A negotiable instrument is a document evidencing an obligation which is transferable by mere delivery or by delivery and endorsement. Such delivery, operating to transfer all legal rights to the obligation evidenced, free from defects in the transferor’s title. It is also a document possessing certain qualities and entitling the holder to a specified sum of money.


Characteristics of Negotiable Instrument

  1. The title passes by delivery.
  2. The holder can sue in his name.
  3. No notice is necessary to the debtor or other obligee.
  4. A transferee can obtain a good title even though the transferor has no title, provided the instrument was in a negotiable state and the transferee took it in good faith.
  5. The instrument must be recognised as a negotiable instrument by law.


Types of Negotiable Instruments

  1. Bill of exchange.
  2. Share warrant.
  3. Bank notes.
  4. Bearer debenture.
  5. Cheques.
  6. Bearer bond.
  7. Promissory notes.
  8. Treasury bills.
  9. Dividend warrant.


Although dock warrant, bill of lading, share certificates, postal or money order are similar in some ways to the negotiable instruments listed above, they are by no means negotiable instruments.



The Bill of Exchange Act defines a bill of exchange to be: “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 to, or to the order of a specified person or to bearer.”


Features of Bill of Exchange

  1. It must be in writing.
  2. The order must be unconditional.
  3. It must be addressed by one person to another and it must be an order to pay.
  4. It must require payment to be made to a specified person or to the bearer.
  5. It must be signed by the drawer.
  6. It must require the buyer to pay a sum of money on demand or in a fixed future date.
  7. The buyer must accept the bill by writing the word accepted across its face and followed by his signature.
  8. It must order payment of a sum certain in money.


Parties to a bill

The parties to a bill are the people who are liable on it. These are:

1) Drawer: This is the person who makes out the bill, signs and issues it, i.e ., the creditor to whom money is owing.

2) Drawee: This is a person to whom the bill is drawn and who after acceptance is called, an acceptor.

3) Payee: This is a person to whom the money is paid. The payee of the bill is the party to be paid the amount or sum stated on the bill. In addition, there are other parties who receive their power from the payee. These are:

  • Indorsee: This is the person to whom the order bill is indorsed.
  • Bearer: This is the person in possession of a bill which is payable to the bearer.
  • Holder: This refers to the payee or indorsee who is in possession of an order bill or a bearer bill.
  • Holder for Value: This is the holder who has given or who is deemed to have given value. He is the holder of a bill for which value is given at any time.
  • Holder in Due Course: This is a holder who has taken a bill:

(i) on the face of it;

ii) before it was overdue;

iii) without notice of previous dishonour by non-payment;

iv) in good faith;

v) for value;

vi) without notice of any defect at the time of negotiation.

  • Endoser: This is a person named on a bill to whom the money was to be paid and who has transferred the bill by writing his name on the book and delivering it to a transferee.


Kinds of Bills

There are two kinds of bills. These are:

1) Inland Bills: This is a bill which is or purports to be

  • drawn and payable within a country.
  • drawn within the country upon the same person resident therein.


2) Foreign Bill: This is a bill used for making a payment arising out of foreign trade. It is similar to an inland bill and is drawn in a set of three. Bills are accompanied with shipping documents, e.g. bill of lading, invoice, certificate of origin and consular invoice. The bill is then a documentary bill.


Advantages of Bill

  1. A bill reduces the risk of carrying large amount of money.
  2. It is transferable from one person to another.
  3. It is a legal document which the creditors can sue the debtor on defaults.
  4. It fixes the date of payment.
  5. Foreign bills enable the exporter to obtain cash soon after the goods are dispatched.
  6. It enables the buyer to defer payment until the goods are received or even later.


Differences between Cheque and Bill


  1. Drawer is a debtor.
  2. It can be crossed and paid into account.
  3. Cheque is not drawn on a person but bank.
  4. A banker may be protected against a forged endorsement of a cheque drawn on him.
  5. The drawer of a cheque is under a duty to his banker to exercise reasonable care when drawing a cheque.



