Lecture 6 – Law Relating to Negotiable Instruments
What is a negotiable instrument?
• Gillian (2015, p. 720) defines a negotiable instrument as
“a signed document detailing the ownership of a debt which can be used … as a method of paying
for goods or services.”
• If not restricted, a negotiable instrument can be transferred from one person to another
until the debt it details is due for payment.
• A negotiable instrument is equivalent to cash
• Not as widely used as before, but still play a significant role in commercial transactions
Relevant Legislation
Bills of Exchange Act 1882 (BoEA 1882), as amended by the Cheques Act 1957 and the Cheques Act
1992
Bills of Exchange – Background
• Origin of bills of exchange
• their origin can be traced back to 12th century
• became more popular in their present form since 14th century onwards
• Benefits of bills of exchange
• Preferred method if payment is to occur at some point after the goods or services
have been delivered – provides security of payment to the seller
• Seller can negotiate the bill with a third party for early payment, mostly on discount
• Allows the seller to carry on business on credit
How a bill operates in practice?
• Foreign Bill
• Inland Bill
, Parties to a bill
• Drawer (debtor) – who draws the bill
• Payee (creditor) – who is due the specified sum in the bill
• Drawee – who is ordered to pay the specified sum to the payee
Definition of a bill of exchange
• S3(1) of BoEA states that 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 or to the order of a specified person, or to bearer.”
How the process works?
• It is drawee’s duty to honour the bill i.e. to pay when it is supposed to
• Payment can be on sight or on demand or at any other specified time, such as in three
months
• On acceptance of the bill by the drawee, the drawee’s designation will change to “acceptor”
• How acceptance of bill occurs? – by writing drawee’s name across the bill and the word
“accepted”.
• What if the bill is not accepted?
• Once accepted, the bill becomes a negotiable instrument unless there are restrictions on
transfer
• “Bearer” – means a person who is in possession of the bill at the relevant time
Form of a bill – an Example
• No prescribed statutory form
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