Chapter 12

CHEQUES AND THEIR PAYMENT

• Cheque is “An unconditional order in writing drawn on a specified

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 the
bearer, and which does not order any act to be done in addition to the
payment of money”.

• Parties to a Cheque:

(1). The Drawer: Maker (account holder) of a cheque is called the drawer.

(2). The Drawee: The person directed to pay the cheque is called the
drawee (banker).

(3). The Payee: Payee is the person named in the cheque to whom or to
whose order the payment is to be made.

• Types of Cheques: Bankers in Pakistan deal with only two types of

cheques: • (i). Open Cheques: They are payable in cash at the counter of
a banker.

• (ii). Crossed Cheques: They are not payable in cash at the counters of a
banker, but can be collected by the banker who would credit the proceeds
to his customer’s account after realization.

PAYMENT OF CHEQUES

• Payment in Due Course: The banker gets legal protection only when
payment is in ‘Due Course’. According to Section 10 of the Negotiable
Instruments Act, 1881, “Payment in Due Course mans payment in
accordance with the apparent tenor of the instrument in good faith and
without negligence to any person in possession thereof under
circumstances which do not afford a reasonable ground of believing that
he is not entitled to receive payment of the amount therein mentioned”.

• It a contractual obligation of a banker to honour his customer’s cheques

if the following essentials are fulfilled:

(1). Cheque should be in a proper form: The customer contracts

reciprocally that in drawing cheques he will draw them in such a form as
will enable the banker to fulfill his obligation, and therefore, in a form
which is clear and free from ambiguity”.

(2). Cheque should not be crossed: A crossed cheque cannot be

honoured over the counter to any person but a collecting banker. If the
paying banker honours a crossed cheque contrary to the crossing, the true
owner may require the banker to pay him such damages as he might have
sustained by the banker’s action.

(3). Cheques should not be drawn on the particular branch: The

payment of a cheque can be made only by the branch of the bank
particularly mentioned on the cheque where the customer is maintaining
his account. If arrangements have been made, encashment of a
customer’s cheque can be made at a branch other than the one where he
maintains his account.

(4). Cheque should be payable to bearer or order: The payment

should be made to a person who is in possession of it as a bearer. Section
3(c) of the Negotiable Instruments Act, 1881, defines bearer as “a person
who by negotiation comes into possession of a negotiable instrument
which is payable to bearer”. Therefore, the paying banker can make the
payment of such a cheque to a person who is in legal possession of it.
When the bearer encashes a cheque, he may be required to acknowledge
receipt of money on the cheque by signing on the back of it. Section 13(1)
of the Act states that “Cheque is payable to order which is expressed to be
so payable or which is expressed to be payable to a particular person”.
Therefore, the banker must establish the identity of the payee before
making payment to him on an order cheque.

(5). Cheque should not be mutilated: When a cheque is torn, worn out
or does not give sufficient evidence of the customer’s intention, it is called
a ‘mutilated cheque’. The banker does not need to pay this cheque
otherwise he becomes liable. However, mutilation by accident may be
excused if the drawer declares about this fact.

(6). No unauthorized material alterations: Section 3(f) of the

Neotiable Instruments Act, 1881 defines that ‘material alteration in
relation to a promissory note, bill of exchange or cheque includes any
alteration of the date, the sum payable, the time of payment, the place of
payment, and where any such instrument has been accepted generally,
the addition of a place of payment without the acceptor’s assent.” Further,
Section 87 says, “Any material alteration of a negotiable instrument
renders the same void against anyone who is a party thereto at the time
of making such alteration and does not consent thereto, unless it was
made in order to carryout the common intention of the original parties,
and any such alteration, if made by an indorsee, discharges his indorser
from all liability to him in respect of the consideration thereof.” Therefore,
a banker must not pay a cheque bearing apparent material alterations not
duly authorized by the drawer under his full normal signature, specimen of
which has been supplied to the banker beforehand.