  1. Drawer is a creditor.
  2. It cannot be crossed and paid into current account.
  3. A bill can be drawn on a person.
  4. The drawee under a bill has no such protection.
  5. The drawer owes no such duty.


Similarities between Cheque and Bill of Exchange

Both are:

  1. orders.
  2. unconditional.
  3. evidenced in writing.
  4. addressed by one person to another.
  5. written by drawer.
  6. time of payment is specified.



A promissory note is defined as, “An unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed determinable future date, a sum certain in money or to the order of a specified person to bearer.”


Parties to a Promissory Note

  1. Maker: This refers to the party who writes out the note, i.e ., the debtor.
  2. Payee: This refers to the person to whom the money is payable, i.e ., the creditor.


Kinds of Promissory Notes

Promissory notes are of two kinds: inland and foreign.

An inland note is one which is or on the face of it purports to be both made and payable within a country; any other note is a foreign note.


Features of a Promissory Note

  1. It is a promise to pay somebody.
  2. It must be in writing.
  3. The maker must sign it.
  4. It must be an unconditional promise.
  5. It can be transferred by endorsing it.


Distinction between a bill of Exchange and Promissory Note

Bill of Exchange

  1. This is an order to pay.
  2. Bill requires acceptance.
  3. It is drawn by the creditor.
  4. The acceptor is primarily liable.
  5. There are three parties to a bill.
  6. Bills are drawn in sets.
  7. Foreign bill when dishonoured can be protested.


Promissory Note

  1. It is a promise to pay.
  2. Acceptance is not necessary.
  3. It is drawn by the debtor.
  4. Drawer is liable to pay.
  5. There are only two parties.
  6. Notes are made singly.
  7. Foreign notes need not be protested.



  • Endorsement: The bill may be negotiated several times before payment. Negotiation is effected by the holder signing his name on the back of the bill, i.e ., endorsing the bill.
  • Dishonoured Bill: This is a bill the debtor refuses to pay when it is presented for payment on the agreed date.
  • Discounting Bill: To discount a bill means to acquire it by purchase for a sum less than its face value. The amount depends on the amount of risk involved.
  • Noting: This term is used when a dishonoured bill is handed to a notary public who re-presents it so as to obtain independent evidence of its dishonour.
  • Allonge: This is a slip of paper attached to a bill of exchange to provide additional space for endorsements where the reverse side of the bill has already been fully covered.
  • Notary Public: This is a public officer whose duty is to certify deeds and other documents. His duties include presentation of dishonoured bill of exchange.
  • Noting Charges: These are the notary’s fees for re-presenting the bill, recording and certifying it dishonoured and drawing up a protest.
  • Protest: This is a formal record of declaration which is prepared by the notary public to protest the dishonour of a bill or against non-payer or non-acceptor of a bill. Failure to note and protest a foreign bill discharges the drawer and endorsers.


Noting or protesting is necessary

  1. on dishonour of a bill by an acceptor for honour.
  2. in the case of non-acceptance or non-payment of foreign bills.
  3. prior to an acceptance of payment for honour.
  4. prior to an acceptance or payment for honour.
  5. before a bill can be presented for payment to a referee in case of need.


  • Accommodation Bill: This is a bill put into circulation in order to raise money on it by the process of discounting.
  • House Bill: These are, in effect, accommodation bills drawn by the head office of a trading firm or company upon one of its branches and are discounted to supply the drawer with funds for trading operations.
  • Overdue Bill: A bill of exchange is overdue if the period for which it was drawn has expired without the bill being presented.
  • Acceptance: The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer. This is effected by the drawee signing his signature across the face of the bill.


There are two kinds of acceptance:

  1. General Acceptance: This is the assent without qualification to the order of the drawer.
  2. Qualified Acceptance: This is one which varies the effect of the bill as drawn. It may be conditional, partial or local.


  • Sola: When this term appears on a bill of exchange it means that it is the sole or only bill, i.e ., the bill has not been drawn in a set.
  • Days of Grace: Unless there is an express statement to the contrary, bills of exchange is due for payment within three days. A time allowed after the period for which the bill has been drawn is known as “days of grace.”