What is a negotiable instrument?

This is a document which represents money and the title in passes to a bona fide transferee free from only defect. It is a chose in action. Negotiable instruments are transferable by reason of law or trade usage or custom.

Characteristics of Negotiable Instruments

  1. Consideration is presumed to have been provided i.e. past consideration is good consideration.
  2. A bona fide transferee of a negotiable instrument need not be notified before it is negotiated.
  3. A holder for value can sue on it in his own name.
  4. If payable to the bearer, it is negotiable by delivery.
  5. If payable to the order of specified person, it is negotiable by endorsement/ endorsement and delivery.
  6. The party liable on a negotiable instrument needs to be notified before it is negotiated.

Examples Include: Cheque, bills of exchange, promissory notes, share warrants, dividend warrants, bearer debentures etc.



Under Section 74(1) of the Bill of Exchange Act, a cheque is a bill of exchange drawn on a banker, payable on demand. It is a negotiable instrument negotiable by delivery or by endorsement and delivery. It differs from a bill of exchange in various ways: –

  1. It can only be drawn on a banker
  2. It is payable on demand
  3. It does not require acceptance
  4. Non-presentation does not discharge it
  5. It is less negotiable
  6. It may be crossed generally or specially
  7. Notice of dishonour is not necessary

Types / classification of cheques

Cheques may be classified on the mode of payment and to whom payable:

  1. Bearer cheque: This is a cheque whose proceeds are payable to the holder.
  2. Order Cheque: This is a cheque whose proceeds are payable to specified person or his order. Whereas a bearer cheque is negotiable by delivery an order cheque is negotiable by endorsement or delivery.
  3. Open Cheque: This is a cheque whose proceeds are payable across the counter.
  4. Crossed Cheque: Is a cheque that contains two parallel transverse lines on its face with or without account. A crossing is an instruction to the banker not to pay the proceeds across the counter.

Types of crossing

A cheque may be crossed generally or specially:

  1. General Crossing: Consist of two parallel transverse lines on the fact of the cheque with or without the words “and Co.” “Account payee”, “Not negotiable” etc. A cheque crossed generally may be crossed specially by the drawee.
  2. Special Crossing: Consists of two parallel transverse lines of the face of the cheque with the name of the banker in told.


There is a simple contractual relationship between the banker and customers. It is a debtor credit or relationship which imposes upon the parties certain legally binding obligations.

Duties of the customer

  1. Duty of Care: The customer is bound to the exercise reasonable care when drawing cheques to guard against alterations. The banker is not liable for any loss arising if the customer has failed to exercise reasonable care.
  2. Notice of irregularities: The customer is bound to notify the banker of any irregularities affecting the accounts e.g. forgeries or unauthorized which the customer is estopped from relying on the irregularity.


Duties of the banker

Paying Bank: This is the banker on which the cheque is drawn. It is the banker liable for the amount.

Collecting Bank: This is the bank in which the cheque is deposited for payment.

  1. Duty of Care: The banker is bound to exercise reasonable care and skill in his dealings with the customer. The standard of care and skill is that of a reasonably competent banker. If the banker fails to exercise such care and skill, the customer has an action in damages for any loss arising for professional negligence.
  2. Professional Advice: The banker is bound to give the customer professional advice on request. He is bound to give advice on investments as and when requested failing which he is liable in damages.
  3. Duty to Honour Cheques: The banker is bound to honour all cheques drawn by the customers provided: –
  1. The cheque is complete and regular on the face of it
  2. The customer‟s account has sufficient funds
  3. The cheque is presented at a reasonable hour on a business hour and business day.
  4. The payee identifies himself to the satisfaction of the banker.
  5. If a banker fails to honour a cheque in breach of this duty, the customer has an action in damages.
  6. Duty of Secrecy: The banker is bound to maintain confidentially in his dealings with customer. He must not discuss to 3rd parties any information which comes to him in the course of his dealings with the customer. The duty of secrecy was laid down in Tournier v. National Provincial and Union Bank of England which the English Court of Appeal insisted of the upholding of the duty. However the court was emphatic that the duty may be qualified in certain circumstance where personal information relating to the customer may be discharged to 3rd parties e.g.
  7. Where disclosure is provided for by the law
  8. Where the banker has the customer convent to disclose
  9. Where disclosure is necessary in the public interest
  10. What it is necessary to protect the banker
  11. Duty not to pay without Authority: The banker must not pay any monies out of the customer’s account without his express or implied authority failing which he is liable in damages for breach of duty. However, banker losses his authority to pay in various ways:-
  12. Countermand of payment: This is an express instruction by the customer to his banker not to honour a particular cheque
  1. b. If the banker has notice of the customer’s death
  2. If the banker has notice of the customers‟ unsoundness of mind
  3. If the banker has notice of presentation of a bankruptcy petition against the customer in court.
  4. If the cheque is irregular e.g. amounts in words and figures do not tally.
  5. If the customer’s account has been frozen by a court order.
  6. If the cheque is presented before time (post dated cheque) or after six months (stale cheque)
  7. If the payee has no title thereto
  8. The customer’s account has insufficient funds
  9. The customer has since closed his account.
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