Negotiable Instruments Business / Commercial Law

1. Negotiable Instruments

2. DEFINITION OF A NEGOTIABLE INSTRUMENT
The word 'negotiable' means transferable from one person to
another, and the term 'instrument' means 'any written document by
which a right is created in favor of some person.' Thus, the negotiable
instrument is a document by which rights vested in a person can be
transferred to another person in accordance with the provisions of the
Negotiable Instruments Act, 1881.

3. Characteristics
The characteristics of negotiable instruments are as follows.
1. Freely Transferable: The right of ownership in these instruments
can be transferred from one person to another easily. If the instrument
is payable to bearer, the property in negotiable instrument is
transferred to the transferee by delivery. If instrument is payable to
order, the property in negotiable instruments transfer by endorsement
and delivery.

4. Characteristics
2. Rights of holder: A holder of negotiable instrument has a right
to recover the money from the person liable on the instrument. The
holder can recover this amount himself or transfer his right to another
person.
3. Promise or Order: A negotiable instrument contains an
unconditional promise or order to pay. In case of promissory note the
debtor promises to pay a certain sum of money to the holder of the
instrument, In case of bill of exchange and cheque the creditors order
his debtor to pay a certain sum of money to the holder of the
instruments.

5. Characteristics
4. Certain Amount: In the negotiable instruments, the promise or
order is made for the payment of certain amount. The person liable to
pay on the instrument must pay certain amount of money and not
anything else. It can call for payment in currency only.
5. In writing: A negotiable instrument must be in writing. An oral
promise or order to pay money cannot be called Negotiable
Instrument.

6. Kinds Of Negotiable Instruments
• There are three kinds of Negotiable Instruments
• Promissory Note
• Bill of Exchange
• Cheque

7. Promissory Note:
• Definition
• A promissory note is an instrument in writing (not being a bank note or a currency note)
containing an unconditional undertaking, signed by the maker, to pay on demand or at fixed or
determinable future time a certain sum of money to a certain person or to the bearer of the
instrument.
• The person who promises to pay is called maker, The person to whom payment is to be made is
called payee.
•
Examples of Promissory Notes
• I promise to pay B on order Rs 5000.
• I acknowledge myself to be indebted to B for Rs 8000 to be paid on demand.
• I promise to pay “B” Rs 5000.
• Mr. B, I.O.U. (I owe you) Rs. 1000."

10. Essentials of Promissory Note:
• 1. In Writing: A promissory note must be in writing. A verbal
promise to pay is not a promissory note. The writing may be on paper,
it may be hand written or printed.
• 2. Promise to Pay: There must be a promise or undertaking to
pay. A mere acknowledgement of debt without clear promise to pay is
not a promissory note.
Example: I promise to pay B Rs.500.

11. Essentials of Promissory Note:
3. Unconditional Promise: It must contain unconditional promise to
pay. The promise must not depend upon the happening of some uncertain
event.
Example: The below notes are not valid promissory note.
a. “A” promise to pay “B” Rs. 500 seven days after his marriage.
4. Signed by maker: It is necessary that the maker must sign the
promissory note. The signature may be in any part of the instrument and
necessarily at the bottom. When the maker is illiterate, his thumb impression
is sufficient.
Example: “A” writes the instrument but does not sign thereon: I promise
to pay “B” Rs 5000”, The note is not a valid promissory note.

12. Essentials of Promissory Note:
5. Certain Maker: The instrument must indicate who is liable to pay.
6. Certain Payee: The payee of a promissory note must be a certain
person. The payee’s name can be indicated by his official designation.
7. Certain Sum: It is necessary that the sum of money promised to be
payable must be certain and clearly mentioned. If the amount is to be
paid is uncertain , the instruments will be not a valid promissory note.
8. Pakistani Currency: A promissory note containing a promise
to pay a certain amount in foreign currency is not a valid promissory
note, For a valid note, it must contain a promise to pay a certain amount
in Pakistani Currency.

13. 9. Other Formalities:
a. The place should be mentioned where it is made.
b. The date should be mentioned on which it is made.
c. The promise to pay must be legal consideration.
d. It must be properly stamp.

14. Bill of Exchange:
“ A bill of exchange is an instrument in writing containing an
unconditional order, signed by the maker, directing a certain person to
pay on demand or at a fixed or determinable future time a certain sum
of money only to, or to the order of, a certain person or the holder of
the instrument”.
The person who makes the bill is called the drawer. The person who is
directed to pay is called drawee. The person to whom the payment is
made called payee.