(7). Funds must be sufficient and available: The banker must see
that there are sufficient funds available in customer’s account to permit
the honouring of the cheque presented. If the funds are not sufficient, the
banker is not obliged to make payment in part. If the banker has received
from his customer certain cheques to be collected and credited to his
account, and they have not been cleared and appropriated by the time a
cheque against them has been drawn and presented, the banker is
authorized to return it with the remark:

(8). The cheque should not be post-dated or stale: A cheque is out-

of-date when it is post-dated or stale. Post-dated cheques are those which
are presented before the due date. If a banker pays a post-dated cheque
earlier than the due date, he loses the protection granted by law, and
shall have to bear any loss that may arise out of his action”. It is also the
custom of bankers in Pakistan not to pay cheques which are presented
after a period of six months has elapsed since their apparent date of
issue. Such cheques are called the ‘stale’ cheques.

(9). Cheques should be presented during the banking hours: The

banker must honour cheques drawn on him if they are presented on a
working day and during the banking hours. In Pakistan, the banking hours
are fixed by custom established by the State Bank of Pakistan; and
changes in them are notified through all reliable media for the information
of all concerned.

10. No legal bar prohibiting payment: The banker should see that
none of the following clauses is applicable on the cheque presented for
payment:

(i). Payment stopped by the drawer (customer) through a notice in writing.

(ii). Knowledge of any defect in the title of the person who is presenting
the cheque for payment.

(iii). Notice of insolvency, insanity or death of the customer; or in case of a

company, notice of its winding-up received by the banker.

(iv). Notice of an assignment of the available credit balance in the account

by the customer. • (v). Knowledge that the customer contemplates a
breach of trust or an act of insolvency.

(vi). Notice of garnishee injunction or other court order restraining the

customer from operating the account.
BOUNCING OF CHEQUES

• Bouncing of cheques can lead to fine and imprisonment for the

customer according to the Pakistani Laws. As per the Financial Institutions
(Recovery of Finance) Ordinance, 2001, that in case the bounced cheque
was issued by a company or body corporate, the Chief Executive by
whatever name called and any director or officer involved of that
company or body corporate shall be deemed to be guilty of offense and
shall be liable to be proceeded against and punished accordingly.
Moreover, the burden of proof for dishonestly issuing the cheques has
been left with the maker of the cheque. This has been done to reduce the
period of legal proceedings.

REVOCATION OF BANKER’S AUTHORITY

• There are certain circumstances in which payment of cheque can be

refused by the banker consisting of following: -

• Countermand of payment (Payment stopped by drawer). • Notice of

customer’s death.

• Notice of customer’s insolvency. • Notice of customer’s insanity.

• Legal orders attaching customer’s account. • Notice of assignment by

the customer.

• Breach of trust in Trust Account like when a trustee intends to misuse

the funds. • Insufficient funds in the account.

Chapter 13
INDORSEMENTS
The word ‘Indorsement’ is derived from the latin word ‘indorsum’ which
means ‘on the back’. Ordinarily it means anything written or printed upon
the back of a deed or writing. Section 15 of the Negotiable Instruments
Act, 1881, defines “Indorsement” as “When the maker or holder of a
negotiable instrument signs the same, otherwise than as such maker, for
the purpose of negotiation, on the back or face thereof or on a slip of
paper annexed thereto, or so signs for the same purpose a stamped paper
intended to be completed as negotiable instrument, he is said to indorse
the same, and is called the ‘indorser’.
• When a negotiable instrument is transferred to any person, so as to
constitute that person the holder thereof, the instrument is said to be
negotiated and he is entitled to the possession of the same and sue
thereon in his own name.

CLASSIFICATION OF INDORSEMENTS • There are five main classes

of indorsement:

1. ‘In blank’ & ‘In full’ Indorsement: Section 16 of the Negotiable

Instruments Act, 1881, reads: “If the indorser signs his name only, the
indorsement is said to be ‘in blank’ or , and if he adds a direction to pay
the amount mentioned in the instrument to, or to the order of, a specified
person, the indorsement is said to be in full , and the person so specified
is called the ‘indorsee’ of the instrument”.

