CHAPTER FIVE

NEGOTIABLE INSTRUMENTS
5.1 INTRODUCTION
Many documents are used in the modern commercial world, but certain documents are freely used in
commercial transfers, are called Negotiable Instruments. A negotiable instrument is a simple contract to pay
money. A person holding the instrument has a right to receive money. The holder can transfer his right or
property to another by simple delivery or in some cases by endorsement and delivery.
According to Commercial Code of Ethiopia (1960):
Definition of negotiable instrument (Art. 715):
(1) A negotiable instrument is any document incorporating a right to an entitlement in such manner that
it be not possible to enforce or transfer the right separately from the instrument.
(2) The law recognizes in particular as negotiable instruments; commercial instruments, transferable
securities, documents of title to goods.
Obligations arising out of negotiable instruments (Art. 716):
(1) The possessor of a negotiable instrument has a right to the entitlement as expressed in the instrument
against presentment of the said instrument to the debtor, on condition that he establishes that he is a
lawful possessor in the manner provided by law.
(2) The debtor shall only pay against delivery of the instrument.
(3) Except in case of fraud or gross negligence on his part, the debtor shall be released by payment at
maturity to the person to whom the instrument gives the capacity of creditor, notwithstanding that the
said person is not the holder of the right.
Commercial Instruments
Definition of Commercial Instruments (Art. 732):
(1) Commercial instruments are negotiable instruments setting out an entitlement consisting in the
payment of a sum of money.
(2) Bills of exchange, promissory notes, cheques, travellers cheques and warehouse goods deposit
certificates shall be deemed to be commercial instruments under Commercial Code of Ethiopia.
There are three common used types of commercial instruments, namely: (i)
Promissory note; (ii) Bill of Exchange; (iii) Cheque, will be discussed in chapter.
5.2. Types of Commercial Instruments
5.2.1 Promissory Note
It is the simplest form of credit instrument. It is a written promise from debtor, buyer,
or borrower to pay a certain sum of money to the creditor or to his/her order. Parties
of a pro-note are maker (debtor) and payee (creditor). Maker is the one who issues
the instrument and creditor is the one in whose favor the instrument is issued.
Example: Three months after date, I the undersigned Mr. Firew promise to pay to Ms.
Bontu Bona or her order, the sum of Birr 10,000 for value received. Here, Mr. Firew as
Maker and Ms. Bontu as Payee.

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Kinds of promissory note
1. Pro-note payable on demand: Example: On demand, I promise to pay Mr. B or
order the sum of Birr 500 for value received.
2. Pro-note payable after date: Example: One month after date I promise to pay
Mr. B or order the sum of Birr five thousand with interest at the rate of twelve
percent per annum until payment.
According to Article-823 (Section-12) of Commercial Code of Ethiopia (1960), a
promissory note shall contain the following;
(a) The term “promissory note” inserted in the body of the instrument.
(b)Unconditional promise to pay a sum of certain money
(c) The time and place of payment
(d)The name of the person to whom or to whose order payment is to be made or a
statement that the note is payable to bearer
(e) The date when and place where the note is issued
(f) The signature of the person who issues the instrument (maker)
Essentials of a Promissory Note
The following are the essentials for a promissory note;
(i) The instrument must be in writing.
(ii) It should contain a promise to pay.
(iii) The promise must be unconditional.
(iv) The person promising to pay must put his signature on the instrument.
(v) The maker and sum payable must be certain.
(vi) The instrument must contain a promise to pay money only.
(vii) The payee must be certain.
(viii) The instrument must be properly stamped.
5.2.2. BILL OF EXCHANGE
Definition: Bill of exchange is an order by a seller to a buyer or by a creditor to a
debtor to pay a certain sum of money to himself or to bearer or to another person.
It is defined as an instrument in writing containing unconditional order signed by the
maker or drawer ordering the drawee to pay a certain sum of money only to a
specified person or bearer on a specified date. Example: Three months after date pay
to me or to my order the sum of birr 3,000 for value received.
Parties to a bill of exchange:
There are three parties involved in a bill of exchange. They are as follows;
1) The drawer is the person who draws the bill (who writes the bill or who is giving
the order).
2) The drawee is the person on whom the bill is drawn. The person to whom the
order is addressed is called a drawee.
3) A payee is the person to whom the amount is payable (who may also be the
drawer or the endorsee)

