Negotiable instruments
A negotiable instrument is a written document that guarantees the
payment of a specific amount of money, either on demand or at a
future date, and can be transferred from one person to another as a
form of payment
Types of negotiable instruments.
1. Bill of Exchange
A bill of exchange is a written order by one person (drawer) directing
another person (drawee) to pay a specific amount of money to a third
party (payee), either on demand or at a future date.
It is an order to pay.
Example:
A wholesaler in Kampala sells goods worth UGX 500,000 to a retailer on credit and writes a
bill ordering the retailer to pay after 30 days.
2. Promissory Note
Explanation:
A promissory note is a written promise made by one person (maker) to pay a certain amount
of money to another person (payee) either on demand or at a specified future date.
It is a promise to pay.
Example:
A friend borrows UGX 200,000 from you and writes:
“I promise to pay UGX 200,000 after one month.”
3. Cheque
Explanation:
A cheque is a written order given by an account holder (drawer) to a bank (drawee) to pay a
certain amount of money to a person (payee).
It is a bank payment order.
Example:
You write a cheque to your landlord to pay rent instead of using cash.
4. Bank Draft (Demand Draft)
Explanation:
A bank draft is a payment instrument issued by a bank guaranteeing payment of a specified
amount to a person. It is prepaid, making it more secure than a cheque.
It is guaranteed by the bank.
Example:
A parent pays school fees using a bank draft issued by the bank to ensure the school receives
the money safely.
5. Treasury Bill
Explanation:
A treasury bill is a short-term negotiable instrument issued by the government to borrow
money from the public. It is usually sold at a discount and redeemed at full value.
It is a government-backed instrument.
Example:
An investor buys a treasury bill for UGX 950,000 and receives UGX 1,000,000 after 3
months
Importances of negotiable instruments .
1. Facilitates Easy Transfer of Money
Negotiable instruments can be easily transferred from one person to another without
complicated procedures.
Example:
Instead of paying cash, you can endorse a cheque to another person as payment for goods.
2. Provides Safety in Transactions
They reduce the need to carry large amounts of cash, lowering the risk of theft or loss.
Example:
A business owner pays suppliers using a cheque instead of carrying UGX 2,000,000 in cash.
3. Promotes Credit Transactions
They allow people and businesses to buy and sell goods on credit and pay later.
Example:
A retailer receives goods and signs a bill of exchange agreeing to pay after 60 days.
4. Serves as Legal Evidence
Negotiable instruments are recognized by law and can be used as proof in case of disputes.
Example:
If someone refuses to pay a promissory note, it can be presented in court as evidence.
5. Enhances Business Transactions
They make buying and selling faster and more convenient, especially in large-scale trade.
Example:
Wholesalers and retailers use cheques and bills of exchange to settle large transactions
quickly.
6. Ensures Certainty of Payment
They clearly state the amount to be paid and the date of payment, reducing
misunderstandings.
Example:
A promissory note clearly indicates that UGX 500,000 will be paid after one month.
7. Acts as a Substitute for Money
Negotiable instruments can be used in place of cash in many transactions.
Example:
A cheque can be used to pay rent instead of giving physical cash.
8. Encourages Banking and Financial Development
They promote the use of banks and formal financial systems, helping economic growth.
Example:
People deposit cheques into bank accounts, increasing banking activity and financial
inclusion.
Characteristics of negotiable instruments.
1. Must be in Writing
A negotiable instrument must be written (either handwritten, printed, or typed). Oral
agreements are not valid.
Example:
A cheque or promissory note must be written on paper or printed—someone cannot just say,
“I will pay you,” and call it a negotiable instrument.
2. Unconditional Promise or Order
The instrument must contain a clear promise or order to pay that is not dependent on any
condition.
Example:
“I promise to pay UGX 300,000 next month” is valid, but
“I will pay if I get a job” is not valid.
3. Fixed or Certain Amount of Money
The amount to be paid must be clearly stated and not changeable.
Example:
A cheque stating UGX 500,000 is valid, but one saying “whatever I owe you” is not
acceptable.
4. Transferability (Negotiability)
The instrument can be easily transferred from one person to another, usually by delivery or
endorsement.