• And indosement ‘in blank’ is also known as a ‘General Indorsement’. It

consists of the bare signature of the indorser and the instrument so
indorsed becomes payable to the bearer. Section 54 of the Negotiable
Instruments Act, 1881, lays down that as long as the indorsement
continues to be ‘on blank’ the instrument may be negotiated by mere
delivery in the same manner as any instrument payable per bearer, even
though the instrument was originally payable to order. An indorsement ‘in
full’ is also known as a ‘Special Indorsement’.

2. Restrictive Indorsement: Under Section 50 of the Act, this is an

indorsement which prohibits further negotiation of the instrument. For
instance, if a cheque is indorsed; ‘pay X only” or “pay X for the account of
Y” etc. the indorsee has no power to transfer this right to any one further.

3. Partial Indorsement: Under Section 56, the indorsement should be

for the whole amount. A partial indorsement purports (intends) to transfer
to the indorsee only a part of the amount payable.

4. Conditional Indorsement: Under Section 52, it is an indorsement

which makes the transfer of the instrument from the indorser to the
indorsee after the fulfillment of stated conditions. For instance, the holder
of the bill indorses: “Pay accounts or order without recourse to me” or
“Pay or order at his own risk”.

5. ‘Sans Recourse’ (Without recourse) Indorsement: When an

indorser wants to exclude his liability to the indorsee or subsequent holder
he indicates on the instrument by writing the words, ‘SANS RECOURSE’ or
‘Without Recourse’

PRINCIPLES OF INDORSEMENTS

• Bankers in Pakistan generally observe the following principles:

 i. The name of the indorser must appear exactly in the same
spelling as written in the instrument as the payee or the
indorsee.
ii. Indorsement in pencil is legally valid but it should be
discouraged; bankers must insist on indorsement in ink.
iii. Indorsement made by an impress stamp or in any other form of
facsimile (copy) signature should not be accepted.
iv. Indorsement made in typewriting or printed form is not treated
as valid unless the payee gives a satisfactory evidence of
confirmation about its genuineness.
v. An indorsement made in a language not spoken in the area and
which the paying banker also does not understand, should not be
accepted without a certified translation. However, in the
presence of a collecting banker’s confirmation, certified
translation is not necessary.
vi. It is not necessary that indorsements, if more than one, should
appear in the same order in which they were made.

LIABILITY OF INDORSER

• The liability of the indorser is similar to that of the drawer. By indorsing

a cheque he commits that on due presentation it will be paid in ‘due
course’, and that if it is dishonoured, he will compensate the holder

Chapter 14

CROSSED CHEQUES AND THEIR COLLECTION

• Crossing: After drawing a cheque the drawer puts two parallel

transverse lines across the cheque and the cheque is then said to have
been ‘crossed’. There are two types of crossing – General and Special.

(1). GENERAL CROSSING: Under Section 23 of the Negotiable

Instruments ACT, 1881, General Crossing has been defined as “Where a
cheque bears across its face an addition of the words ‘and company’ or
any abbreviation thereof between two parallel transverse lines simply,
either with or without the words ‘not negotiable’, that addition shall be
deemed to be a crossing, and the cheque shall be deemed to be crossed
generally”.

• Cheque Crossed “Account Payee”: Section of 123-A defines, “Where

a cheque crossed generally bears across its face an addition of words
“Account Payee” between the two parallel transverse lines constituting the
general crossing, the cheque, besides being crossed generally, is said to
be crossed “Account Payee”. This cheque shall ease to be negotiable and
it shall be the duty of the banker collecting payment of the cheque to
credit the proceeds thereof only to the account of the payee named in the
cheque. If the collecting banker contravenes the provisions of this clause
and credits the amount to some other account, he will do so at his own
risk and if he does not keep the payee’s account he should refuse to
handle the cheque.