15. Essentials of Bill of Exchange:
The following are the essentials of a bill of exchange
1. In writing: A bill of exchange must be in writing. A verbal
order to pay cannot be called bill of exchange.
Example: “A” draws a bill on “B” as: “Pay Rs.5000 to X “
2. Unconditional Order: The language used in a bill of exchange should
convey an order to pay. The order to pay must not depend upon the
happening of an event. It must be unconditional.
Example: A draws a bill on B, as “Pay Rs.5000 to C as early as possible.” it
is not a valid bill.
A draws a bill on B, as “ pay rs.5000 to C” it’s a valid bill as it is unconditional.

16. Essentials of Bill of Exchange
• 3. Signed by Drawer: It must be signed by the drawer. The signature
may be in any part of the instrument. If the drawer is illiterate his
thumb impression is sufficient.
Example: A draws a bill on “B” “ Pay Rs.10000 to X” but does not
sign thereon. It is not a valid
4. Certain Drawee: The drawee of a bill of exchange must be a certain
person. The name of drawee must be mentioned in the bill. If the bill
does not mentioned the name of the drawee it is not a valid bill.

17. Essentials of Bill of Exchange
• 5. Certain Payee: The payee of the bill must also be certain person.
The payee’s name can be indicated by his official designation as well.
A bill may be made payable to two or more payees jointly or it may be
made payable in the alternative to one of two, or one or some of
several
Example: “A” draws a bill as under
a. Pay Rs. 50000 to Principle of Boys Degree College.
b. Pay Rs.50000 to X or Y.
c. Pay Rs. 50000 to M and N.

18. Essentials
6. Certain Sum: It is also essential that the sum payable must be
certain and definite. If the amount ordered to be paid is uncertain, the
instrument cannot be called a valid bill of exchange.
7.Currency

19. CHEQUE
Definition: “A cheque is a bill of exchange drawn on a specified bank
and not expressed to be payable otherwise than on demand”
The person who draws the cheque is called drawer. The bank on
which the cheque is drawn is called drawee. The person to whom
cheque is made payable is called payee.

20. Essential of Cheque:
The following are essentials of a cheque.
1. In writing: The cheque must be in writing. Cheque which are
printed or made out on a typewriter are also valid.
2. Unconditional Order: It must contain to pay unconditionally. If the
bank is ordered pay upon the condition of payee’s signing the
receipt, then the instrument is a conditional order thus not a
cheque.

21. Essentials of Cheque:
3. Signed by drawer: A cheque will be valid only if it is signed by the
account holder or by some who is authorized to sign on his behalf.
4. Payable on Demand: A cheque is always drawn payable on demand. The
demand should be made within reasonable time. In Pakistan the cheque must
be presented within six month from date of issue.
Example: A draws a cheque on 1st June 2014, it is valid till six months.
5. Certain Sum: The amount mentioned in the cheque should be certain
amount. There should be no element of doubt. In practice, banks return the
cheque if the amount in words and figure differ.

22. Types of Cheque:
The cheque may be divided in the following two types:
1. Open Cheque: An open cheque is payable at the counter of the
bank on the presentation of the cheque.
2. Crossed Cheque: It is not payable at the counter. Its
payment is made only through the collecting bank of a customer. The
collecting bank credits the proceeds of the cheque to the account of
the payee.

23. Parties to instruments
A promissory note has only two parties
• The party making the note, known as maker
• The party who is required to pay the money called payee.
A bill of exchange has three parties
• The party who draws the bill, called drawer
• The party whom the bill is drawn, called the drawee
• The party to whom the payment is to be made called payee

24. Liabilities of parties
1. Liabilities of the Maker of a Note:
The maker of a promissory note is the principal debtor. He is bound to
pay the amount on maturity. In default of such payment, the maker is bound
to compensate any party to the note for any loss or damaged sustained by
him caused by such default.
2. Liability of the drawee :
The liability of the acceptor of a bill is just like liability of the maker of
the note, since both have the same responsibility. The acceptor is bound to
pay the amount of the bill at the maturity to the holder on demand. In case
of default of such payment, the acceptor is bound to compensate any party
to the bill any loss or damage sustained by him and caused by such default.