Example:
You can sign the back of a cheque and give it to someone else as payment.
5. Payable on Demand or at a Definite Time
The instrument must specify when payment will be made—either immediately (on demand)
or at a fixed future date.
Example:
• “Payable on demand” → can be cashed anytime
• “Payable after 30 days” → has a clear future date
6. Must be Signed by the Maker or Drawer
The person issuing the instrument must sign it to make it legally valid.
Example:
A cheque without a signature from the account holder is not valid and cannot be processed by
the bank.
Acceptance for honour.
Acceptance for honour occurs when a third party (a stranger to the bill) agrees to accept and
pay a bill of exchange on behalf of one of the parties (usually the drawer or an endorser)
after the bill has been dishonoured by non-acceptance.
In simple terms:
Someone steps in to save the reputation (honour) of a party by agreeing to pay when the
original drawee refuses.
It happens when;
• A bill of exchange is presented for acceptance
• The drawee refuses to accept it (dishonour)
• The bill is usually noted or protested (formally recorded)
• A third party voluntarily agrees to accept it
Holder in due course
A holder in due course is a person who obtains a negotiable instrument legally, in good
faith, for value (payment), and without knowing any defect in it.
It is someone who receives the instrument honestly, pays for it, and has no idea of any
problem with it.
Rights of a Holder in Due Course
A holder in due course enjoys special legal protection:
1. Right to Sue All Prior Parties
They can claim payment from all previous parties involved.
Example:
If a cheque bounces, they can sue the drawer and endorsers.
2. Gets a Better Title
They obtain a clean title, even if previous holders had defects.
Example:
Even if the cheque was stolen earlier, a holder in due course can still claim payment.
3. Free from Defects
They are not affected by previous fraud or illegal issues (in most cases).
4. Priority in Payment
They have a stronger legal position than ordinary holders.
Paymeant
Payment in negotiable instruments refers to the act of settling the amount stated in the
instrument (such as a cheque, bill of exchange, or promissory note) by the person who is
legally responsible to pay.
It is when the person who owes money actually pays it to the rightful holder of the
instrument.
Types of Payment
1. Payment in Due Course
This is the proper and legal payment made according to the terms of the instrument.
Conditions of Payment in Due Course:
• Must be made to the rightful holder
• Must be made in good faith (honestly)
• Must be made without negligence
• Must be made at or after maturity
Example:
A bank pays a cheque to the correct person whose name appears on it after verifying their
identity.
2. Payment for Honour
Explanation:
This happens when a third party pays the bill to protect the reputation (honour) of a party
after it has been dishonoured.
Example:
If a bill of exchange is dishonoured, another person steps in and pays on behalf of the drawer
to protect their business reputation.
Presentation
Presentation means formally showing or delivering a negotiable instrument (like a
cheque, bill of exchange, or promissory note) to the person who is supposed to accept or pay
it.
It is when the holder takes the instrument to the right person to get payment or
acceptance.
Types of Presentation
1. Presentation for Acceptance
This applies mainly to a bill of exchange. The bill is presented to the drawee to confirm
whether they agree to pay.
Purpose:
To obtain the drawee’s acceptance (signature).
Example:
A trader draws a bill on a buyer and presents it to the buyer to sign, agreeing to pay after 30
days.
2. Presentation for Payment
This is when the instrument is presented to the liable party to receive payment.
This applies to:
• Cheques
• Promissory notes
• Bills of exchange (after acceptance)
Example:
You take a cheque to the bank to receive money.
Rules for Proper Presentation
1. Must be Made by the Holder
Only the rightful holder or their agent should present the instrument.
Example:
The person named on the cheque or their authorized agent presents it.
2. Must be Made at the Proper Time
• For payment → on or after maturity
• For acceptance → before maturity
Example:
A post-dated cheque cannot be presented before its date.
3. Must be Made at the Proper Place
Presentation should be made at the correct place stated on the instrument.
Example:
A cheque should be presented at the bank where it is payable.
4. Must be Made on a Business Day
Presentation should be done on a working day, not a public holiday.
