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Core Concept — Negotiable Instruments
📃Governing law: Negotiable Instruments Act, 1881 S. 1, 1A — whole of Pakistan, in force from 1 March 1882; applies regardless of any contrary usage or custom. Negotiable = transferable by delivery; instrument = written document creating a right.
Promissory Note·Bill of Exchange·Cheque➜payable to ORDER or BEARERS. 13
Delivery S. 3(d)
Transfer of possession, actual or constructive.Issue S. 3(e)
First delivery of an instrument, complete in form, to a person who takes it as holder.Negotiation S. 14
Transfer so as to constitute the transferee the holder.2
Characteristics
✨Order or bearer S. 13
Order: "Pay Azam", "Pay Azam or order", "Pay Azam or Babar" — no words prohibiting transfer.Bearer: "Pay bearer", "Pay Azam or bearer", or last indorsement in blank (signature only)."Pay bearer whenever he asks for" → not valid.
Easy transferability
Bearer → by mere delivery. Order → by indorsement + delivery.Title of holder in due course S. 9
In the hands of a holder in due course the instrument becomes free from all defects.Finder of a lost note can't recover; an innocent HDC from him can sue maker and all prior parties.3
Parties, Holder & Holder in Due Course
👥Maker — makes a promissory note
Drawer — maker of a bill or cheque
Drawee — on whom bill/cheque is drawn, directed to pay; Acceptor once he signs assent
Payee — named person to whom/to whose order money is paid
Holder S. 8
(i) Entitled to possession in his own name (not a beneficial owner through a benamidar), and (ii) entitled to receive/recover the amount. If lost/destroyed, the person in possession at that time continues as holder.Holder in due course S. 9
Possessor (bearer) / payee or indorsee (order) who took it for consideration, before it became overdue, without notice of defect in transferor's title.✅ Conditions to become a Holder in Due Course
1. Is a holder
+
2. Valuable consideration
✖ gift
+
✖ gift
3. Before maturity
on demand: within reasonable time
+
on demand: within reasonable time
4. Complete & regular
no unconfirmed material alteration
+
no unconfirmed material alteration
5. Good faith
no negligence / suspicion
no negligence / suspicion
Material alteration S. 3(f): change of date, sum, time or place of payment; adding a place of payment to a generally accepted bill without acceptor's assent.
| Basis | Holder | Holder in due course |
|---|---|---|
| Consideration | Not necessary | Necessary |
| Right to sue | May not sue all prior parties | Can sue all prior parties |
| Good faith | May or may not | Must |
| Title | May not be free from defects | Better title than transferor |
| Maturity | Before or after | Only before maturity |
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Promissory Note S. 4
✍An instrument in writing (not a bank/currency note) containing an unconditional undertaking, signed by the maker, to pay on demand or at a fixed/determinable future time a certain sum of money only to, or to the order of, a certain person, or to the bearer.
Rs. 10,000/- onlyDate: September 15, 20XX
Three months after the date I promise to pay Ashraf or to his order the sum of Rupees Ten Thousand, for value received.
To: Ashraf (Payee)Sign: Zahid (Maker)
7 Essentials
- In writing
- Promise to pay (not mere acknowledgment)
- Definite & unconditional
- Signed by maker (thumb mark OK)
- Certain parties
- Certain sum
- Legal tender (money only)
✔ Valid
- "I promise to pay B or order Rs. 500"
- "I acknowledge myself to be indebted to B in Rs. 1,000 to be paid on demand, for value received"
- "…seven days after Saleem's death" (certain to happen)
- Payable to the principal of a college (ascertainable)
- Sum with interest, at an indicated exchange rate, or in instalments with default acceleration
✖ Invalid
- Oral promise on telephone
- "I owe you Rs. 1,000" / "I am liable to pay" — mere acknowledgment
- "…after my marriage" / "as soon as I can" / "at my convenience" — conditional
- "Rs. 500,000 and all other sums due"; "with interest calculated at quarterly rests"; "and all applicable interest" — uncertain sum (per study-text solutions)
- Money + horse/shares; foreign currency (USD) — not legal tender
- "to you or your successors" — uncertain payee; unsigned note
Not conditional: payable at a particular place, after a specified time, or on an event certain to happen. Adjustment for the maker's business profit or loss does not make the sum uncertain.