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According to Article-735 (Section-I) of commercial code of Ethiopia-1960, a bill of
exchange shall contain the following;
(a) The term “bill of exchange” inserted in the body of the instrument
(b)An unconditional order to pay a sum certain in money
(c) The name of the person who is to pay (drawee)
(d)The time and place of payment
(e) The name of the person to whom or to whose order payment is to be made or
an indication that it shall be payable to bearer
(f) The date when and place where the bill is issued
(g)The signature of the person who issues the bill (drawer)
Kinds of bill of exchange:
Based on geographical location there are two types of bills: a) Inland bills b) Foreign
bills.
Inland bills are drawn and paid within the country. For example, An Ethiopian Mr.
Bona is a wholesaler selling his products on credit basis to Mr. Derara, who is a
retailer in Gimbi town. Here, Mr. Bona will draw a bill on Mr. Derara, and which will be
paid on the due date to Mr. Obsa. Here, both the drawer (Bona) and drawee (Derara)
are living in Ethiopia.
Foreign bills will normally arise in the international trade. For example, an exporter
in Ethiopia sells his/her goods to an importer in India, here the bill is drawn by the
exporter who is in Ethiopia and the bill be drawn on the importer who is in India. Thus,
the bill is drawn in Ethiopia but paid in India.
Based on due dates also there are two types of the bills: After date, and After sight.
If the bill is payable “after date”, then the days are to be counted started from the
date on which the bill is drawn. If the bill is worded payable “after sight” then the
days are counted from the date of acceptance of the bill by the drawee.
Before arriving at the due date of the bill, three days of grace must be added. If there
is a public holiday on the due date of the bill, it must be presented for payment on the
preceding date or a day before.
Acceptance of the bill: When a drawee writes his name across a bill and agreeing
to the order of the drawer, it is called an acceptance of the bill.
Dishonor of bill: A bill of exchange is dishonored either by non-acceptance or
non-payment. That is, where the person on whom the bill is drawn (the drawee)
refuses to accept it, the person presenting it must treat it as dishonored by non-
acceptance. A bill is dishonored by non-payment when it is duly presented for
payment but the drawee does not honor it. This is dishonored by non-payment.
Discounting of bill of exchange: The banker purchases the bills for a sum less
than its face value, the difference comprise a discount.
Difference between Bill of Exchange & Promissory Note:
1) In a bill of exchange, there are three parties, drawer, drawee and payee. In a
promissory note, there are only two parties, the maker and the payee.