Example:
You cannot present a cheque for payment on a Sunday.
5. Must be Made within a Reasonable Time
Delay in presentation may discharge some parties from liability.
Example:
If you keep a cheque for too long and it becomes stale, it may not be honored.
Notice of dishonour
A notice of dishonour is a formal communication given to parties liable on a negotiable
instrument to inform them that it has been dishonoured (not accepted or not paid).
It is a message telling the concerned parties that payment or acceptance has failed.
When is Notice of Dishonour Given?
It is given when a negotiable instrument is dishonoured by:
1. Non-Acceptance
• When a bill of exchange is presented for acceptance and the drawee refuses to accept
it.
2. Non-Payment
• When the instrument is presented for payment and the liable party refuses or fails to
pay.
Who Gives the Notice?
• The holder of the instrument
• Or an authorized agent (e.g., a bank or lawyer)
To Whom is Notice Given?
• The drawer
• The endorsers
• Any other party liable on the instrument
Liabilities of parties
Liability of parties refers to the legal responsibility of each person involved in a
negotiable instrument (such as a cheque, bill of exchange, or promissory note) to ensure that
payment is made when due.
It explains who is responsible to pay and when they must pay.
Main Parties and Their Liabilities
1. Liability of the Drawer
The drawer is the person who creates and signs the instrument (e.g., writes a cheque or bill).
Liability:
• The drawer is secondarily liable
• He must ensure that the instrument is paid if the drawee fails
• He becomes liable after dishonour and notice
Example:
If a cheque bounces due to insufficient funds, the bank can demand payment from the drawer.
2. Liability of the Drawee (or Acceptor)
The drawee is the person or bank ordered to pay money.
Liability:
• Becomes primarily liable after acceptance
• Must pay the full amount at maturity
• Cannot refuse payment after acceptance (except legal reasons)
Example:
A business accepts a bill of exchange; it must pay the agreed amount on the due date.
3. Liability of the Maker (Promissory Note)
The maker is the person who promises to pay in a promissory note.
Liability:
• Primarily liable
• Must pay the amount at maturity without conditions
• Cannot avoid payment once the note is valid
Example:
A borrower who signs a promissory note for UGX 500,000 must repay it.
4. Liability of Endorsers
An endorser is a person who transfers the instrument to another by signing it.
Liability:
• Secondary liability
• Each endorser is responsible if the instrument is dishonoured
• Must pay after proper notice of dishonour
Example:
If you endorse a cheque to someone and it bounces, you may be required to pay if the drawer
fails.
5. Liability of the Holder
The holder is the person in possession of the instrument entitled to receive payment.
Liability:
• Generally has no liability to pay
• Must present the instrument properly
• Must give notice of dishonour when necessary
• If careless, may lose legal rights
Example:
If a holder delays presenting a cheque and it becomes stale, they may lose the right to
payment.
Forged signature
A forged signature is a signature that is falsely written or copied by a person who is not
the real owner or authorized signer of a negotiable instrument (such as a cheque, bill of
exchange, or promissory note).
It is when someone signs another person’s name without permission to cheat or steal
money.
Legal Effect of a Forged Signature
1. It is Completely Invalid
A forged signature has no legal effect. The instrument becomes void against the person
whose signature was forged.
Example:
If someone forges your signature on a cheque, you are not legally responsible for payment.
2. No Liability for the Person Whose Signature is Forged
The real owner of the signature is not bound to pay anything.
Example:
If your signature is forged on a bill of exchange, you are not liable for the debt.
3. The Forgery Does Not Transfer Title
Even if the instrument is passed to another person, the transfer is invalid because it is based
on fraud.
Example:
A stolen cheque with a forged signature cannot give legal ownership to the holder.
4. Bank Cannot Debit the Customer’s Account
If a bank pays on a forged cheque, it is considered wrong payment and the bank must refund
the customer.
Example:
If a bank pays UGX 1,000,000 on a forged cheque, it must restore the money to the
customer’s account.
5. Forgery is a Criminal Offence
Forging a signature is a crime punishable by law.
Example:
A person caught forging cheques can be arrested and prosecuted for fraud.
