Business Law Unit 3 Business Law Complete notes

Business Law Unit 3

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Business Law Unit 3

Definition of Negotiable Instruments

The law relating to negotiable instrument is embodied in the negotiable instruments act 1881. It deals with the promissory notice, bills of exchange and cheques. The negotiable instruments act came into force of the first day of March 1884.

It extends to the whole of Pakistan but it does not affect the provision of Sec 24 and 35 of the state. Bank of Pakistan act 1956 and accordingly every negotiable instrument shall be governed by the provisions of this act.

The word negotiable means transferable by delivery and instrument means a written document, so it means a document which can be transferred from one person to another making the receiver of that document entitled to receive that same amount of value which is contained.

According to Sec 13 (1) of the negotiable instrument act “A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or bearer.

Business Law Unit 3 Business Law Full Notes Presentation of Negotiable Instruments

Types Negotiable Instrument

According to Sec (13) of negotiable instrument act 1881, a negotiable instrument includes.

(a) A bill of exchange.

(b) A promissory note or.

(c) A cheque.

Above three types of negotiable instrument are mentioned in the said section.

However of instrument to be treated as negotiable instrument

(i) If it is in such a form which entitles the holder to sue in his own name.

(ii) If it is transferable.


(i) Bill of exchange

(ii) Promissory notice.

(iii) Cheques

(iv) Divident warrants

(v) Share warrants.

(vi) Bearer debentures

(vii) Bank drafts

(viii) Railway receipts

Documents which are not considered negotiable instruments:
Following documents are not considered negotiable instruments:

(i) Money orders

(ii) Postal orders

(iii) Deposit receipts

(iv) Share certificate

(v) Bill of lading

(vi) Fixed deposit

(vii) Dock warrant


(i) The instrument should be freely transferable.

(ii) The person who obtains it in good faith and for gets it free from all defects and is entitled to sue upon.

Business Law Unit 3 Business Law full notes Types of Negotiable Instrument

Essentials Of A Negotiable Instrument

I. Written:

Negotiable instrument is in writing.

II. Transferable:

Negotiable instrument is transferable from one person to another. The right of ownership is transferred from one person to another person.

III. Rights of the Holder:

Negotiable instrument gives the rights to the creditor to recover something from debtor. The creditor can recover himself or he can transfer his right to another person.

IV. Unconditional Promise:

Negotiable instrument contains an unconditional promise or order to pay.

V. Certain Amount:

In the negotiable instrument, the promise or order is made for payment of certain amount. The sum payable may be certain notwithstanding that it includes further interest or it is payable at a indicated rate of exchange.

VI. Payable in Money:

Negotiable instrument is always payable in money.

VII. Discharge of debt:

It can be conveniently in the discharge of debts.

VIII. Transferee can sue in his name:

The transferee of the negotiable instrument can sue the debtor in his own name in case of dishoner.

IX. Title:

A holder in due course of negotiable instrument is free from all defects. The term holder in due course means the bona -fied transferee for values of a negotiable instrument who takes it in good faith and before majority. The title of holder in due course is not in any way affected by defective title of the transferor or any party.

X. Presumptions:

Certain legal presumptions are applicable to all the negotiable instrument. The presumptions are regarding consideration, time, date, stamp and holder in due course.

Parties to Negotiable Instrument:

Following are the parties to the negotiable instrument.

(i) Drawer

(ii) Endorser

Holder and Holder In Due Course

A holder is an individual who is in possession of an instrument that is either payable to him or her as the payee, endorsed to him or her, or payable to the bearer. Those who obtain instruments after the payee are holders if such instrument is either payable to the bearer or endorsed properly to their order. The party in possession is not considered to be the holder in a case in which a necessary endorsement has been forged.


The holder of a promissory note bill of exchange or cheque means any person entitled in his own name to the possession there of and to receive or receive the amount due. Thus a person who is in possession may or may not be a holder. However in due course means any person who for consideration becomes the possessor of a negotiable instrument.

Definition of holder

According to Sec 8.

“Holder of a promissory note, a bill of exchange or cheque means the payee or endorsee who is in possession of it or the bearer there of but it does not include a beneficial owner claiming through a Benamidar.

Conditions to be holder:

(i) He must be entitled to the possession.

(ii) He must be entitled to receive the amount.

(iii) He must be entitled to negotiate.

(iv) He must be entitled to sue.

Definition of holder in due course:

According to Sec 9.

‘Holder in due course means any person who for consideration becomes the possessor of a promissory note bill of exchange or cheque if payable to bearer, or the payee, or endorsee thereof, if payable to order, before it becomes overdue, without notice that the title of the person from whom derived his own titled was defective.

Conditions to be holder in due course:

Following are the condition to be holder in due course.

I. Holder:
Holder in due course must be entitled to the possession of the instrument in his own name under a legal title.

II. Lawful consideration:
He must be the holder of the instrument against the lawful consideration.

III. Complete instrument:
Instrument must be complete in all respects.

IV. Before maturity of the instrument:
In order to become holder in due course he must possess the instrument before its date of maturity. V. Good faith:
Holder in due course must get the instrument in good faith. Under the belief that the title of the transferee is not defective.


Following are the right and privileges of a holder in due course.

I. Better Title:

A holder is due course gets better title than the transferor while a holder cannot get a better title.

II. Transfer of Good Title:

A holder in due course also transfers a good title to the subsequent holders.

III. Incomplete Stamped Instrument:

If unstamped instrument is transferred to the holder in due course, he can claim the whole amount.

IV. Free From all Defects:

As the instrument passes through the hands of a holder in due course to the subsequent holders, it become free from all defects.

V. Validity of Instrument:

Executor of a negotiable instrument and acceptor of a bill of exchange for the honour of the drawer cannot deny the validity of the instrument.

