RANACO EDUCATION & TRAINING

INSTITUTE

CHAPTER 3
NEGOTIA BLE INSTRUMENT
3.1
3.2

Concept of negotiable instruments

Types of negotiable instruments

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

INSTITUTE

LESSON OUTCOME
By the end of this chapter, students should be able
understand the concept of negotiable instruments and know
the basic law governing negotiable instruments.

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

INSTITUTE

3.1

CONCEPT OF NEGOTIABLE
INSTRUMENTS

Exchange of goods and services is the basis of every business

activity. Goods are bought and sold for cash as well as on credit.
All these transactions require flow of cash either immediately or
after a certain time.
In modern business, large number of transactions involving huge
sums of money take place everyday. It is quite inconvenient as well
as risky for either party to make and receive payments in cash.
Therefore, it is a common practice for businessmen to make use of
certain documents as means of making payment. Some of these
documents are called negotiable instruments.

Source: See Negotiable instruments <www.nos.org/secbuscour/17.pdf >viewed at 15 May 2012

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

INSTITUTE

3.2

TYPES OF NEGOTIABLE INSTRUMENTS

Negotiable instruments which are currently in use include the following:

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Bills of exchange
Cheques
Promissory notes
Bankers drafts
Bank notes
Treasury bills
Share warrants
Dividend warrants
Debentures
Travellers cheques

Source: Lee Mei Pheng & Ivan Jeron Detta, Commercial law, Oxford Fajar, 2011

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

INSTITUTE

CONTINUE
Bills of exchange:
A bill of exchange is a form of a written promise that the
person who takes the bill will be paid the amount stated in it
when presents at proper place & time.
There are 3 parties:
1. drawer: draws the bill or writes order to pay
2. drawee: who is ordered to make payment
3. payee : receive payment

Source: Lee Mei Pheng & Ivan Jeron Detta, Commercial law, Oxford Fajar, 2011
LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

INSTITUTE

CONTINUE
Example:
You (exporter in Malaysia) want to ship your goods (e.g. cars)
and your buyer (Korea) will pay for those goods later.
Therefore, you need a bill of exchange which is a form of a
written promise that the buyer who takes the bill will pay the
amount of the goods stated in it (i.e. bill of exchange) when
your goods arrive at proper place & time.

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

INSTITUTE

Cont.

LAW 243 COMMERCIAL LAW

Source: see http://www.exportfinance.gov.au/Pages/Documentarycollection.aspx#content viewed at 15 May 2012

RANACO EDUCATION & TRAINING

INSTITUTE

CONTINUE
The main steps are:
1.

After youve finalised the export contract and agreed the terms
of the documentary collection,
2.
you ship the goods to your buyer.
3.
You lodge the bill of exchange (which your bank can help
prepare)
and relevant shipping documents with your bank.
4. Your bank forwards the bill of exchange, shipping documents
and your
instructions to your buyers bank.
5.
The buyers bank presents the bill of exchange to your buyer for their
acceptance. The bill of exchange might state a future
date at which your
buyer must pay, for example 30 days. By
signing the bill of
exchange, the buyer undertakes to pay on
the due date. In return,
your buyer receives the shipping
documents, allowing them to clear
the goods.
6.
Buyer makes payment to its bank
7 & 8. Once the buyers bank receives payment from your buyer, it transfers
the funds to the your bank for final payment to you.
Source: see http://www.exportfinance.gov.au/Pages/Documentarycollection.aspx#content viewed at 15 May 2012

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

INSTITUTE

CONTINUE
The essential characteristics of a bill of exchange are as follows:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

An unconditional order
In writing
Addressed by one person to another
Signed by person giving it
Requiring person to whom it is addressed to pay
A sum certain in money
To order of a specified person
Supported by consideration
Capacity to contract
Date of bill

Source: Lee Mei Pheng & Ivan Jeron Detta, Commercial law, Oxford Fajar, 2011
LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

INSTITUTE

CONTINUE
NATURE OF BILL OF EXCHANGE:
1.

AN UNCONDITIONAL ORDER -S.3(3):

Order to pay cannot include order for any other act.

If have condition- not bill of exchange

2.

3.

IN WRITING- S.3: writing includesPrinting,

lithography,
typewriting,
photography, and
any other mode of representing or reproducing words in visible form

ADDRESSED BY ONE PERSON TO ANOR -S.5(2)

Natural person, firms, companies

Drawer, Drawee
Source: Lee Mei Pheng & Ivan Jeron Detta, Commercial law, Oxford Fajar, 2011

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

INSTITUTE

CONTINUE
4.

SIGNED BY PERSON GIVING IT- S.23

Drawers signature is essential

5.

REQUIRING PERSON TO WHOM IT IS ADDRESSED TO PAY

On Demand (s.10) Or

At A Fixed Or

Determinable Future Time (s.11)

6.

A SUM CERTAIN IN MONEY

S.9(1): A sum certain although it is required to be paid:

With interest

By stated instalments

Whole sum in case of default

Source: Lee Mei Pheng & Ivan Jeron Detta, Commercial law, Oxford Fajar, 2011

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

INSTITUTE

CONTINUE
7.

TO ORDER- S.8(1):

To order- a specified person (name)

To bearer-blank indorsement

8.

SUPPORTED BY CONSIDERATION
- S.27(1): valuable consideration in bill of exchange

9.

CAPACITY TO CONTRACT BY BOE

S.22(1):capacity to contract.

Minors, mentally disorder X open current account

X liable for Bill they may draw

10.

DATE OF BILL

S.3(4)(a): undated=invalid
Source: Lee Mei Pheng & Ivan Jeron Detta, Commercial law, Oxford Fajar, 2011

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

INSTITUTE

CONTINUE

LAW 243 COMMERCIAL LAW

Sample of a bill of exchange:

RANACO EDUCATION & TRAINING

INSTITUTE

QUIZ
1.

Negotiability is a form of transfer of property

(ownership) from one person to another in a
document evidencing a contractual obligation to
pay money (True / False)

2.

The following are negotiable instruments which are

currently in use except:
a. cheque
b. bills of exchange
c. bank notes
d. money

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

INSTITUTE

CONTINUE
3.

A bill of exchange is a form of a written promise that

the person who takes the bill will be paid the
amount stated in the bill when he presents it at the
proper place and time (True / False)

4.

The person who draws the bill of exchange is called

the drawee (True / False)

5.

The person to whom the order to pay is addressed

is called the drawer (True / False)

6.

The person to whom payment is to be made is

called the payee.

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

INSTITUTE

CONTINUE
7.

The following are essential characteristics of a bill of

exchange except:
a.
b.
c.
d.

8.

conditional order
in writing
addressed by one person to
another
signed by person giving it

If the order contained in a document is conditional,

such a document is not a bill of exchange (True/False)

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

INSTITUTE

CONTINUE
9.

The drawers signature is not essential to make the

instrument a bill (True / False)

10. A bill of exchange is not invalid by reason that it is

not dated (True / False)

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

INSTITUTE

Thank you!

LAW 243 COMMERCIAL LAW