25. Liabilities of parties
3. Liability of the drawee bank:
The drawee of cheque having sufficient funds of the drawer in his
hand, properly applicable to the payment of such cheque, must pay the
cheque when duly required to do so, and, in default of such payment, must
compensate the drawer for any loss or damage caused by such default.
4. Liability of the drawer:
The drawer of an instrument undertakes that the same shall be
accepted by the drawee when presented for acceptance and be paid him
when presented for maturity.

26. Payment and discharge of liabilities
Payment: Payment of the amount on due on a promissory note, bill
of exchange, or cheque must, in order to discharge the maker, be made
to the holder of the instrument.
Interest: When interest at a specified rate is expressly made
payable on promissory note or bill of exchange. Interest shall be
calculate at the rate specified, on the amount of the principle money
thereon.

27. Payment and discharge of liabilities
Discharge from Liability:
When the acceptor becomes the holder of the bill at or after
maturity and all the rights under it are thereby extinguished, the
instrument is said to be discharged.
Mode of Discharge.
a. Discharge by Payment
b. Discharge by Cancellation
c. Discharge by Release

28. Payment and discharge of liabilities
a. Discharge by Payment: when the maker or drawee makes the
payment to the holder of an instrument, all the parties are thereby
discharged.
b. Discharge by cancellation: If the holder cancels the name of
acceptor with the intention of discharging him, then the latter’s
liability to the holder or any party claiming under such holder, will
be discharged.

29. Payment and discharge of liabilities
Discharge by Release:
The holder of an instrument may discharge a party in any
manner other than cancellation. This is known as discharge by release.
For instance, the old instrument is discharged if the acceptor or drawee
or maker gives to the holder a new instrument in place of the old; and
all the parties to the old instrument are thereby discharge.

30. INDEMNITY AND GRAUNTEE

31. Contract of Indemnity
Definition and Nature: The term indemnity means to compensate or
make good loss.
Definition of Indemnity: A contract by which one party promises to
save the other from loss caused to him by the conduct of the promisor
himself or by the conduct of any other person is called a contract of
indemnity.

32. Essentials of Contract of Indemnity
Following are the essentials of a valid contract of indemnity:
1. It must contains all the essentials of a valid contract
2. It is a contract between two parties, one person promises to save
the other from any loss which he may suffer.
3. The loss may be caused by the conduct of the promisor himself or
any other person.
4. The contract of indemnity may be expressed or implied.

33. Rights of Indemnity holder
The following are the rights of indemnity holder:
1. He can recover all damages which he may be complied to pay in
respect of any suit filed against him.
2. He can recover the expenses in respect of any suit filed by him with
the authority of indemnifier.
3. He can recover all expenses which he might have paid as a result of
any compromise which was made with the consent of indemnifier.

34. Contract of Guarantee
Definition: A contract of guarantee is a contract to perform the promise
or discharge the liability of a third person in case of his default”
The person who gives the guarantee is called surety or guarantor. The
person to whom the guarantee is given is called creditor. The person in
respect of whose default the guarantee is given is called principle debtor.
Example: A tells B, “lend some money with interest to C; if C is unable
to return your money, I shall pay on his behalf. This contract of
Guarantee.

35. Essentials of Contract of Guarantee
1. Tripartite Contract:
It is agreement between principle debtor, creditor and surety.
The three separate contract exist between them, of the promise by the
principal debtor is not fulfilled, the liability of the surety arises. In a
contract of guarantee the principal debtor is liable and the surety will
be liable on principal debtor’s default. The principal contract exist
between principal debtor and the creditor and the contract between
creditor and surety is a secondary contract.

36. Essentials of Contract of Guarantee
2. Consideration: A contract of guarantee like other contract must
fulfills essentials of a valid contract.
3. Misrepresentation: A guarantee obtained by means of
misrepresentation made by the creditor concerning a material part of
the transaction is invalid.

37. Kinds of Guarantee
1. Simple Guarantee: A guarantee which extends to a single debts
or transaction is called ordinary, simple, or specific guarantee. It
comes to an end as soon as the liability under the transaction ends.
Example: G guarantee K for payment of 5 bags of wheat purchased
by C. C makes payment, Later, C again purchases 5 bags of wheat, and
C did not pay. K sued G. G’s guarantee and G is not liable.
2. Continuing Guarantee: A guarantee which extends to a series
of transaction is called continuing guarantee.