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2) The creditor always draws a bill of exchange on the debtor. But, promissory
note is drawn by the debtor and given to the creditor.
3) A bill of exchange contains an order to pay money. Promissory note contains a
promise to pay money.
4) Acceptance is not needed in the case of promissory note since it is written by
debtor, but the bill of exchange requires acceptance.
5) In a bill of exchange notice of dishonor is required from payee to drawer, but
there is no need of notice of dishonor in the case of a promissory note.
5.2.3. CHEQUE (CHECK)
It is the most frequently used credit instrument in the business community in order to
facilitate the smooth flow of transaction.
Definition:
It is an unconditional order in writing, drawn on a banker, signed by the drawer
requiring the banker to pay on demand a sum certain in money to or to the order of a
specified person or to bearer.
Nowadays, a cheque has become very popular in businesses, because it has the
following merits:
(i) Wrong payment is not possible, since the name of the payee is clearly written on the
face of it.
(ii) Being a negotiable instrument, it can be passed from one person to another
person.
(iii) A paid check is used as voucher (receipt), and hence there is no need for a
separate receipt for each payment made.
In the Commercial Code of Ethiopia Proclamation No: 166 of 1960, articles 827 to 841
of Section-I, chapter-4 contains the legal provisions of checks.
Definition: - A check is a bill of exchange drawn on a specified banker and not
expressed to be payable otherwise than on demand. Therefore, a check is also a bill
of exchange with two additional qualifications;
(a) It is always drawn on a specified banker.(Article-829)
(b)It is always payable on demand.
Thus, all checks are bills of exchange, but all bills are not checks.
Most important features of a cheque: (Article-827)
1. Instrument in writing: A check must be necessarily an instrument in writing.
Oral orders do not constitute a check. This is no specific rule regarding the writing
materials to be used. It may be done by a pen, pencil, and typewriter. Thus there is
no legal breach in writing out checks with lead pencils also. But banks in their own
interest and in the interest of their customers, allow the checks to be drawn only in
ink.
2. Unconditional Order: A check is an order to pay and it is not a request. It is not
essential that the word ‘order’ must form a part of the writing because the word ‘pay’
itself denotes a command and words like ‘please’ or ‘kindly’ can be avoided in a
check. The order must be unconditional. If any condition is attached to the order, the
instrument is not a check than as a receipt.
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3. On a Specified banker: A check is always drawn on a specified banker. Usually
the name & address of the banker is clearly printed on the check leaf itself. A check
drawn on a particular branch of a particular bank cannot be encashed at another
branch of the same bank unless there is an agreement between the parties.
4. Payee must be certain: The check must be made payable to the order of a
certain specified person or to his agent or the bearer. The payee is the person to
whom the amount of the check is payable. Therefore, the payee must be a certain
person. Payee may be a human being or an artificial person, such as a company, a
trade union etc. A check can be made payable to alternate persons. For e.g. ‘pay to
Bona Chala or Abdi Boru’. A check may have a restrictive payee only. E.g. ‘pay to
Bona Chala only’. A check payable to two or more persons jointly can be negotiated
by the endorsement of any one of them.
3. A Certain sum of money: Usually a check is drawn for a definite sum of money.
Any phrase like “less than Birr 100 only” or “above Birr 200 hundred only” does not
give a clear idea to the parties concerned and it will render the check invalid. That is
why, bankers request their customers to mention the amount both in words and
figures.
If there is any difference between the amount specified by figures and words, the
banker can return the check, since the amount is not certain. However, the banker
honors the check to the extent of the amount stated in words. Where the amount of a
check is expressed more than once in words or more than once in figures and there is
a discrepancy, the smaller sum shall be paid. (Article-837 of section-I, Chapter 4 of
Commercial code of Ethiopia, 1960)
6. Payable on demand:
A check is payable only on demand. It is not necessary to use the word ‘on demand’
as in the case of demand bill. Unless the drawer specifies a time factor the check is
always payable on demand.
7. To be signed by the drawer:
The drawer, i.e. the customer, must sign the check. The drawer normally puts his
signature at the bottom right corner of the check. The signature must be that of the
person in whose name the account is kept or his authorized agent. When the
signature differs from the specimen or it is slightly difference, the banker need not
honor the check.

