Jannel Yza S.

Gunida
BSBA – IV
Negotiation Lecture

I. Preliminary Subject – Matter on Negotiation

A. Most common forms of Negotiable Instrument

1. Promissory note
2. Bill of Exchange
3. Cheques

B. Definition

1. Promissory Note

A promissory note refers to a written promise to its holder by an entity or an

individual to pay a certain sum of money by a pre-decided date. In other words,
Promissory notes show the amount which someone owes to you or you owe to someone
together with the interest rate and also the date of payment.
For example, A purchases from B INR 10,000 worth of goods. In case A is not able to
pay for the purchases in cash, or doesn’t want to do so, he could give B a promissory
note. It is A’s promise to pay B either on a specified date or on demand. In another
possibility, A might have a promissory note which is issued by C. He could endorse this
note and give it to B and clear of his dues this way.
However, the seller isn’t bound to accept the promissory note. The reputation of a buyer
is of great importance to a seller in deciding whether to accept the promissory note or not.

2. Bill of Exchange
Bills of exchange refer to a legally binding, written document which instructs a
party to pay a predetermined sum of money to the second(another) party. Some of the
bills might state that money is due on a specified date in the future, or they might state
that the payment is due on demand.
A bill of exchange is used in transactions pertaining to goods as well as services.
It is signed by a party who owes money (called the payer) and given to a party entitled to
receive money (called the payee or seller), and thus, this could be used for fulfilling the
contract for payment. However, a seller could also endorse a bill of exchange and give it
to someone else, thus passing such payment to some other party.
It is to be noted that when the bill of exchange is issued by the financial
institutions, it’s usually referred to as a bank draft. And if it is issued by an individual, it
is usually referred to as a trade draft.
 A bill of exchange primarily acts as a promissory note in the international trade;
the exporter or seller, in the transaction addresses a bill of exchange to an importer or
buyer. A third party, usually the banks, is a party to several bills of exchange acting as a
guarantee for these payments. It helps in reducing any risk which is part and parcel of any
transaction.

3. Cheques
A cheque refers to an instrument in writing which contains an unconditional
order, addressed to a banker and is signed by a person who has deposited his money with
the banker. This order, requires the banker to pay a certain sum of money on demand
only to to the bearer of cheque (person holding the cheque) or to any other person who is
specifically to be paid as per instructions given.
Cheques could be a good way of paying different kinds of bills. Although the
usage of cheques is declining over the years due to online banking, individuals still use
cheques for paying for loans, college fees, car EMIs, etc.  Cheques are also a good way of
keeping track of all the transactions on paper. On the other side, cheques are
comparatively a slow method of payment and might take some time to be processed.

C. General Characteristic of a Promissory Note, Enumerate

 It is a written document.
 There must be a clear and unconditional promise to pay a certain sum to a
specified person or on-demand.
 It must be drawn and duly signed by the maker.
 It must be properly stamped.
 It specifies the name of the maker and payee
 The amount to be paid must be certain, given in both figures and words.
 Payment is to be made in the country’s legal currency.
A promissory note may consist of various terms and conditions related to
indebtedness like the principal amount, date of maturity, the rate of interest, terms of
repayment, issue date, name and signature of the drawer, name of the drawee and so
forth. A promissory note needs no acceptance.

D. General Characteristic of a Bill of Exchange, Enumerate.

 An instrument which a creditor draws upon his debtor.

 It carries an absolute order to pay a specified sum.
 The sum is payable to the person whose name is mentioned in the bill or to any other
person, or the order of the drawer, or to the bearer of the instrument.
 It requires to be stamped, duly signed by the maker and accepted by the drawee.
  It contains the date by which the sum should be paid to the creditor.
E. General Characteristic of a Cheque, Enumerate.

1. Open Cheque: Otherwise called as uncrossed cheque, it is one on which cash is payable
at the counter of the bank, or it is transferred to the bank account of the person whose
name is written on the cheque. It is negotiable, i.e. it is transferable in nature.
2. Bearer Cheque: Bearer cheque refers to the cheque which can be encased by the person
whose name is written on the cheque or anyone who presents the cheque before the bank
for payment. It is negotiable in nature, which can be transferred by simply delivering it
and so endorsement is not needed. No identification of the presenter or holder is required
in case of a bearer cheque.
3. Order Cheque: As the name suggests, it is the cheque which becomes payable to the
person or organization whose name is specified on the cheque or to his order. To convert
a bearer cheque into an order cheque, the word ‘or bearer’ is stricken off from the cheque.
Endorsement of the cheque to the third party is done by simply signing on the cheque.
4. Crossed Cheque: You might have observed, two transverse parallel lines at the top left
corner of some cheques, which may or may not have the words – & Co., A/c payee or
Non-Negotiable. Such cheques are regarded as crossed cheques. The amount on such
cheques is credited to the account of the payee.
5. Self Cheque: When a person wants to withdraw money from his own account, by writing
‘self’ at the name of the payee, is called self-cheque. Do not cross the cheque or cancel
the words ‘or bearer’ from the cheque. These cheques should not be crossed, as well as
the words ‘or bearer’ should not be stricken off from the cheque, so that any person as
your representative can receive the amount on your behalf.
6. Blank Cheque: A cheque which is only signed, but the name of the payee and date is not
indicated, is called a blank cheque. Such cheques can be made account payee, and the
maximum limit of withdrawal can be mentioned.
7. Stale Cheque: A cheque bears a date and is valid up to three months of the stated date. If
a cheque is presented before the bank, after the expiry of the reasonable period, i.e. three
months after the date, then it is called stale cheque.
8. Post-Dated Cheque: When a cheque is drawn containing a future date, it is called post-
dated cheque. In such cases, money will not be payable by the bank before that date.
9. Ante-dated Cheque: A cheque containing a prior date, is called an ante-dated cheque.
Bank honours cheques until three months to the date mentioned.
10. Banker’s Cheque: Otherwise called a pay order, it is a non-negotiable instrument, which
is issued by the bank on behalf of the customer, which is payable in the same city.
11. Cancelled Cheque: Due to any kind of mistakes while writing the cheque, it is cancelled,
and so it is called cancelled cheque.
12. Mutilated Cheque: A cheque which is torn, damaged, crushed or washed, is called a
mutilated cheque. Such cheques are honoured only when certain details are visible, after
confirming with the drawer.
13. Traveler’s Cheque: A cheque issued by a bank for a fee, containing a fixed amount.
These cheques are enchased or used to make payment in a foreign country, after
endorsement by the signature of the holder.
14. Gift Cheque: Cheques that are used for the purpose of gifts and prizes, usually very large
in size, are called Gift Cheques. Banks charge a fee for issuing such cheques.