Discharge of bill of exchange
Discharge of a bill of exchange refers to the termination or ending of all rights and
liabilities of all parties involved in the bill.
It means the bill is fully settled and no one owes anything anymore.
Ways a Bill of Exchange is Discharged
1. Payment in Due Course
This is the most common way of discharge. It happens when the acceptor pays the full
amount on the due date to the rightful holder.
Example:
A bill of UGX 500,000 is paid by the acceptor on maturity to the holder → the bill is
discharged.
2. Cancellation of the Bill
The bill is discharged when all parties agree to cancel it before payment is made.
Example:
A creditor agrees to cancel a bill because the debtor has already paid in cash.
3. Renunciation (Waiver of Rights)
The holder may voluntarily give up their right to claim payment.
Example:
A lender decides to forgive a debt and writes off the bill.
4. Material Alteration
If the bill is changed in an important way (like amount, date, or parties) without consent, it
becomes invalid.
Example:
Changing UGX 200,000 to UGX 2,000,000 without permission discharges the bill.
5. Payment Before Maturity (at Discount)
If the holder agrees to accept payment early, the bill can be discharged.
Example:
A debtor pays a bill 10 days early and the holder accepts it.
6. Merger of Rights (Unity of Parties)
If the same person becomes both debtor and creditor, the bill is discharged.
Example:
If the holder buys the business of the acceptor, the debt is cancelled.
7. Insolvency or Bankruptcy (in some cases)
If a party becomes bankrupt and the legal process settles the debts, the bill may be discharged
partially or fully.
Example:
A bankrupt trader’s assets are used to settle debts, ending liability.
8. Payment for Honour or Acceptance for Honour
When a third party pays the bill to protect someone’s reputation, the original bill is
considered settled.
Example:
A friend pays a dishonoured bill on behalf of a trader to protect their name.
Relationship of a Partnership to Persons Dealing in
Negotiable Instruments
This is how a partnership firm and its partners are legally connected to third parties
(banks, suppliers, customers) when negotiable instruments like cheques, bills of exchange,
and promissory notes are used in business transactions.
It explains how a partnership is responsible for cheques, bills, and other payment
documents issued or received in the course of business.
1. Firm Bound by Acts of Any Partner
Every partner acts as an agent of the firm. Any negotiable instrument signed by one partner
in the normal course of business binds all partners.
Example:
If one partner signs a cheque to pay a supplier, all partners are responsible for ensuring the
cheque is honored.
2. Joint Liability on Negotiable Instruments
All partners are jointly liable for payments arising from negotiable instruments issued in the
name of the firm.
Example:
If a bill of exchange worth UGX 1,000,000 is not paid, the creditor can claim the full amount
from any partner.
3. Unlimited Liability of Partners
If the firm fails to pay, partners may be required to pay from their personal property.
Example:
If a partnership cheque bounces due to insufficient funds, creditors can recover money from
partners’ personal accounts.
4. Authority to Issue and Accept Instruments
Each partner has implied authority to:
• Draw cheques
• Accept bills of exchange
• Issue promissory notes
in the ordinary course of business.
Example:
A shop partner can issue a cheque to pay suppliers without needing permission from all
partners.
5. Liability for Fraud or Misuse
If a partner commits fraud or wrongfully issues a negotiable instrument during business, the
entire firm is liable to third parties.
Example:
If a partner issues a cheque knowing there is no money in the account, the firm may still be
sued by the holder.
6. Effect of Retirement or Change of Partners
A retired partner may still be liable for negotiable instruments issued before retirement,
unless notice is given to third parties.
Example:
If a supplier is not informed of retirement, they may still hold the retired partner liable for
unpaid bills.
7. Transactions with Banks
Banks deal with the partnership as a single entity, but recognize instructions from authorized
partners.
Example:
Only partners authorized in the bank mandate can sign cheques for the firm.
8. Binding Nature of Endorsements
If a partner endorses a negotiable instrument on behalf of the firm, the endorsement binds all
partners.
Example:
A partner endorses a cheque received from a customer to pay another supplier → the firm is
legally bound.
