Negotiable Instruments: Summary notes

To rank as a negotiable instrument, a document must be recognized as such by statute, or by custom of merchants.              A negotiable instrument is a written document which represents money. The main characteristics of a negotiable instrument are
as follows:

  1. If made payable to bearer, it is transferable by delivery alone; if payable to order it is transferable by delivery plus indorsement.
  2. It can be sued upon by a holder for the time being.
  3. It is not necessary to give notice of assignment to the person liable thereon.
  4. It is presumed that consideration for the negotiable instrument has been given.

Types of Instruments.

The most important negotiable instruments are bills of exchange, promissory notes and cheques, and these three types are the subject-matter of the Bills of Exchange Act. Nevertheless, certain other instruments are negotiable namely:

  1. Treasury bills.
  2.   Bank notes.
  3. Share warrants, if they are to the bearer but not otherwise.
  4. Dividend warrants.

Postal orders and money orders are not negotiable instruments, nor are share certificates.

The Nature of a Bill of Exchange.

A bill of exchange 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, or at a fixed or determinable future time, a sum certain in money to, or to the order of, a sped fled person, or to bearer.

Parties to a bill. There are three parties:

(a)        The person who gives the order to pay — the drawer.

(b)        The person to whom payment is to be made — the payee.

(c)        The person to whom the order is addressed — the drawee .

There need not necessarily be three persons, for example, the drawer and drawee may be the same person, or the drawee may be a fictitious person, in which case the holder may at his option treat the instrument as a bill or promissory note.

The advantages of a Bill of Exchange.

  1.  A bill of exchange provides a creditor with a better remedy. Once a bill of exchange has been accepted, it settles the amount of the debt owing, and makes legal remedy easier to obtain than would be the case under an ordinary contract.
  2. Bills of exchange my be discounted. Thus anybody who holds the bill, and is entitled to claim the money on the due date, can discount the bill by taking it to a bank or discounting house. The bank will, in many cases, be willing to take the bill off the holder’s hands, pay the holder the present value of the bill and collect the money when due.
  3. A bill may be negotiated. Anyone who holds a bill of exchange can transfer it to a creditor in payment.


The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer. Acceptance may be either general or qualified. An acceptance is general when the drawee of a bill agrees to pay the amount by ‘accepting’ the bill without adding any condition regarding payment or time or place. This is done by the drawee by signing his name on the bill with or without the word ‘accepted’. After acceptance, the drawee is known as the acceptor. In case the acceptor fails to pay the proceeds of the bill on its maturity, be becomes liable to the holder.

Presentment for acceptance. Strictly speaking, it is only necessary to present a bill for acceptance in three cases:

  1.  Where it is payable after sight.
  2. Where it is so expressed.
  3. Where the bill is drawn payable elsewhere than at the place of residence or business of the drawee.

Qualified acceptance. An acceptance is qualified which is made subject to some condition or qualification. The holder of the bill may refuse to take a qualified acceptance, the drawer and the indorsers are discharged unless they agreed to it. A qualified acceptance may take any one of the following forms:

  1.  Conditional, i.e. where payment is subject to the fulfillment of a condition in the bill.
  2. Partial, ire. to pay only part of the amount of the bill.
  3. Local, i.e. to pay at a specified place only.
  4. Qualification to time, i.e. ‘ accepted four months after date’ when the bill stipulates to be payable three months after date.

Acceptance for honour. Where a bill has been dishonoured, any person not already a party liable thereon can with the consent of the owner intervene, and accept for the honour of anyone liable thereon.


A bill payable to a specified person or to his order can be negotiated by indorsement followed by delivery. Indorsements are of five kinds:

  1. In blank — where indorser merely signs his own name.
  2. Special — this signifies the person to whom, or to whose order, the bill is payable.
  3. Conditional — where a bill purports to be indorsed with a condition that may be disregarded, and payment to the indorsee is valid, whether the condition has been fulfilled or not.
  4. Restrictive — this prohibits further negotiation giving the indorsee the right to receive payment of the bill, and sue any party the indorser could have sued, but he has no power to transfer his rights.
  5. Sans recours. This is an indorsement by which the indorser excludes his own liability on the bill , if the bill is ultimately dithonured for non payment. The indorsee is not obliged to accept a bill with such an indorsement. But if he accepts it, he has no right of action against the indorser if the bill is dishonured.