VI. Fictitious Bill:

An acceptor of a bill of exchange drawn in a fictitious name and payable to the drawer’s order is not exempted from liability to any holder in due course by reason and such name being fictitious one.

VII. Conditional Instrument:

When one instrument is delivered for special purpose and not for the transfer of ownership this does not affect the holder in due course.

VIII. Payee’s Incapacity:

Maker of a note and acceptor of a bill payable order cannot deny the payee’s capacity, at the date of the note or the bill to endorsed it in a suit by holder in due course.

IX. Capacity of Prior Party:

No endorser of a negotiable instrument shall in a suit thereon by a subsequent holder, be permitted to deny the signature or capacity to contract for any prior party to the instrument.

Business Law Unit 3 Business Law full notes Holder and Holder In Due Course

Negotiation and Assignment


Easy transferability is one of the important characteristics of a negotiable instrument. An instrument may be transferred:
1. By assignment, or
2. By negotiation.

Transfer by Assignment

A negotiable instrument can also be transferred by assignment. Assignment means transfer of ownership by a written document under the provisions of the Transfer of Property Act, 1882.


A executed a promissory note in favour of B. B sold this note by assignment under a sale deed to C. C sued A to recover the amount. A contended that since C was not a holder in due course, no suit was maintainable.

The Court held, although C was not a holder in due course, yet he is a holder within the meaning of Sec. 8 as he is in possession of the note and as an assignee, entitled to recover the amount in his own name. Hence an instrument can be transferred by assignment. But a transferee acquires only those rights which the transferor had at the time of assignment and no more.

Transfer by Negotiation (Sec. 47):
When a note, bill or cheque is transferred to any person, so as to make that person holder of the instrument, the instrument is said to be negotiated.

Mode of negotiation or how negotiation is effected?

(i) Negotiation by delivery (Sec.47) The transfer of a negotiable instrument payable to bearer can be effected by mere delivery.

A, the holder of a negotiable instrument payable to bearer, delivered it to B’s agent to keep it for B. The instrument has been negotiated.

(ii) Negotiation by endorsements and delivery (Sec. 48). A negotiable instrument, payable to order, is negotiable by the holder, by indorsement and delivery thereof.

A holds a cheque payable to order. A signs on the back of the cheque and writes ‘Pay B’. Therefore, A delivers the cheque to B. It is negotiation by indorsement and delivery.
Significance or Importance of the Term ‘Delivery’:

The term ‘delivery’ is very important in negotiation: Delivery here means actual or constructive delivery with an intention of transferring property in the instrument. If the instrument is executed but is not delivered, there is no negotiation.


(a) A person executed a promissory note but died before delivering it to the payee.
The promissory note was found in his papers and it was delivered to the indorsee. There is no negotiation and payee cannot recover the amount.

(b) Similarly, when an instrument payable to bearer was accidentally lost and picked up by a passer-by X, the passer-by did not acquire any title. However, if he transfers it, say, to Mr. Y. who takes it for value and in good faith, he (Y) will acquire a good title to the instrument.


Assignment: Under general contract principles, a negotiable instrument may be transferred to an assignee, who then holds the instrument with all the rights of the Assignor.

Negotiation: Transfer of an instrument in such a form that the transferee becomes a holder, who has at least the same rights in the instrument as the transferor, and may have more rights than the transferor.

Negotiating Order Instruments: An order instrument may be negotiated by delivery with any necessary endorsements.

Negotiating Bearer Instruments: Unlike an order instrument, a bearer instrument need not be indorsed to transfer the payee’s rights to the transferee. All that is required is delivery to the new bearer.


Indorsement: A signature, with or without additional words or statements (e.g., “for deposit only,” “payable to Jane Smith,” “payable from acct. # 000001,” etc.), made by the indorser in order to transfer his or her rights to the

Blank Indorsement: An indorsement that specifies no particular indorsee and can consist of a mere signature.

Special Indorsement: An indorsement that indicates the specific person to whom the indorser intends to make the instrument payable — i.e., the indorsee.

Qualified Indorsement: An indorsement which disclaims any contract liability on the instrument (e.g., “without recourse”).

Restrictive Indorsement: Any indorsement on a negotiable instrument that requires the indorsee to comply with certain instructions regarding the funds involved.

Indorsement for Deposit or Collection: “For deposit only.”

Effect of Negotiation

Negotiation involves transfer of ownership of the instrument from its holder to the other person. When the instrument has been transferred by negotiation the holder who has taken it for value gets good title to the instrument notwithstanding any defect in the title of the transferor, except in the case of forgery because forgery conveys no title.

Thus, where the title of any prior endorser is defective by virtue of fraud, coercion or misrepresentation, the bona fide holder who has taken the instrument, in good faith gets a good title. Negotiation thus conveys a better title to the transferee than the transferor, when the holder is a holder in due course.

Business Law Unit 3 Business Law full notes Negotiation and Assignment Difference Between Negotiation and Assignment

Difference Between Negotiation and Assignment

The various points of distinction between negotiation and assignment are discussed below:-

1. Negotiation requires delivery only to constitute a transfer, whereas assignment requires a written document signed by the transferor.

2. Consideration is always presumed in the case of transfer by negotiation. In the case of assignment consideration must he proved.

3. In case of negotiation, notice of transfer is not necessary, whereas in the case of assignment notice of the transfer must be given by the assignee to the debtor.

4. The assignee takes the instrument subject to all the defects in the title of the transferor. If the title of the assignor was defective the title of the assignee is also defective. However, in case of negotiation the transferee takes the instrument free from all the defects in the title of the transferor. A holder in due course is not affected by any defect in the title of the transferor; He may therefore have a better title than the transferor.

5. In case of negotiation a transferee can sue the third party in his own name. But an assignee cannot do so.

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