38. BAILMENT AND PLEDGE

39. Contract of Bailment
Meaning and Definition: The word bailment is derived from French word
“baillier” which means to deliver. “A bailment is delivery of goods by one
person to another for some purpose, upon a contract that they shall, when
the purpose is accomplished, be returned.
A bailment is the voluntary transfer of the possession of goods by the owner
to another person, under a contract that other person shall do hold them or
return them to the owner or deliver them according to his order.
A bailment arises when one person transfers possession of goods to another
on condition that he will return them after the accomplishment of purpose.
The person delivering the goods is called bailer, The person to whom they
are delivered is called the Bailee.

40. Essentials Features of Bailment
1. Contract: A bailment is based upon contract between bailor
and bailee. The delivery of goods should be made for some purpose
and when the purpose is accomplished, the goods shall be returned to
the bailor.
Example: A gives a piece of cloth to T, a tailor for making suit, There
is a contract of bailment between A and T.
2. Specific Purpose: The bailment of goods must be made for
some purpose, when the goods are delivered by mistake without any
purpose, there is no contract, when the purpose is accomplished, the
goods will be returned to the bailor

41. Essentials Features of Bailment
3. Delivery of Goods: Bailment is the delivery of movable goods
from one person to another person.
4. No change of ownership: Under the bailment, it is only the
possession that passes from the owner to the other and not the
ownership. If there is a change of ownership the transaction may be a
sale or exchange but not a bailment.
5. Return of Same Goods: When the purpose is accomplished, the
goods must be returned in original foam as they were given.

42. Kinds of Bailment
Bailment is classified according to benefit and reward;
1. Benefit: According to benefit, bailment can be grouped into three
classes.
a. For benefit of bailer: “A” delivered some ornaments for safe custody
to B his neighbor, without any charges for that, it is bailment for
bailor ony.
b. For the benefits of Bailee: Where goods are delivered to the
bailee to be used without any compensation.
c. For benefits of bailor and bailee: Where the goods delivered for
the benefits of bailor and bailee.

43. Kinds of Bailment
2. Reward: Bailment is classified into two classes according to reward.
a. Bailment without reward: It is bailment in which neither the
bailor nor the bailee is entitled to any remuneration. E.g Lending a
book to a friend.
b. Bailment for reward: It is bailment where the bailee or the bailor is
entitled to remuneration. E.g Car lent for hire

44. PLEDGE:
Definition: The bailment of goods as security for payment of a debt or
performance of a promise is called a pledge.
The bailor in this case is called Pawnor, The bailee is called Pawnee. Under
the pledge, one person transfers possession of some goods to another to
secure the payment of debt or the performance of a promise. In case of
pledge the goods are deposited as security to get a loan.
Example: A borrows Rs. 1 million from B keeps his property as security
for payment of the debt, The bailment of property is pledge.

45. Essentials of Pledge:
Following are the essentials of pledge.
1. Movable Property
2. Transfer of Possession
3. No transfer of Ownership

46. Contract of Agency
Agent and Principal: An agent is a person employed to do any act
for another or to represent another in dealings with third person. The
person for whom such act is done, or who is so represented is called
the principal.
The person who acts on behalf of another is called an agent, The
person who authorizes another person to act in his behalf is called
principal. The contract which creates the relationship of agent and
principal is called agency

47. Essentials of Agency:
The essentials of Agency are as follow:
1. Agreement: The relationship of agency is the result of an
agreement between the principal and agent.
2. Who can be Principal: Any person who is of the age of
majority according to law to which he is subject, and who is sound
mind can be principal.
3. Who can be agent: Any person may be an agent.
4. Intention: The agent must have intention to act on behalf of
the principal.

48. Kinds of Agency:
1. General Agent: A general agent is appointed to do all acts in
connection with a particular business. E.g: a person appointed as a
general manager is a general agent, he can do any lawful acts for that
business.
2. Special Agent: A special agent is appointed to do some particular act in
a particular transaction. E.g: a person is appointed to purchase a
particular house. He has only has authority to do that particular act.
3. Mercantile agent: A mercantile agent is the person who has
authority to sell or buy goods. He is generally appointed by a
manufacturer or seller to assist in the sale of goods. He does not take the
title to the goods. He assists in the transfer of title from seller to a buyer.