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Bill of Exchange S. 5
📨An instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay on demand or at a fixed/determinable future time a certain sum of money only to, or to the order of, a certain person or the bearer. Usually drawn by a creditor on his debtor.
Rs. 10,000/- onlyDate: September 15, 20XX
Three months after the date pay to Yaseen or to his order the sum of Rupees Ten Thousand, for value received.
Accepted — Aslam
To: Aslam (Drawee)Sign: Mohsin (Drawer)
Payee: Yaseen
Parties & liability
- Drawer — principal debtor until acceptance
- Drawee — not liable until acceptance; then liable as acceptor after maturity
- Payee — receives payment
Essentials mirror the note, but with an order (not a request) and signed by drawer and drawee. Fictitious payee → may be treated as payable to bearer.
✔ Order (even if polite): "Babar, please pay Rs. 50,000 to Ehsaan or order"; "Bilal will much oblige me by paying Dawood Rs. 30,000".
✖ Mere request / defective: "please let Jazib have Rs. 50,000 … and oblige"; "highly obliged if you make it convenient"; "as early as possible"; no drawee named; money + wheat.
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Cheque & Comparison Blocks S. 6
🏦A bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. Drawer = account holder; drawee = banker; payee. A bearer cheque is valid for six months (study-text example).
| Basis | Promissory Note | Bill of Exchange |
|---|---|---|
| Parties | 2 (maker, payee) | 3 (drawer, drawee, payee) |
| Maker = payee? | Not possible | Possible ("pay to me or my order") |
| Nature | Promise | Order |
| Acceptance | Not required | Required from drawee |
| Liability | Maker: primary & absolute | Drawer: secondary & conditional |
| Bearer | Cannot be drawn "payable to bearer" | Can, but not "to bearer on demand" |
| Dishonour notice | Not required to maker | To all prior liable parties |
| Basis | Cheque | Bill of Exchange |
|---|---|---|
| Drawee | Always a banker | Any person, incl. banker |
| Payable | Only on demand | On demand or after a period |
| Acceptance | Not required | Required |
| Stamp | Not required | Must be stamped |
| Stop payment | Drawer can countermand | Cannot be countermanded |
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Application — Which Instrument?
🧩Debtor pays creditor directly
No third party involved ➜ issue a promissory note ("Five months after date I promise to pay Zain or order…").Settling two debts at once
A owes Kamran and Abdullah owes A ➜ A draws a bill of exchange on Abdullah, payable to Kamran, accepted by Abdullah.Accepting an endorsed bill
Check: unconditional order, stamped, signed by drawer & drawee, certain parties/sum, alterations confirmed, proper indorsement and delivery.8
Common Exam Traps
⚠️"…after X's death" is valid — death is certain; "after marriage" is conditional.
"Pay Afshan only" → not negotiable (transfer restricted).
Bill received as a gift or after maturity → holder, not HDC.
Note for USD / goods → invalid; money (legal tender) only.
"Please pay" can still be an order; "I shall be obliged if convenient" is a request.
Blank indorsement converts an order instrument into a bearer instrument.
Negotiable instruments need not be registered.
Drawee of a cheque is always a banker; cheque needs no acceptance, no stamp.
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Quick Revision Box
⚡1881NI Act (in force 1 March 1882)
3Instruments: note · bill · cheque
7Essentials of note / bill
5HDC: holder · value · pre-maturity · regular · good faith
- S. 3 Definitions (bearer, delivery, issue, material alteration) · S. 4 Note · S. 5 Bill · S. 6 Cheque
- S. 7 Parties · S. 8 Holder · S. 9 Holder in due course · S. 13 Negotiable instrument · S. 14 Negotiation
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