Topic 5 Law of Negotiable Instruments

LAW
OF
NEGOTIABLE
INSTRUMENTS
(Topic 5)
1
1) Introduction
2) Examples of Negotiable Instruments
3) Concept of Negotiability
4) Protection of the Paying Banker
5) Protection of the Collecting Banker
2
Introduction
Negotiable instruments such as cheques,
bankers’ draft etc are documents used in
commercial and financial transactions.
The law of negotiable instruments is

governed by the Bills of Exchange Act 1949
(Revised 1978).
3
Examples of Negotiable Instrument
Promissory Notes
Cheques
Bankers’ draft
Bank notes
Traveler’s cheques
Treasury bills
Share warrants
Dividend warrants
4
Concept of Negotiability
It includes the quality of transferability i.e.
transfer of property (ownership) from one
person to another based on documents which
represents a contractual obligation for
payment of money.
A negotiable instrument is a document

containing an undertaking to pay a definite
sum of money which may be transferred by
several ways such as delivery or indorsement
(signing on the back of the documents).
5
CHEQUE SAMPLE
Payee: either name Drawee

of individual or company Date
Date: ………………………
ABC BANK
Pay/Bayar: ………………………………………………………….. atau pembayar/or bearer Amount

in number
Ringgit Malaysia:………………………………………………….
RM
………………………………………………………………………..
Amount in words Signature of drawer. If it is

drawn by company then
stamp chop is necessary.
6
7
8
9
10
11
12
13
Cheques
Sec. 73(1) of the Bills of Exchange Act 1949
 A cheque is a bill of exchange drawn on a banker
payable on demand.
Elements of a valid cheque :
1. It must be an unconditional order in writing.

 The order must be without any conditions or
qualifies and made in writing.
 It must be in form of order and not request.
 The word ‘pay’ and not ‘please pay’.
14
Cheques
2. The cheque must be signed.
 The person who gives the cheque should sign it.
 If no signature, the drawer would not be liable.
(Sec 23. of BEA).
3. It is drawn in a banker.
 The drawer must give direction to a particular
person, usually the bank. The name and address
of the payee is stated on the face of the cheque.
15
Cheques
4. The cheque instructed bank to pay money on
demand.
 Demand for payment is affected by presenting the
cheque to the banker on whom it is drawn.
5. It is drawn for a specified person or in favour

of a bearer.
 The order must be a payment to a specified
person or to a bearer.
 Bearer is the person who is in possession of the
bill or note. 16
TYPES OF CROSSINGS:
1) GENERAL CROSSING ( Sec. 76(1), BEA 1949.)
(1)
(2) (4)
(3)
17
2) SPECIAL CROSSING (Sec. 76(2), BEA 1949.)
(1)
(2)
18
Protection of the Paying Banker
Paying banker (drawee bank) is the bank
where a customer draws a cheque on it.
The duty of a paying banker is to pay the

right person according to the customer’s
mandate.
If the bank pays to a wrong person, the bank

must bear the loss.
19
The BEA provides protection to the paying banker :
(1) Payment in due course.
Sec. 59 : A bearer is not liable if the banker pays a
cheque in due course by or on behalf of the drawee
or acceptor.
Payment in due course means payment made at

or after maturity of the bill to the holder in good
faith and without notice that his title to the cheque
is defective.
20
2. Forged or unauthorized indorsement.
Sec. 60 : if the banker pays in good faith and in the

ordinary course of business a cheque drawn on him
which bears a forged or unauthorized indorsement,
he is not prejudiced by the forgery.
e.g. A draws a cheque on Kredit Bank Bhd in favour

of B. It is stolen by C who forges B’s indorsement
and negotiates it to D who in turns negotiates it to E
who obtains payment from the bank. If the bank
pays in good faith in the ordinary course of business,
the bank will not be prejudiced by the forgery. 21
3. No indorsement or irregular indorsement.
Sec. 82 : The paying banker is protected if he

pays a cheque, which is not indorsed or is
irregularly indorsed, in good faith and in the
ordinary course of business.
22
4. crossed cheque.
Sec. 80 : if the paying banker pays a crossed cheque
in good faith, without negligence and according to
the crossing, he is not liable.
e.g. Amy draws a cheque on Bank Y Bhd in favour of
Betty in order to repay a friendly loan. On receiving
the cheque, Betty crosses it generally. The cheque is
stolen by Cathy who goes into Bank Z Bhd and
pretending to be Betty open an account in Betty’s
name. Bank Z Bhd presents the cheque to Bank Y
Bhd who pays in good faith and without negligence.
Bank Y Bhd is not liable to Betty by virtue of Sec 80.
23
Protection of the Collecting Banker
Collecting banker is the bank to whom a

holder of a cheque presents the cheque for
the credit of his account.
Its duty : To collect the amount stated in the

cheque from the paying banker.
If the collecting bank fails to collect the

amount as instructed by the customer, the
collecting banker will be liable for breach of
contract.
24
The BEA gives protection for the collecting
banker :-
Sec. 85 : if a banker, in good faith and without
negligence, receives payment of a cheque for a
customer with no title or a defective title, he is not
liable to the true owner.
To get this protection, the collecting bank must prove

the following :-
 1. the collecting banker acted for the customer.
 2. the collecting banker acted in good faith.
 3. the collecting banker acted without negligence.
25
If the act is done in good faith though

negligently the bank will not be protected.
The test of negligence is stated in Marfani &

Co. Ltd v. Midland Bank Ltd.
 The court will have to look at the circumstances of
the case complained, time of the act complained
of and whether it is reasonable for banker to
possess such information that a reasonable banker
should have as to suspect that the customer is not
the true owner of the cheque.
26
From decided case, courts have held a collecting

banker negligent in not making proper
enquiries.
Woodland Development Sdn Bhd v. Chartered Bank.

Facts :
The director of the plaintiff (payee) handed 3 cheques

of which 2 were crossed with the words ‘account payee’
to Richard and Yap to open an account in a bank in the
name of the plaintiff. However they persuaded the
defendant’s bank to collect the amount for the third
party. 27
Woodland Development Sdn Bhd
v. Chartered Bank.
Held :
The defendant’s bank was negligent in

collecting cheques for the third party and was
not protected under Sec. 85(1).
The bank was ordered to return the amount

of money with interest to the plaintiff.
28

Topic 5 Law of Negotiable Instruments

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What are some examples of negotiable instruments?

What are some examples of negotiable instruments?

What is the concept of negotiability?

What is the concept of negotiability?

LAW

The law of negotiable instruments is

A negotiable instrument is a document

Payee: either name Drawee

Pay/Bayar: ………………………………………………………….. atau pembayar/or bearer Amount

Amount in words Signature of drawer. If it is

Elements of a valid cheque :

1. It must be an unconditional order in writing.

5. It is drawn for a specified person or in favour

1) GENERAL CROSSING ( Sec. 76(1), BEA 1949.)

The duty of a paying banker is to pay the

If the bank pays to a wrong person, the bank

Payment in due course means payment made at

Sec. 60 : if the banker pays in good faith and in the

e.g. A draws a cheque on Kredit Bank Bhd in favour

Sec. 82 : The paying banker is protected if he

Collecting banker is the bank to whom a

Its duty : To collect the amount stated in the

If the collecting bank fails to collect the

To get this protection, the collecting bank must prove

If the act is done in good faith though

The test of negligence is stated in Marfani &

From decided case, courts have held a collecting

Woodland Development Sdn Bhd v. Chartered Bank.

The director of the plaintiff (payee) handed 3 cheques

The defendant’s bank was negligent in

The bank was ordered to return the amount

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