Cheque includes both electronic image of a truncated cheque and a cheque in

electronic mode.

F. Parties to a Promissory Note

 Drawer: The one who makes the promise to another, to pay the debt is the drawer
of the instrument. He/She is the debtor or borrower.
 Drawee: The one, in whose favour the note is drawn is the drawee. He/She is the
creditor who provides goods on credit or lender, who lends money.
 Payee: The one, to whom payment is to be made is the payee of the negotiable
instrument.

The drawee and payee can be the same person when the amount is to be paid to
the person in whose favour the note is drawn. However, when the amount is to be paid to
another person, on the order of the drawee, meaning that if the drawee transfers the
instrument in favour of another person then, in that case, the payee would be different.

Further, the party that owes money to another party holds the promissory note and
after discharging the obligation completely, the drawee or payee (whatever the case may
be) cancels the note and returns to the drawer.

G. Parties to a Bill of Exchange

1. Drawer: The person who makes the bill, or who gives the order to pay a certain sum
of money, is the drawer of the instrument.
2. Drawee: The person who accepts the bill of exchange, or who is directed to pay a
certain sum, is called drawee.
3. Payee: The person receiving payment is called the payee, who can be a designated
person or the drawer himself.

Now, apart from the parties mentioned above, there are some other parties to a bill
of exchange, described as under:
  Drawee, in case of need: If in any bill of exchange, a person’s name is mentioned in
addition to the original drawee, who can be resorted for payment. Then, that person
will be called as drawee.
 Holder: The holder of the bill of exchange, is the person who possesses the bill and
who has the right to recover the amount from the parties.
 Acceptor: The person who accepts the bill is called acceptor. Usually, a debtor or
drawee is the acceptor. However, it can be accepted by some other person also, on
behalf of the debtor/drawee.
 Endorser: If the holder of the bill, endorses it to another person, then the person will
be called as the endorser.
 Endorsee: The person to whom the bill of exchange is endorsed, is called as an
endorsee.

H. Parties to a Cheque
Basically, there are three parties to a cheque:

 Drawer: The person who draws the cheque, i.e. signs and orders the bank to pay the
sum.
 Drawee: The bank on which the cheque is drawn or who is directed to pay the
specified sum written on the cheque.
 Payee: The beneficiary, i.e. to whom the amount is to be paid.
Apart from these three, there are two more parties to a cheque:

 Endorser: When a party transfers his right to take the payment to another party,
he/she is called endorser.
 Endorsee: The party in whose favour, the right is transferred, is called endorsee.
Sometimes, the drawer and payee can be the same person, when the drawer writes
a self-cheque.

I. Other Parties to Negotiable Instruments

1.   Maker/drawer: the person who makes or executes the note promising to pay the
amount stated therein.
2. Drawee: The person directed to pay the money by the drawer. The drawee is the
paying bank in case of cheque.
3.  Payee: Payee is the person whose name is written on the promissory note or bill of
exchange or cheque. The payee is entitled to receive amount mentioned in the note or
bill or cheque.
 4. Holder: Holder is either the payee or some other person to whom he may have
endorsed the promissory note or bill of exchange or cheque. A person cannot be a
holder unless he is the payee or indorsee (endorsee) thereof.
5. Holder in due course: Holder in due course means any person who for consideration
became the possessor of a promissory note, bill of exchange or cheque, if payable to
bearer, or the payee or indorsee thereof, if payable to order, before the amount
mentioned in it became payable, and without having sufficient cause to believe that
any defect existed in the title of the person from whom he derived his title.”
6.   Endorser: A signature of the owner (the holder of the instrument) would serve the
legal rights to transfer an instrument to another party. The holder of the instrument
who transfers his right to another party by endorsement is called endorser.
7.   Endorsee: If the endorser adds a direction to pay the amount mentioned in the
instrument to, or to the order of, a specified person, the person so specified is called
the “endorsee” of the instrument.
8. Endorsement: If the endorser signs his name only, it is called endorsement in blank. If
the endorsement contains the instructions of endorser to pay the amount mentioned in
the instrument to, or to the order of, a specified person, the endorsement is called
endorsement in full.
9. Drawee in the case of need: In addition to drawee’s name, the name of a person is
given in the bill or endorsement, to have resorted in case of need. Such person is
called drawee in case of need.
10.   Acceptor for honour: In the event of refusal of acceptance of bill by the original
drawer or in cases of providing better security when demanded by notary public, with
the consent of the holder some other person who is originally not liable for payment of
bill, may accept  it for honor of any party liable on the bill .  Such acceptor is called
‘Acceptor for honour”.

II. Forms and Interpretation

A. Requirements as to the negotiability of a promissory note.