(2). SPECIAL CROSSING: Special crossing has been defined under

Section 124 as “Where a cheque bears across its face an addition of the
name of a banker, either with or without the words ‘Not Negotiable’, that
addition shall be deemed a special crossing, and the cheque shall be
deemed crossed specially; and to be crossed to that banker.” If this
cheque is lost or stolen, there is no risk of wrong payment.

• ‘Not Negotaible’ Crossing: Section 130 reads: “A person taking a

cheque crossed generally or specially, bearing in either case 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”.
The ‘not negotiable’ crossing does not restrict in anyway the
transferability of a cheque. Crossing is a material part of a cheque.

• Advantages of Crossing

1) It is an effective means of minimizing the risk of loss or forgery.

2) Crossing is a direction to the paying banker to pay the money

generally to a particular bank.

3) Only a banker can secure payment of a crossed cheque, as such it is

easy to compel the holder to present it through a quarter of known
respectability, and credit.

4) Since only a banker secures payment of a crossed cheque, it can

easily be traced for whose use the money was received.

5) Mere crossing of a cheque does not effect its negotiability.

• Authorized Persons: Section 125 says that “Where a cheque is

uncrossed, the holder may cross it generally or specially. Where a cheque
is crossed generally, the holder may cross it specially. Where a cheque is
crossed generally or specially, the holder may add the words ‘not
negotiable’. Where a cheque is crossed specially, the banker to whom it is
crossed may gain cross it specially to another banker, his agent, for
collection. When an uncrossed cheque, or a cheque crossed generally, is
sent to a banker for collection, he may cross it specially to himself.”
Crossing can be withdrawn by the drawer only. In such a case, after
cancelling the crossing, he writes ‘Pay Cash’, across the cheque and puts
his full signature thereof on the cheque. Since a Special Crossing
specifically mentions the name of the banker through whom the
instrument is to be collected, only the banker named in such a crossing is
authorized to cancel.

COLLECTION OF CROSSED CHEQUES

• Collecting Banker: A collecting banker is one who has assumed duty

of collecting the proceeds of a cheque for the customer or for himself.
When he collects the proceeds for the customer, he acts as his agent,
whereas in case of collecting for himself, he is a holder for value by virtue
of the fact that:

i. He makes the payment before collection;

ii. He credits the customer’s account with the value of the cheque
before it is realized; iii. The cheque is received in adjustment of an
overdraft.

• Duties of a Collecting Banker: The collecting banker must examine

minutely all the crossings and cheques handed to him for collection. If the
customer gives him a cheque crossed specially to any banker, he should
not accept it for collection. Similarly, a cheque corssed “Account Payee
Only” should be collected only for the payee named in the cheque amd for
no one else. While making payment the paying banker normally relies on
the collecting banker’s discharge. Therefore, it is vey important duty of
the collecting banker to examine all the indorsements and other material
parts of all cheques and drafts before presenting them for collection, and
giving his discharge on the instruments. If a cheque is dishonoured on
presentation, it is the duty of the collecting banker to inform his customer
accordingly. Moreover, the banker is entitled to debit a dishonoured
cheque to his customer’s account in case he has already credited it.

Protection to the Collecting Banker: Section 131 reads: “Subject to

the provisions of this Act relating to cheques crossed ‘Account Payee’,
where a banker in good faith and without negligence receives payment for
a customer and of a cheque crossed generally or specially to himself, and
the customer has no title or defective title thereto, the bankers shall not
incur any liability to the true owner of the cheque by reason only of having
received such payment”. This definition lays down the following duties for
the collecting banker:

1). The cheque should be crossed when it is received for collection by the
collecting banker. If a cheque received by a banker is not crossed
generally, he must ask the customer to cross it. Special Crossing is also
necessary and is done by the banker himself. The collecting banker is not
protected in case of collection of open cheques.

2). Cheques or drafts must be collected for the customer only because
banker collects them as agent, and not as holder for value.