Discrepancy in the sum payable

(1) Where the amount of a cheque is expressed both in words and figures and there is a discrepancy, the
amount expressed in words shall be paid.
(2) Where the amount of a cheque is expressed more than once in words or more than once in figures and
there is a discrepancy, the smaller sum shall be paid.
5.3. TYPES OF CHEQUE
Based on different factors, there are different types of check. The followings are the
main types of checks:
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Bearer Cheque: A cheque payable to a certain person or to the bearer is known as
bearer cheque.
Order Cheque: is a cheque which is payable to a certain person or to his order. An
order cheque can be negotiated only by endorsement (i.e. the transferor should sign
his name)
Based on the date written on it:
1. Post-dated check: is one that has a date on it later than today. You cannot
cash it until that date. It is only cashed after date specified on it.
2. Ante-dated check: is cheque bears a date earlier than today and it can be
encashed it immediately
3. Stale check: is check presented for payment after six months from the date on
it. At any time, it is not honoured by the bank
With regards to writings on the check: -
1. Crossed check.
2. Endorsed check.
5.3.1 CROSSED CHECK
Crossing is an ‘instruction’ given to the paying banker to pay the amount on the
check through a banker only and not directly to the person presenting it at the
counter. Thus, crossing on a check is intended to ensure that its payment is made to
the right payee. A check without crossing is called an open check and it is open to
many risks. In order to protect it from risks crossing has been introduced.
Article-863 to Article-863 of section-5 of the Commercial Code of Ethiopia (1960)
contains provisions relating to crossing.
Types of Crossing:
1. General Crossing. 4. Account payee crossing.
2. Special Crossing. 5. Double crossing.
3. Not-negotiable Crossing.
1. General Crossing:
“Where a check bears across its face an addition of the words “and company” or any
abbreviation thereof between two parallel transverse lines or of two parallel
transverse lines simply either with or without the words “Not negotiable” that addition
shall be considered to be crossed generally”.
Essentials of General Crossing: -
1. Two lines are important in crossing.
2. The line must be drawn parallel and transverse. Transverse means that they
should be arranged in a crosswise direction. They should not be straight lines.
3. The lines are generally drawn on the left hand side; preferably the line should
cut across some of the writings.
4. The words “and company” or its abbreviation may be written between the lines.
The words “ and company” themselves are not essential without two parallel
transverse lines.

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 5. The words “Not negotiable “may be added to a crossing. But they themselves
do not constitute a crossing.
Significance of general crossing: -
(i) The effect of general crossing is that it gives a direction to the paying
banker. The direction is that the paying banker should not pay the check at
the counter. In other words, payment is made through an account and not at
the counter
(ii) If a crossed check is paid at the counter by the banker;
 The paying banker loses his statutory protection.
 He has no right to debit his customer’s account.
 He will be liable to the drawer for any loss, which the customer may
suffer.
 He will be liable to the true owner of the check who may be a third
party irrespective of the fact that there is no contract between the
banker & the third party.
(iii) The main purpose of crossing is to give protection to the check. When a
check is crossed generally, a person who is not entitled to receive its
payment is prevented from getting that check encashed at the counter of
the paying banker.
2. Special Crossing: -
“Where a check bears across its face, an addition of the name of a banker, with or
without the words “not negotiable”, that addition shall be deemed a crossing and the
check shall be deemed to be crossed specially.
Essentials of Special Crossing: -
(i) The parallel transverse lines are not at all essential for a special crossing.
(ii) The name of a banker must be necessarily specified across the face of the
check.
(iii) It must appear on the left hand side, preferably on the corner.
(iv) The two parallel transverse lines and the words “not negotiable” may be added
to a special crossing.
Significance of Special crossing: -
(i) It is also a direction to the paying banker. Here the direction is that the paying
banker should pay the check only to the banker, whose name appears in the
crossing or to his agent.
(ii) If a check specially crossed is presented by another bank, the paying banker is
justified in returning the check.
(iii) A special crossing gives more protection to the check than a general crossing.
In special crossing, the check is specially crossed to the payee’s banker. Here
the banker, in whose favor the check has been crossed, knows the payee and
his specimen signature well. So he will not collect it for any person other than
the payee.
3. Not Negotiable Crossing: (Article 865)