Relations of Partners to One Another
The relation of partners to one another refers to the rights, duties, and obligations that
exist between partners in a partnership business. These relations are mainly based on the
partnership agreement (deed) and, where silent, on partnership law.
It explains how partners are expected to behave, share work, share profits, and treat each
other in the business.
1. Right to Share Profits and Losses
Partners have the right to share profits of the business, and they must also share losses unless
agreed otherwise.
Example:
If two partners agree to share profits equally, and the business makes UGX 1,000,000 profit,
each gets UGX 500,000.
2. Right to Participate in Management
Every partner has the right to take part in managing the business unless the agreement says
otherwise.
Example:
Both partners in a shop can decide on prices, suppliers, and daily operations.
3. Duty to Act in Good Faith
Partners must act honestly and fairly towards each other and avoid cheating or hiding
business information.
Example:
A partner must not secretly take business money for personal use
.4. Duty to Contribute Capital
Partners must contribute capital as agreed in the partnership deed.
Example:
If one partner contributes UGX 2,000,000 and another UGX 1,000,000, both must invest as
agreed.
5. Right to Inspect Accounts
Every partner has the right to check and examine the business books at any time.
Example:
A partner can review sales records to confirm profits are correctly calculated.
6. Duty to Indemnify the Firm
A partner must compensate the firm for any loss caused by their negligence or misconduct.
Example:
If a partner wastes company money on personal expenses, they must repay it.
7. Right to Interest on Capital and Loans
Partners may receive interest on capital contributed or loans given to the firm (if agreed).
Example:
A partner who loans UGX 1,000,000 to the firm may receive agreed interest.
8. Duty Not to Compete with the Firm
A partner must not run a competing business or secretly benefit from similar business
activities.
Example:
A partner in a retail shop should not open another similar shop nearby.
9. Duty to Render True Accounts
Each partner must share correct and honest information about business transactions.
Example:
A partner must not hide sales or inflate expenses.
10. Right to Be Consulted
Important business decisions should be made with agreement of all partners.
Example:
Decisions like taking loans or expanding business require consultation.
Dissolution of Partnership
Dissolution of partnership is the process where the legal relationship between partners
comes to an end, meaning they stop carrying on business together as a partnership.
It means the partners agree or are forced to stop working together in business, but
sometimes the business may still continue with new partners.
• Dissolution of partnership → partnership relationship ends, but business may
continue
• Dissolution of firm → business completely closes down
Causes of Dissolution of Partnership
1. Mutual Agreement
Partners may agree to end the partnership at any time.
Example:
Two friends running a shop decide to stop working together after 3 years.
2. Expiry of Fixed Period
If the partnership was formed for a specific time, it ends when that time expires.
Example:
A 5-year partnership automatically ends after 5 years.
3. Completion of Purpose
If the partnership was formed for a specific project, it ends after completion.
Example:
A partnership formed to build a road ends when the road is completed.
4. Death of a Partner
The death of one partner may dissolve the partnership unless the agreement allows
continuation.
Example:
If one of two partners dies, the partnership may automatically end.
5. Insolvency of a Partner
If a partner becomes bankrupt, the partnership may be dissolved.
Example:
A partner who cannot pay personal debts may cause dissolution.
6. Illegal Business
If the business becomes illegal, the partnership must end immediately.
Example:
A business operating without a license is closed by law.
7. Court Order
A court may dissolve a partnership due to misconduct, disputes, or fraud.
Example:
A partner misuses business funds and the court orders dissolution.
8. Continuous Losses
If the business is making heavy losses, partners may decide to dissolve it.
Example:
A shop running at a loss for years is closed by agreement.
In Conclusion;
Negotiable instruments are important financial documents such as cheques, bills of exchange,
and promissory notes that make business payments easy, safe, and reliable. They can be
transferred from one person to another and are legally recognized, which helps promote trust
in business transactions. Overall, they improve trade by ensuring convenience, security, and
efficiency in payments.
Ref;Business Law Textbooks
• Aggarwal, S.K. Business Law
• Chand, K.R. Mercantile Law / Business Law
• M.C. Kuchhal & Vivek Kuchhal Business Law