
The following is a famous definition of a negotiable instrument as given in the English case of
Crouch v Credit Foncier of England Ltd (1873) LR 8 QB 374.
“where an instrument is by the custom of trade transferable like cash, by delivery, and is
also capable of being sued upon by the person holding it, it is entitled to the name of a
negotiable instrument, and the property in it passes to a transferee who has taken it for
value and in good faith.”
From the above judicial definition, it will be seen that the following are essential features of a
negotiable instrument.
i. The property and rights in the negotiable instrument passes by delivery alone, or by
delivery and endorsement. No further evidence of transfer is required.
ii. The holder of the instrument can sue on it in his own name.
iii. No notice need to be given to the debtor (that is the person who is liable to pay) in respect
of the instrument.
iv. Valuable consideration is presumed to have been given for the instrument. Since English
law applies, “Valuable consideration” which is not a requirement in Roman Dutch Law,
is a requirement in negotiable instruments. However, the law presumes it in the case of a
negotiable instrument.
v. A negotiable instrument is transferred “free of equities”. This means that a transferee
obtains a good title to the instrument although the transferor’s title may have been
defective. For example, the transferee is not affected by defenses such as fraud.
However, it is only a transferee who has received the instrument in good faith for value
who enjoys this privilege.
Negotiability contrasted with Transferability
The term ‘negotiability’ and ‘transferability’ are often regarded as being synonymous. This is a
common misunderstanding. In fact, to appreciate the concept of negotiability, it may be
contrasted with transferability. All negotiable instruments are transferable but not all transferable
1|Page
, instruments are negotiable. While transferability refers to the process of passing title in an
instrument, negotiability usually refers to the quality of the title of the instrument that is passed.
As previously noted, ‘negotiability’ has a strict legal meaning and the difference between
negotiation and transfer may be illustrated by considering the examples of a watch and a
banknote. The ownership of the watch can only pass from one person to another if there is the
element of intention. Possession is not sufficient and, if the watch is lost or stolen and passed on
through several hands, the original true owner of the watch at no time loses ownership and may
claim possession from the present holder. The watch is a non-negotiable article; title does not
transfer by delivery alone; nor does it pass ‘free of equities’.
A banknote on the other hand, is a negotiable instrument. If the note is lost or stolen and comes
into the possession of a person who takes it in good faith and for the value and is innocent of the
defect in title of the transferor, he or she becomes the true owner of the banknote and no amount
of effort on the part of the person who lost the banknote will avail. Miller v Race (1758) 1 Burr
425. Both the watch and banknote are transferable, but only the banknote has the quality of
negotiability.
Examples of Negotiable Instruments
The following instruments have been recognized as negotiable instruments by statute or by
business usage or custom.
1. Bills of Exchange
2. Cheques
3. Promissory notes
4. Bank Drafts
5. Dividend Warrants
6. Bearer Debentures
7. Treasury Bills
Example of Non-negotiable Instruments
Although they look like negotiable instruments the courts have refused to recognize the
following as negotiable.
1. Money Orders
2. Postal orders
3. Fixed Deposit Receipts issued by Banks
4. Certificates of Deposit
5. Share Certificates
6. Letter of Credit
7. IOUs
8. Bills of Lading
2|Page