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Article 865 of CCE permits the use of the words “Not negotiable” in the crossing. The words ‘Not negotiable’ may
also be written in both types of crossing; general and special; and a crossing with these words is said to be ‘Not
Negotiable’ crossing.
A person taking a cheque crossed generally or specially, in either case bearing the words “ not negotiable” shall not
have, and shall not be capable of giving, a better title to the cheque than that which the person from whom he took it
had.
Significance of Not negotiable crossing:
The inclusion of the words “not negotiable” in the crossing has great significance.
These words do not make the check not transferable, but it takes away one of the
important characteristics of a negotiable instrument. This important characteristic is
that the holder for value acquires absolute title to the instrument even if the
transferor’s title was defective and the holder was unaware about it. Thus, the
inclusion of the words “not negotiable” in the crossing on the check cancels this
important characteristic of a negotiable instrument and the transferee of the check
cannot have better title than the transferor.
The object of ‘ not negotiable’ crossing is to afford protection to the holder or drawer of a cheque, because even if
such a cheque goes to wrong hands and from there it is transferred to holder in due course, the true owner will not lose
his claim against an indorsee. Thus an endorsee of such a crossed cheque must not accept the cheque unless he knows
the endorser very well and is convinced about his having a good title thereto.
4. Account payee Crossing:
Although the law is silent with regard to this form of crossing, it has been recognized by custom amongst
businessmen and bankers. The words ‘account payee’ within a general or a special crossing, are a direction to the
collecting banker to collect and credit the payee’s account with the proceeds of the cheque. It means that a cheque
marked ‘account payee only’ or A/c Payee’ or ‘Payee’s A/c’ have same significance. If the banker goes against this
order, he will be guilty of negligence. Hence “accounts payee only” crossing is not negotiable practically, as banks
will collect it on behalf of no person other than the payee.
Significance of A/c payee crossing: -
This type of crossing gives a further protection to a check. This crossing gives a
direction to the collecting banker. The direction is that, the collecting banker should
not collect it for any person other than the payee. The collecting banker should
ensure that the check is credited only to the account of the payee. Practically a/c
payee checks cannot be negotiated further.
The safest form of crossing will be a combination of “not negotiable” and “A/c payee”
crossings, which give the fullest protection to a check.
5. Double Crossing: -
Where a check is crossed specially, the banker to whom it is crossed may again cross
it specially to another banker, his agent for collection. However, the above form is not
in practice. The present practice is to indicate the agent by specifying the fact on the
back of the check.
Who may Cross a Cheque?
Crossing of an uncrossed cheque does not amount to a material alteration so as to affect the validity of the instrument.
Apart from the drawer of a cheque crossing it generally or specially at the time of issue, the holder of a cheque and
also the banker may cross it. Law permits the crossing being made even after issue of a cheque in the following ways:

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 (i) Where a cheque is uncrossed, the holder may cross it generally or specially.
(ii) Where a cheque is crossed generally, the holder may cross it specially.
(iii) Where a cheque is crossed generally, or specially, the holder may add the word “not negotiable”.
(iv) Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially, to another
banker, his agent, for collection.
Once crossing is made, it is a material part of the cheque and its alteration except in the above cases will amount to a
material alteration. Thus, if a special crossing on a cheque is altered by the holder into a general crossing by striking
out the name of the banker, it will be unauthorized. And also, where a cheque is crossed ‘account payee’ and the
holder alters it into a general crossing by striking out the words ‘account payee’, the alteration is irregular and
discharges the instrument.
Cancellation of Crossing
The cancellation of crossing is usually termed as ‘opening of crossing’. Although,
the law does not make any provision related to cancel the crossing, but in practice, the
drawer of the cheque is entitled to cancel or open the crossing by writing the words “ pay cash” and cancelling the
crossing along with his fully signature, i.e. only the drawer can cancel the crossing.

5.3.2. ENDORSEMENT
Endorsement has been dealt in Article-843 to Article-852 of Section-2 of the
Commercial code of Ethiopia.
“Where the maker or holder of a negotiable instrument signs the same, otherwise
than as such maker, for the purpose of negotiation at the back or face thereof or on a
slip of paper annexed there to ….he is said to endorse the same and is called the
endorser “.
The above definition provide that the endorsement can be made either on the back of
the instrument or on the face thereof. In practice, an endorsement must always be
made on the back of the instrument. If the space available on the back has been
completely covered a piece of paper may safely be attached to the instrument &
subsequent endorsement may be made on that paper. The paper so attached is
known as “Allonge”.
Rules Regarding Endorsement:
The rules regarding endorsement are as follows:
1. A regular endorsement implies signature of the holder of the negotiable
instrument himself at the backside of the instrument for the purpose of
negotiation.
2. The payee must sign his name in the exact spellings as appearing in the check.
3. Endorsements in pencil or by a rubber stamp are not usually accepted.
4. Endorsement need not contain complimentary prefixes or suffixes.
5. Endorsement does not require any particular form of words. However, it must
contain an order to pay.

