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 (promissor) 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).
Ethiopian law has adopted a very broad definition and types of negotiable instruments. Art 715, after defining negotiable instruments, states that the law in particular recognizes three types of instruments as negotiable; these are
a) commercial instruments
b) transferable securities
c) Document of title to goods
The three main types of negotiable instruments mentioned in art 715(2) should first be defined and classified to understand their exact nature and meaning.
A) commercial instruments
Commercial instruments usually referred to as commercial papers could be shortly defined as instruments other than cash, entitling the payee or the holder payment of a specified amount of money. A closer definition is given in Art 732(1) of the commercial code which reads:
“Commercial instruments are negotiable instruments setting out an entitlement consisting in the payment of a sum of money”
From Both definitions one can clearly understand the exact scope of commercial papers. The right contained in a commercial instrument is always payment of money and money only. An instrument entitling the holder to property rights or any other right than a sum of money could not qualify as a commercial paper. Even though Art 732 (1) clearly indicates the true nature of commercial papers i.e. their entitlement of the holder to payment of a sum of money, contradicts itself by the wider recognition it gives to the different types of commercial instruments in Art 732 (2). This Article, enumerating the types of commercial instruments states “Bills of exchange, promissory notes, cheques, traveler’s cheques and warehouse goods deposit certificates” shall be considered as commercial instruments under the code. A travelers cheque is a different type of cheque hence, the classification can be reduced to four categories i.e. bills of exchange, promissory notes, cheques and warehouse goods deposit certificates.
Bills of exchange, promissory notes and cheques are regarded as commercial papers in most jurisdictions. A definition and a specimen of these in strummers is given herein below. The best way to define any negotiable instrument is through the basic elements constituting it’s validity. The commercial code without providing any formal definition, enumerates the basic requirements of bills of exchanges, promissory notes and cheques in art 735, 825 and 827 respectively. At this stage without going to the detail requirements of each instrument we shall summarize each element and attempt to generally provide common requirements.
Bill of exchange (draft)
A bill exchange (called draft in some jurisdictions) can be defined as “any instrument drawn on drawee that orders the drawee to pay a certain sum of money usually to a third party (the payee) on demand or at a definite future time “
Section op 5 of the Indian Negotiable instrument act of 1881 also defines it similarly in the following way.
“A Bill of exchange is an instrument in writing containing an unconditional order, signed by maker, directing a certain person to pay sum of money only to, or to the order of a certain person or to the bearer of the instrument”
Black’s law dictionary also defines a Bill of exchange as” An unconditional written order signed by one person (the Drawer) directing another person (the drawee or payer) to pay a certain sum of money on demand or at a definite time to third person (the payee) or order.”