Negotiable Instruments

3/06/2025

Negotiable Instruments

Negotiable Instruments

Ekeminijah Ifon

University Of Uyo

Introduction

A Negotiable instrument is a written document that promises payment of money to a specific person or party. It can be transferred from one person to another, and the holder can sue on it in their own name.

A negotiable instrument is a signed document that promises a payment to a specified person or assignee. In other words, it is a formalized type of IOU: A transferable, signed document that promises to pay the bearer a sum of money at a future date or on-demand.

A negotiable instrument can be transferred from one person to another. Once the instrument is transferred, the holder gains full legal title to the instrument.

A Negotiable Instrument:

Is a written order/promise to pay money.
Is negotiable: meaning that it is an assignable, chosen in action. Ordinarily, a choice in action could not be assigned (this was the common law position) however, equity allows assignment of a chose in action provided that prior notice has been given to the debtor. Unlike an assignment, Negotiable instruments do not require a deed of assignment to be executed.

It is freely transferable by mere delivery to a bona fide holder for value free from equities.

Passes full legal title to the transferee who can sue in his own name.

Value is generally presumed to have been given for the negotiable instrument. By Section 27 of the Bill of Exchange Act, an antecedent debt or liability is valuable consideration.

The Bill of Exchange Act 1917 codifies the following as negotiable instruments:

Bill of Exchange.
Promissory notes.

This notwithstanding, the court in Webb hale and co V Alexander Water ltd noted that the existence and evolution of other negotiable instruments has not been inhibited. Other negotiable instruments include: Share Warrants, Treasury Bills, traveller cheques, bearer bonds and debentures etc

Types of Negotiable Instruments

Personal Checks

Personal checks are signed and authorized by someone who deposited money with the bank and specifies the amount required to be paid, as well as the name of the bearer of the check (the recipient).

Traveler's Check

Traveler’s checks are another type of negotiable instrument intended to be used as a form of payment by people on vacation in foreign countries as an alternative to foreign currency.

Traveler’s checks are issued by financial institutions with serial numbers and in prepaid fixed amounts. They operate using a dual signature system, which requires the purchaser of the check to sign once before using the check and a second time during the transaction.

Money Orders

Money orders are like checks in that they promise to pay an amount to the holder of the order. Issued by financial institutions and governments, money orders are widely available but differ from checks in that there is usually a limit to the amount of the order – typically $1,000.

Promissory Notes

Promissory notes are documents containing a written promise between parties — one party (the payor) is promising to pay the other party (the payee) a specified amount of money at a certain date in the future. Like other negotiable instruments, promissory notes contain all the relevant information for the promise, such as the specified principal amount, interest rate, term length, date of issuance, and signature of the payor.

The promissory note primarily enables individuals or corporations to obtain financing from a source other than a bank or financial institution - Section 85 of the Act

Certificate of deposit (CD)

This is a product offered by financial institutions and banks that allows customers to deposit and leave untouched a certain amount for a fixed period and, in return, benefit from a higher interest rate.

Usually, the interest rate increases steadily with the length of the period. The certificate of deposit is expected to be held until maturity, when the principal, along with the interest, can be withdrawn.

Bill of Exchange

Section 3(1) of the Bill of Exchange Act defines it as:

An unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a determinable future time, a sum certain in money or to the order of a specified person or a bearer. Anything else is not a bill of exchange.

Cheque

It must be payable on demand, and drawn on the banker. Since the cheque is payable on demand, it does not need acceptance. The drawer of a cheque is meant to exercise reasonable care in drawing it unlike in a bill. The bank, unlike the drawee of an ordinary bill, is protected against forged or unauthorised endorsement.

A cheque is an unconditional order in writing, signed by the drawer requiring a bank to pay a certain sum in money to the person to whom it is drawn or the order.

Type of Cheque

Open cheque: payable over the counter of the drawee bank after ascertaining the identity of the payee.
Crossed cheque: two transverse lines run across the face of the cheque. Crossed cheques are payable only into the account of the payee. A crossed cheque is advantageous in the sense that it forestall fraud as it is paid into account of intended payee.

Functions of Negotiable Instruments

1. Payment Instrument

2. Financing

3. Security

4. Facilitating international trade

5. Investment instrument

6. Transfer of value

7. Credit Instrument

Cost Insurance Freight

Cost, insurance, and freight (CIF) is an international shipping agreement, which represents the charges paid by a seller to cover the costs, insurance, and freight of a buyer's order while the cargo is in transit. Cost, insurance, and freight only applies to goods transported via a waterway, sea, or ocean.

The goods are exported to the buyer's port named in the sales contract. Once the goods are loaded onto the vessel, the risk of loss or damage is transferred from the seller to the buyer. However, insuring the cargo and paying for freight remains the seller's responsibility.

Cost, Insurance, and Freight (CIF) is one of the 11 Incoterms rules set by the International Chamber of Commerce. It’s an international shipping agreement, which represents the charges paid by a seller to cover the costs, insurance, and freight of a buyer's order while the cargo is in transit. It follows the same procedure as the Cost and Freight (CFR) Incoterms rule, but the seller must also provide insurance coverage in case of loss or damage to the goods during the transportation.

Role of bills of lading in CIF contracts

Proof of shipment:

It acts as a receipt, confirming that the goods have been loaded onto the vessel and details the quantity and description of the cargo.

Contract evidence:

The Bill of Lading outlines the terms of the carriage contract between the shipper and the carrier, including the port of origin, destination, and freight charges.

Document of title:

The holder of the Bill of Lading is considered to have constructive possession of the goods, allowing them to transfer ownership by transferring the document to another party.

Payment facilitation:

In a CIF contract, the exporter can use the Bill of Lading to accurately calculate and pay the freight cost to the shipping company.

