Tuesday, August 25, 2020

Types of Negotiable instruments

Types of Negotiable instruments 

The types of Negotiable instruments are largely determined based upon the scope of definition given to negotiable instruments and specification of the instruments legally recognized as negotiable in that country’s law. In most countries, the scope of negotiable instruments is limited to commercial papers. i.e. to instrument other than cash, entitling the holder or the person whose name is specified on the paper, the payment of money. In this sense, negotiable instruments may be classified as order to pay [ Bills of exchange and cheque] and promises to pay (promissory notes). 

In the first class the person issuing the instrument (the drawer) gives a clear order to another 3rd party (Drawee) to make payment to holder or specified person on the instrument. In the second category there is no order to be given, but the maker of the instrument (promissory) binds himself and promises the beneficiary (the promisee) to pay a specified amount of money.

Negotiable instruments may also be classified as either demand instruments or time instruments. A demand instrument is payable on demand i.e. the moment it is presented to the drawee. An instrument will be payable an demand (1) if it states that it is payable on demand or at sight (2) if it does not state any time of payment. All cheques are demand instruments, because by definition, they must be payable on demand. Generally, A demand instrument is payable immediately after it is issued. Here the term “issue” refers to the first delivery of an instrument by the maker or drawer, to the payee or holder, for the purpose of giving rights on the instrument to any person.

A time instrument is payable at a definite future time. For instance, an instrument payable 3 months after date is payable 3 months after the date written on its face. An instrument written on Meskerem 19,2000 may state that it is payable on Tahsas 24, 2000. This instrument is a time instrument because the holder has to wait until Tahsas 24,2000 to be entitled to collect the specified amount.

Lastly, negotiable instruments may be classified as order instruments and bearer instruments. Order instruments entitle the payee or any other person to whom order is given in his favor. for example an instrument which states “payable to Ahmed Dawed or order/ payable to the order of Ahmed Dawed “ is payable to Ahmed dawed or any other person in whose favor order is given by Ahmed Dawed. In other words, Ahmed Dawed can directly collect payment on the instrument or transfer it to another person. Hence this person will be entitled to collect payment, if he does not want to cash it,  he may also give further order to another person, and so on.

Bearer instruments without specifying the person entitled to collect, simply give right to any person who happens to be holder or in possession of the instrument. In this case any person by simply becoming the holder of the instrument will be entitled to whatever amount of money is stated on the instrument. For example if an instrument reads simply “pay” , “Payable to bearer “or” pay to cash will entitle the holder the right emanating from the instrument.

With respect to identifying the types of instrument, as stated above it better is to refer to the specific legislation of the country giving recognition to specific types of  instruments.  For instance under Indian law only three kinds of instruments are recognized as negotiable instruments. These are Bills of exchange, promissory notes and cheque.

In America, the uniform commercial code (here in after referred to as UCC), which is adopted by most states, specifies four types of negotiable instruments, these are: drafts (Bills of exchange), cheques, promissory notes and certificates of deposit (CDs).


In America every states has it’s own law applicable to negotiable instruments. Can the Regional states in Ethiopia adopt their own law on negotiable instruments?

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