5). The collection must be done in good faith and without negligence.
‘Good faith’ for a banker means acting honestly as a collecting banker;
and it is assumed to be operative unless proved otherwise. In order to
prove having collected without negligence, a banker should take all such
steps which a prudent businessman would take to guard himself against
adverse effects. If a banker ignores the stop-payment instructions
received for his customer; accepts irregular indorsements on the
instruments; opens a Current or Savings Account without an introduction;
or ignores the “Account Payee” crossing to collect proceeds for a person
otherwise than a payee, he will be acting with negligence.

6). The collecting banker should inform his customer about the dishonour
of a cheque, so as to enable him to recover the amount from the parties
liable on it. If the banker fails to do so the customer may ask him for
compensation for any loss which he would have suffered because of not
being informed of dishonour of the cheque.

• Conversion: As far as collecting banks are concerned, the act of

conversion consists of presenting the cheque for someone who is not
entitled to it, and obtaining the money”, therefore, when a banker makes
a wrongful presentation and contravenes the provisions for protection to a
collecting banker, he may be guilty of ‘conversion’. A banker who takes a
bill or cheque for value marked ‘not negotiable’ will be liable for
conversion, because there is no statutory or other protection for a banker
in such a case.

• Position of Paying Banker: If a cheque is properly drawn and is

otherwise regular in form, a paying banker is bound to honour it in
accordance with Section 129 of the Negotiable Instruments Act, 1881, in
the absence of an express notice that the customer is committing a fraud.

Chapter 15

OTHER NEGOTIABLE INSTRUMENTS

• Quasi-Negotiable Instruments

Some documents of title to goods, such as bills of lading and Railway

Receipts, are transferable by indorsement and delivery under the customs
of merchants; but these are not negotiable instruments, as they are not
money securities; and their transferee does not get a god title to the
goods from a transferor whose title was defective. They are known as
Quasi-Negotiable Instruments.

• Defective Title: According to Section 9 of the Negotiable Instruments

Act, 1881, the title of a person to a promissory note, bill of exchange or
cheque is defective when he is not entitled to receive the amount due
thereon by reason of the provision of Section 58, which provides that no
person is entitled to receive the amount of the instrument for following
reasons:

i. a person is a finder of an instrument lost by another;

ii. Has obtained it form the maker, drawer, acceptor or holder
thereof by means of an offence or fraud or for an illegal
consideration;
iii. any person who claims it through such person who is not entitled
to receive its amount.

PROMISSORY NOTE

• Section 4 defines promissory note as “Promissory note is an instrument

in writing (not being a Bank Note or a Currency Note) containing an
unconditional undertaking signed by the maker, to pay on demand or at a
fixed or determinable future time, a certain sum of money only, to, or to
the order of a certain person, or to the bearer of the instrument”.

• Promissory note may be made by two or more persons, and they may be
liable thereon jointly and severally. A promissory note is incomplete until it
has been delivered to the payee or the bearer.

• Presentment of payment: Promissory notes, bills of exchange and

cheques must be presented for payment to the maker, acceptor or drawee
thereof respectively by or on behalf of the holder. In default of such
presentments, the other parties are not liable thereon to such holder”. A
promissory note payable on demand must be presented for payment at
maturity which is the date on which it falls due. Three days of grace are
also admissible in case a promissory note is payable at a fixed or
determinable future time and in such a situation, the maturity is the third
day on which the promissory note is payable. But when such a day falls on
a public holiday under Section 25, the instrument falls due on the
immediately preceding day.

• Promissory-note made payable at a bank: When a promissory note

has been made payable at a bank, the banker would be justified in paying
it when due and debiting it to the maker’s account; but the banker will be
liable in the event of a forged indorsement on the promissory-note.
BILL OF EXCHANGE

• Section 5 defines a bill of exchange as “An instrument in writing

containing an unconditional order, signed by the maker, directing a
certain person to pay on demand or at a fixed or determinable future
time, a certain sum of money only to, or to the order of a certain person or
to the bearer of the instrument”.

