Negotiable instruments and the law in Sri Lanka
A negotiable instrument is a document of payment that passes by delivery or endorsement, and a holder in due course takes it free from earlier defects in title.
Meaning
A negotiable instrument is a written document that orders or promises the payment of money and can be transferred from person to person: by delivery if it is payable to bearer, or by endorsement and delivery if it is payable to order. Its special feature is that a holder in due course, who takes it in good faith and for value without notice of any defect, gets a good title even if an earlier holder's title was defective. This is an exception to the general rule nemo dat quod non habet (no one can give a better title than he has). In Sri Lanka these instruments are governed by the Bills of Exchange Ordinance, modelled on the English Bills of Exchange Act 1882. It covers bills of exchange, cheques and promissory notes.
Features of a negotiable instrument
- Freely transferable: by delivery (bearer instruments) or by endorsement and delivery (order instruments).
- Better title for a holder in due course: free from defects in the title of earlier holders.
- The holder can sue in his own name, without notifying the person liable that it was transferred.
- Presumptions in favour of the holder: each party is presumed to have signed for value, and the holder is presumed to be a holder in due course, until the contrary is proved.
- Formal requirements: in writing, signed, unconditional, for a sum certain in money.
The three instruments under the Ordinance
| Instrument | Nature | Parties |
|---|---|---|
| Bill of exchange | An unconditional order to pay | Drawer, drawee (acceptor), payee |
| Cheque | A bill drawn on a banker, payable on demand | Drawer (customer), drawee (bank), payee |
| Promissory note | An unconditional promise to pay | Maker, payee |
Promissory note
A promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time a sum certain in money to, or to the order of, a specified person or to bearer. For example: 'Three months after date I promise to pay Nimal Perera or order Rs. 200,000, value received. (Signed) Kamal Silva.' The maker is primarily liable; there is no drawee and no acceptance.
Bill of exchange and promissory note compared
| Point | Bill of exchange | Promissory note |
|---|---|---|
| Nature | An order to pay | A promise to pay |
| Parties | Three: drawer, drawee, payee | Two: maker, payee |
| Acceptance | A bill payable later is usually presented to the drawee for acceptance | No acceptance needed |
| Primary liability | The acceptor, once accepted | The maker |
| Notice of dishonour | Must be given to the drawer and endorsers | Not needed to bind the maker |
A Sri Lankan garment exporter selling to a European buyer may be paid through a bill of exchange; once the bill is accepted, the exporter's bank can discount it and pay the exporter early. A small trader buying stock on credit may give the supplier a promissory note.
Short answer: “What is a negotiable instrument?” A written instrument for the payment of money, transferable by delivery or endorsement and delivery, under which a holder in due course takes free from earlier defects in title.
Structured question: “Distinguish between a bill of exchange and a promissory note.” Order vs promise; three parties vs two; acceptance needed vs not; acceptor vs maker primarily liable; notice of dishonour needed vs not.
Structured question: “Explain the main features of negotiable instruments.” Free transferability, better title for a holder in due course, holder sues in own name, presumptions of value and due course, formal requirements; name the Ordinance.
A negotiable instrument is T-H-S-P: freely Transferable, Holder in due course protected, holder Sues in own name, Presumptions in his favour.