Presentment for payment

A bill must be duly presented for payment, other-wise the drawer and endorsers are discharged from liability. The bill must be presented for payment at the proper time, unless it has been previously dishonoured. In calculating the date at which the bill is payable three days are allowed after the specified time if the bill is not payable on demand. These are called days of grace, and must be working days.

Where a bill is drawn payable on demand it must be presented within a reasonable time of issue or indorsement to make the drawer and indorser respectivelY liable,

Presentment may be dispensed with in certain instances as where the drawee is a fictitious person or where the necessity is waived. If payment is refused or can¬not be obtained the bill is dishonured, and, as with dishonour by non-acceptance, the holder acquires an immediate right of recourse against the drawer and indorsers.

Discharge of a Bill. Bill may be discharged in five ways:

  1. By payment.
  2. By renunciation — any holder may renounce his rights, though this must be evidenced in writing.
  3. By negotiating to the acceptor, i.e. when the acceptor becomes the holder of the bill in his own right.
  4.   By cancellation — where it is done intentionally by the holder,or his agent and the cancellation is apparent.
  5. By material alteration of the bill without the assent of the parties liable upon it. For example, the holder alters the date of payment appearing on the bill, all parties liable up to the time of alteration are discharged.

Types of bills.

  1.  Inland Bill. An inland bill is one which is both drawn and payable within Kenya. Any other bill is a foreign bill.
  2. Bill payable to bearer. A bill is payable to bearer when it is expressed to be so or when the only or last indorsement is an indorsement in blank .
  3. Bill payable to order. A bill is payable to order when it is expressed to be payable to order; or it is payable to a particular person and does not contain words prohibiting transfer.
  4. Inchoate instruments. Where a person signs on a blank stamped paper and delivers to another to be converted into a bill, this gives a prima facie authority to fill it up as a complete bill for any amount the stamp will cover, using the signature of the drawer.

Noting and Protesting.

Noting : It is not necessary to note or protest an inland bill, but it is advisable to do so for procuring legal proof of dishonor. Thus, where a bill or promissory note is dishonored, the holder may, cause such dishonor to be noted by an oath commissioner or a notary public on the instrument or on a paper attached thereto.

Protesting: Where a foreign bill has been dishonored by            non-acceptance or non-payment, the bill must be protested. In this case the notary public or an oath commissioner represents the bill and then makes out a formal certificate of dishonor containing a copy of the bill.

Holder in due course and his rights

A holder in due course is one who has taken a bill complete and regular on the face of it, before it was overdue, without notice that it had been previously dishonored, if such was the case; in a good faith and for value, and without notice at the time the bill was negotiated to him, of any defect in the title of the person who negotiated it.

The following are the rights of the holder:

  1. He may sue on the bill in his own name.
  2.   He holds it free from any defect of title of prior parties.
  3. Where his title is defective, if he negotiates to a holder in due douse, the latter obtains a valid title.

Promissory Notes

A promissory note is defined as ‘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, or to the order of a specified person or to bearer’.

Distinction between bill and note

  1. A bill of exchange is an order to pay, and a note is a promise to pay.
  2. There are usually three parties to a bill, but to a note there are only two parties.
  3. A bill payable after sight must be presented for acceptance to the drawee in order to fix the maturity date, but a note is presented for payment without any prior acceptance by the maker.
  4.  If a bill is dishonored, due notice of dishonor is required to be given 60 to the drawer and endorsers, but no such notice is needed in the case of a note.


A cheque is a bill of exchange drawn on a specified banker payable on demand. The cheque does not need to have the words ‘on demand’ on it, as all bills are treated as payable on demand where there is no specified time for

payment. Payment by cheque is conditional, the creditor being at liberty to refuse such payment. If a cheque is sent by post the loss of it will fall on sender unless that method was specified.

Provisions Protecting Bankers

A banker paying in good faith and in the ordinary course of business a cheque payable to order on demand where the indorsement of the payee is forged is protected and may debit the customer’s account. The banker is however not protected if drawer’s signature is forged.

Protection to Paying Bankers on Crossed Cheques

Where the banker, on whom a crossed cheque is drawn, in good faith and with-out negligence pays it, if crossed generally, to a banker, and if crossed specially, to the banker to whom it is crossed, or his agent for collection being a banker, the banker paying the cheque, and, if the cheque has come into the hands of the payee, the drawer, shall respectively be entitled to the same rights and be placed in the same position as if payment of the cheque had been made to the true owner thereof.

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