• Parties to a bill of exchange: According to Section 7, there are three

parties to a bill of exchange.

• Drawer: Every person capable of contracting under Section 11 of the

Contract Act may become the drawer, drawee, acceptor, indorser, payee
or indorsee of a bill of exchange or promissory-note. The liability of drawer
is conditional to the notice of dishonour of the bill or cheque having been
given or received by the drawer.

• Drawer and ‘Drawee in case of need’: Drawee is the person on

whom the bill of exchange is drawn and who has been directed to pay. A
bill of exchange may be addressed to two or more drawees. When in the
bill, or in any indorsement thereon, the name of any person is given in
addition to the drawee to be resorted to in case of need, such a person is
called a ‘drawee in case of need’.

• Acceptor and ‘acceptor for honour’: After the drawee has signed his
assent on the bill of exchange, he becomes the acceptor. An acceptance
may be general or unqualified (without any condition), or qualified, when
it contains a condition for payment. An acceptance may also be ‘partial;,
i.e. to pay only a part of the amount for which the bill is drawn.

When a bill of exchange has ben noted or protested for non-acceptance or

for better security, any other person who has been a party to the bill may
accept the same by writing his assent for the honour of any party to the
instrument with the consent of the holder and thus becomes an ‘acceptor
for honour’. According to Section 32, by accepting a bill of exchange the
acceptor binds himself to pay it according to the apparent terms of
acceptance. Thus the acceptor is the principal debtor to the holder of the
instrument and his liability is absolute, unconditional and quite
independent of the drawer.

An ‘acceptor for honour’ is liable to all parties subsequent to the party for
whose honour he has accepted the bill of exchange. However, an
‘acceptor for honour’ cannot be charged unless the bill, at its maturity,
has been presented for dishonour at his end.
Payee or Indorsee: Payee is the person to whom or whose order the
promissory-note or bill of exchange has been made payable. A bill may be
payable to two or more payees jointly or severally. However, a holder may
indorse the promissory-note or bill in favour of someone else known as
‘indorsee’.

Presentment for Acceptance: It is necessary to present the bill for

acceptance before it is presented for payment. Section 131-G lays down
that presentment for acceptance is not necessary and the bill of exchange
should be treated as dishonoured by non-acceptance in the following
situations:

a). When the drawee is dead or insolvent or is a fictitious person or a

person not having capacity to contract by bill of exchange;

b) Where, on the due date for presentment, the drawee cannot, after
reasonable search, be found at the place at which the bill is to be
presented;

c) Where, after exercise of reasonable diligence, such presentment cannot

be effected;

d) Where, although the presentment has been irregular, acceptance has

been refused on some other ground.

• Person Receiving Payment:

Holder: According to Section 8, “the holder of a promissory-note, bill of

exchange or cheque means the payee or indorsee who is in possession of
it or the bearer thereof, but does not include a beneficial owner claiming
through a benamidar”.

• Holder in Due Course: Section 58 explains that if a promissory note,

a bill of exchange or cheque is lost or obtained through illegal means or
fraud then neither the finder nor anyone who got it through that person
has the right to claim the amount due from the original issuer, unless the
current holder can prove that they obtained it legitimately as a holder in
due course or through someone who was holder in due course.

DISHONOUR OF BILL OF EXCHANGE

Section 91 reads: “A bill of exchange is said to be dishonored by non

acceptance when the drawee, or one of the several drawees not being
partners, make default in acceptance upon being duly required to accept
the bill, or where presentment is excused and the bill is not accepted”.
According to Section 131-H , “When a bill of exchange is dishonoured by
non-acceptance, an immediate right of recourse against the drawer and
indorsee accrues to he holder, and no presentment for payment is
necessary”. According to Section 91, a “bill is dishonored by non-payment
when it is duly presented for payment which is refused or cannot be
obtained or when payment is excused and the bill is overdue and unpaid”.
It is necessary to give notice of dishonour to the concerned parties as per
the law. If a bill which a banker has discounted for a customer is
dishonored, he will debit to his customer’s account and return the bill to
him.

