Negotiable Instruments Research Essay

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Negotiable instruments continue to hold a significant place in business because they are the primary means of payment and the way that trade obligations are fulfilled. It is crucial to remember that using negotiable instruments to send and receive payments has become much more common in today's society. Birla (2011) defined negotiable instruments as any transferable documents that ensure the payment of a specified sum of money to the party mentioned on the document, either under duress or at a specified time. The Negotiable Instruments Act 1881, for instance, governs the rules pertaining to negotiable instruments in India. Accordingly, the Negotiable Instruments Act 1881 states the negotiable instruments to include: a bill of exchange (BOE), a promissory note, and check (Birla).

Upon the transfer of the negotiable instruments also called negotiation of the instrument, the holder in due course acquires the full legal responsibility to the instrument. Indeed, the negotiable instruments can either be transferred by either delivery or by endorsement and delivery (Beatty, Samuelson and Sánchez Abril). For example, in the promissory note, it involves two parties the maker of the note or the issuer and the party to whom the note is payable also called the payee. In the promissory note, the issuer promises to pay a certain amount of money to the payee. In the second type of negotiable instruments which is the bill of exchange, it consists of three parties in its inception. They include the drawer, which is the person that draws the bill and is responsible for giving the order to pay a certain amount of money to the third party. The party that is called upon to make the payment is known as the drawee, while the amount to whom the payment is made is referred to as the payee.

Lastly, a check is a form of bill of exchange drawn on a particular banker, and it is not explicitly stated to be payable unless on demand. Though the Negotiable Instruments Act 1881, only gives three instruments as examples of negotiable instruments, however, it does not prevent the treatment of any other instrument which conforms to those essential of negotiability as negotiable instruments (Birla). Evidently, a negotiable instrument is any transferable document which satisfies the application of the law governing negotiable instruments or by the custom of the trade. Clearly, a negotiable instrument must be transferable from one person to the other and ownership can be passed by delivery.

Moreover, in the United States of America, the Uniform Commercial Code (UCC) is the primary governing principle on the issuance and the transfer of negotiable instruments (Beatty, Samuelson and Sánchez Abril). Indeed, the legislations stipulates what should and what should not be a negotiable instrument. For a document to be referred to as a negotiable instrument, then it must meet several requirements. First, the paper must be in writing and contain a signature of the maker or the drawer of the paper. Second, the paper must contain a promise or an order to pay a certain amount of money. Third, the paper must be payable to the payee on demand or after a definite time. Lastly, the document payable to order or the bearer except for the case of a check (Miller).

Liability of Parties

The parties involved in the negotiable instruments enter into a contract among themselves as such it is imperative for them to enter into valid contracts (Evans). Clearly, any person who enters into an agreement in the making of a negotiable instrument can bind himself by the aking, the acceptance, the endorsement and the delivery of a negotiable instrument. Thus for any person who is of sound mind, above the legal age, and is liable to enter into a contract under the various provisions can enter into a valid contract and thus can make a negotiable instrument.

Liability of the Drawer

According to the different laws governing negotiable instruments, the responsibility of the drawer only arises in the case of dishonor of the check or the bill of exchange and nothing other than those (Evans). In the event of the bill of exchange, the BOE is dishonored when there is non-acceptance or the failure to comply with payment. On the other hand, a check is dishonored when the drawer does not make the payment. Immediately the bill of exchange or the check is dishonored by non-acceptance by the drawee, the holder of the bill of exchange or the check has the right to recourse against the drawer of the check or bill of exchange. It is imperative to note that the drawer becomes liable only when the drawee dishonors the check or the bill of exchange (Miller). Nonetheless, in the case of a check, the drawer remains responsible even when the check is not presented to the drawer bank to prevent the drawer to experience damage during the giving of the check.

Liability of the Endorser

The responsibility of the endorser is provided under the negotiable instruments act 1881, and under the Uniform Commercial Code (UCC). If there is no contract, on the contrary, the liability of the endorser exists whoever the person that indorses and makes delivery of the negotiable instrument before its maturity without any forms of endorsement without making responsibility is bound to every subsequent holder (Evans). Nonetheless, this can occur in the case where there is an instance of dishonor by the drawee, the maker or acceptor to compensate for the holder for any loss that the endorsee might experience because of the dishonor. Moreover, there should be the provision of due notice, and the endorser should receive it as per the provisions of the articles of negotiable instruments act 1881 and the UCC. Clearly, the endorser is overly liable to the instrument, and that should be payable on demand.

It is imperative to note that for the endorsement to exist then the document must satisfy all the aspects of the negotiable instruments (Miller). Indeed, if the marker or the holder of the negotiable instrument makes a signature on the paper for the purpose of the agreement, then the marker is said to have indorsed the negotiation and is thus referred to as the endorser. Evidently, for the liability of the endorser to exist then the endorsement of the instrument must exist and endorsee should receive the instrument. As such if all of these acts do not occur, then the liability of the endorser should not arise.

Liability of the Drawee

Under the responsibility of the drawee of the check, in most cases of negotiations, the drawee of the check is always a banker. It is the duty of the banker always to pay the check, and if the banker refuses to make the payment without any sufficient cause shown, then the banker must compensate the drawer for any loss experienced (Evans). Indeed, the bank is liable to pay not the holder of the negotiable instruments but the drawer. The amount of compensation that the drawee of the negotiable instruments should pay the drawer should equal the extent of the loss of the damage. For example, this can include the loss of credit that the drawer can suffer in the process. However, the banker should only pay the check when it is duly required of them to make the payment otherwise the banker is not liable for any payment of damage (Miller).

Negotiable Instruments Defenses

In many cases, as negotiable instruments are forms of contracts with specific terms, there exist those instances when a person issues a negotiable instrument but in the process cancel them for a myriad of reasons (Miller). Indeed, there exist many situations that the maker of such instruments can wish to avoid the payment of the instrument and can thus mount a defense against the payment of the instrument. However, the arguments in such a case depend upon the condition being fulfilled as the type of defense can hinder or make the maker of the negotiable instrument avoid the payment on the negotiable instrument. For a universal defense, it can occur because of such instances of fraud, illegality, incapacity, and breach of contract. On the other hand, a personal defense occurs under less substantial grounds than the universal defense as such it does not protect the defending party from those claims that are made by the holder in due course (HDC) (Miller). The holder in due course means the owner of a negotiable instrument in such cases when the instrument does not bear evidence of forgery, and they took it in good faith without any notice that the instrument is overdue or dishonored. The HDC protects the purchaser of debt when they are assigned the right to receive the debt.


Evidently, some provisions govern the instruments that fall under negotiable instruments. It is imperative to note that all those instruments that satisfy the stipulations can fall under negotiable instruments and thus be liable to rules governing them. Indeed, the relevance of negotiable instruments in the business world is unequivocal.

Works Cited

Beatty, Jeffrey F, Susan S Samuelson, and Patricia Sánchez Abril. Introduction to Business Law. 1st ed. Boston: Cengage Learning, 2015. Print.

Birla, Ritu. "Law as economy: convention, corporation, currency." UC Irvine L. Rev. 1 (2011): 1015.

Evans, Don A. Texas Business Law. 3rd ed. Gretna: Pelican Pub. Co., 1995. Print.

Miller, Roger LeRoy. Business Law Today, Comprehensive: Text And Cases: Diverse, Ethical, Online, And Global Environment. 10th ed. Boston: Cengage Learning, 2015. Print.

Miller, Roger L. Modern Principles of Business Law. 1st ed. Boston: Cengage Learning, 2012. Print.

July 15, 2023

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