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 6. An illiterate man can make a valid endorsement by putting his left thumb
impression in the presence of certain person who should sign and whose
address should also be given.
7. In case of joint stock companies the endorsement should be made by persons
who are duly authorized to sign on behalf of these institutions.
8. Endorsement should be completed by delivery of the instrument.
Kinds of Endorsement: -
According to the Negotiable Instrument Act: 1881, endorsements have of the
following kinds:
1. Endorsement in Blank: -
If the endorser signs his name only the endorsement is said to be ‘in blank’. The
endorser does not specify the name of the endorsee with the effect that an
instrument endorsed in blank becomes payable to the bearer, even though originally
payable to order and no further endorsement is required for its negotiation.
For e.g. if a check is payable to ‘x or order’ and ‘x’ merely signs on its back such
endorsement is called endorsement in blank. Such endorsement makes it a bearer
check, which may be further negotiated by mere delivery. But if such a check is
crossed one its payment cannot be made at the counter, even if it is endorsed in
blank.
2. Endorsement in Full: -
In addition to his signature if the endorser adds a direction to pay the amount
mentioned in the instrument to a specified person, the endorsement is said to be
“endorsement in full”
If a check is payable to ‘Mr.X’ and if Mr.X adds the word ‘pay to Y’ or ‘pay to Y or
order’ such endorsement is called endorsement in full. The instrument will then be
payable to y or his order and will necessitate endorsement by ‘Y’ for its further
negotiation.
An endorsement in blank may be converted into an endorsement in full. The holder of
a negotiable instrument endorsed in blank may write above the endorser’s signature,
a direction to pay to any other person convert the endorsement in blank into an
endorsement in full. Here the holder does not incur the responsibility of an endorser.
For e.g. a check is endorsed in blank by ‘X’ by signing on its back. Y its holder may
convert the endorsement in blank into an endorsement in full by writing above X’s
signature ‘ pay to ‘z’ or order’. Thus, z will become the endorsee, but ‘Y’ will not be
liable to him as the endorser, because his name does not appear on the instrument. If
the check is dishonored, z can make all other parties liable except ‘Y’.
3. Conditional Endorsement: -
If the endorser by express words in the endorsement makes his liability, or the right
of the endorsee to receive the amount depending upon the happening of a specified
event, although such event may never happen such endorsement is called conditional
endorsement. Thus the endorser gets the following rights;
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 a. He makes his liability on the instrument conditional on the happening of a
particular event. He will not be liable to the subsequent holder if the specified
event does not take place.
b. He may make the right of the endorsee of the instrument conditional on the
happening of a particular event.
Example: ‘pay c ‘if he returns from USA ‘. Thus c get the right to receive payment only
if he returns from USA. If the event does not take place the endorsee cannot sure any
of the parties. This endorsement is normally not accepted by the banker.
4. Restrictive Endorsement:
The restrictive endorsement takes away the negotiability of a check. Thus, the
endorsement may by express words restrict the right to negotiate or to receive its
proceeds, such an endorsement prohibits further endorsement and it is called
‘Restrictive Endorsement’. For e.g. if B endorses an instrument payable to bearer as
follows:. Pay to ‘C only’, the right of ‘c’ for further negotiable is excluded
5. Sans Recourse Endorsement: -
An endorser of a negotiable instrument may by express words in the endorsement
exclude his own liability thereon. For e.g. if ‘R’ endorses a check as follows;
 Pay to X or his order, at his own risk.
 Pay to C without recourse to me.
Here ‘R’ will not be liable to ‘X’ or any of the subsequent endorsees, if the bank
dishonors the check. Again if R has excluded his personal liability by endorsing the
check without recourse. He transfers it to B, B endorses to C and ‘C’ endorses it back
to R. Thus, R shall have the right as endorsee against B and C if the check is
dishonored.
6. Facultative Endorsement: -
The endorsee must give notice of dishonor of the instrument to the endorser but the
endorser may waive this duty of the endorsee by writing in the endorsement “notice
of dishonor waived”. The endorser remains liable to the endorsee for the non-
payment of the instrument.

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