Noting and Protesting: Noting is a minute made on a dishonoured bill

or on a slip of paper affixed to the bill of exchange to secure official
evidence that it has been dishonoured. Section 99 lays down that the
noting should be made by a Notary Public within a reasonable time after
the dishonor.

If on the date of maturity, the acceptor becomes insolvent or his credit

has been publicly impeached, the holder may request a Notary Public to
ask the acceptor for a better security for its payment at maturity; and on
its being refused, request him to note the fact and issue a certificate to
that effect. This certificate is called ‘Protest for better security’.

Banker’s Draft: Drafts drawn by one branch on another branch or on the

Head Office of the same bank or vice versa, are not cheques or bills, as
these have no distinct drawer and drawee.

Lost Drafts & its Cancellation: When the purchaser of a draft informs
the issuing bank that the draft issued to him has been lost, the drawee
bank should be informed immediately that the payment of the draft may
be postponed until the holder in due course presents it. Banks generally
issue a duplicate draft in lieu of the original reported lost. Before the
duplicate draft is issued, the purchaser indemnifies the bank against
liability in case of the lost draft presented by someone who has obtained a
good title to it. The indemnity should cover the amount of the draft and all
costs and expenses reasonably incurred by the bank in establishing the
title of the person presenting the draft.

Inchoate Stamped Instruments: Inchoate means incomplete. When a

person signs a stamped paper which is not complete or which is wholly
blank, and hands it over to the holder, giving him authority to fill up the
blank and subsequently create bill of exchange, it is an “Inchoate
Stamped Instrument”. Since the demand bills (bills payable on demand)
and cheques are exempted from the excise duty they will not be included
in this category of instruments.

Other Categories of Negotiable Instruments

1. Inland and foreign instruments: A promissory-note, bill of exchange
or cheque which drawn in Pakistan or made payable in Pakistan, or drawn
upon any person resident in Pakistan, is termed as “Inland Instrument”,
otherwise it will be a foreign instrument.

2. Instruments payable on demand: A Cheque is always payable on

demand. However, a promissory note and bill of exchange are payable on
demand when no time for payment is specified on them, or when the
payment is expressed to be ‘on demand’ or ‘at sight’ or ‘on presentment’.

Other Categories of Negotiable Instruments:

3. Time instruments: A Promissory Note or bill of exchange which is

payable after a fixed period, or after sight, or on a specified day, or on the
happening of an event which is certain to happen, is known as ‘time
instrument’.

4. Documentary and clean bill: When documents of title to goods and

other documents, like invoice, marine policy, etc are attached to a bill of
exchange to confirm the consideration, such a bill is called a
‘documentary bill’, when no such documents are attached to it, it is called
a ‘clean bill’.

5. Fictitious bill: When the name of the drawer or payee, or both are
fictitious in a bill of exchange, the bill is said to be fictitious. Section 42,
does not relieve the acceptor of such a bill from the liability to pay any
holder in due course.

• Ambiguous instrument: If the faulty language of an instrument does

not confirm whether it is a bill of exchange or promissory note, it is called
an ‘ambiguous instrument’. Section 17, confers the choice to the holder to
decide it as either a promissory note or a bill of exchange.

• Escrow: When a negotiable instrument is delivered conditionally, or for

the purpose as a collateral security, or for a safe custody only, and not for
the purpose of transferring absolutely, property in it, it is called an
‘escrow’. The liability to pay on escrow does not arise if the agreed
conditions are not fulfilled, or the purpose for which the instrument was
delivered is not satisfied.

• Undated bills and notes: A negotiable instrument is not valid because

it is undated. If the instrument is otherwise properly drawn and fulfills the
legal requirements, the date of its drawing or execution can be proved by
oral or other evidence. The holder in due course may, however, insert the
true date of issue or acceptance in it. Such an insertion is not regarded as
a material alteration hence the instrument is payable accordingly.