Dispute resolution:

If any issues arise regarding the shipment, the details on the Bill of Lading can be used as evidence to resolve disputes

A bill of lading performs three important functions: it confirms the contract of carriage, serves as a receipt for the goods, and is a document of title that can be transferred to third parties.

Payment terms in CIF contracts

Under a CIF contract, the purchaser is obliged to pay against the tender of a clean bill of lading that covers the goods contracted to be sold, an insurance policy and a commercial invoice that shows the price.

In a Cost, Insurance, and Freight (CIF) contract, the seller is responsible for paying for shipping and insurance, while the buyer is responsible for unloading and transporting the goods.

Seller's responsibilities

Paying for shipping the goods to the buyer's port
Insuring the goods while they are in transit

Buyer's responsibilities

Paying for unloading the goods
Paying for transporting the goods to their final destination.

CIF is an Incoterm, or international trade term, that's often used in maritime shipping and international contracts. It's only used when shipping goods overseas or by waterway.

Risk of Cost Insurance Freight

Under CIF, the seller is responsible for all the costs and risks of shipping, with the buyer only taking responsibility upon delivery. The buyer would be at risk since the goods would not be insured while they sit in the container waiting to be loaded on the vessel. As a result, CIF agreements would not be appropriate for shipments, including containerized cargo.

Free On Board

Definition of FOB arrangements

Free On Board is a widely used shipping term that applies to both domestic and international transactions. It's an agreement between the buyer and seller that specifies when the ownership and liability for the goods being shipped transfer from the seller to the buyer. Free on board, often abbreviated as “F.O.B.,” applies to the sale of goods and indicates that purchased property will be placed on board a vessel for shipment at a designated place without expense to the buyer for packing, potage, cartage, etc.

In FOB arrangements, the seller must get the purchased goods onto the shipping vessel that will bring the goods to the buyer.Freight on board is a shipping term that details the responsibility each party involved in a relevant transaction has regarding shipping fees.

Role of bills of lading in FOB arrangements

In a Free on Board (FOB) arrangement, a bill of lading acts as the primary document proving that the goods have been loaded onto the ship at the designated port, signifying the seller's responsibility has ended and the buyer now assumes ownership and responsibility for the shipment, including all associated costs and risks from that point onwards; essentially marking the transfer of title from the seller to the buyer.

A bill of lading is a document that is signed by the shipowner or a representative to prove that the vessel or the carrier received the goods

Payment Terms of Free On Board

FOB is written into a sales agreement to determine where the liability responsibility for the goods transfers from the seller to the buyer. FOB stands for "Free On Board". There is no line item payment by the buyer for the cost of getting the goods onto the transport. There are two possibilities: "FOB origin", or "FOB destination". "FOB origin" means the transfer occurs as soon as the goods are safely on board the transport. "FOB destination" means the transfer occurs the moment the goods are removed from the transport at the destination. "FOB origin" (also sometimes phrased as "FOB shipping" or "FOB shipping point") indicates that the sale is considered complete at the seller's shipping dock, and thus the buyer of the goods is responsible for freight costs and liability during transport. With "FOB destination", the sale is complete at the buyer's doorstep and the seller is responsible for freight costs and liability during transport.

The two terms have a specific meaning in commercial law and cannot be altered. But the FOB terms do not need to be used, and often are not. In this case the specific terms of the agreement can vary widely, in particular which party, buyer or seller, pays for the loading costs and shipment costs, and/or where responsibility for the goods is transferred. The last distinction is important for determining liability or risk of loss for goods lost or damaged in transit from the seller to the buyer.

The buyer takes responsibility for the goods as soon as they leave the seller's location. The buyer bears the costs and risks associated with transportation from that point forward. FOB Destination: The seller retains responsibility for the goods until they reach the buyer's destination.

FOB conditions are defined in the purchase order between the vendor and the client. While FOB status doesn't determine ownership (which is in the bill of sale or separate agreement), it does say which party assumes responsibility for the shipment at different points in the journey.

Risk and Liability in Free On Board

Free on Board is a shipping term for the point in the supply chain when a buyer or seller becomes liable for the goods being transported.Purchase orders between buyers and sellers set FOB terms and help determine ownership, risk, and transportation costs.

The risk of loss or damage to the goods transfers to the buyer once the goods leave the seller's location.The risk of loss or damage remains with the seller until the goods reach the buyer's destination. The buyer assume risk of loss or damage from origin; choose insurance providers and coverage levels.

Comparison of CIF and FOB Arrangements

Both CIF (Cost, Insurance, and Freight) and FOB (Free on Board) are international trade terms used to define the responsibilities of a seller and buyer when shipping goods, with the key similarity being that they both specify the point at which the risk of loss or damage transfers from the seller to the buyer during the shipping process, usually occurring when the goods are loaded onto the vessel at the port of origin; however, the main difference is that with CIF, the seller is responsible for arranging and paying for insurance during transit, while with FOB, this responsibility falls on the buyer.

Both require the seller to bear the expense and risk of loss until the goods are tendered to the buyer at the place of destination.

Both are Incoterms:

Both terms are part of the International Chamber of Commerce's Incoterms rules, which standardize international trade practices.

Sea and Inland Waterway Transport:

Both CIF and FOB are typically used for shipments transported via sea or inland waterways.

Seller Responsibility for Export Duties:

In both cases, the seller is responsible for handling export duties and paperwork required to get the goods out of their country.

Buyer Responsibility for Import Duties:

The buyer is responsible for import duties and customs clearance in their own country.

Point of Risk Transfer:

Both terms define a specific point in the shipping process where the risk of damage or loss transfers from the seller to the buyer.

Differences

The main difference is that the seller is responsible for the risks and costs of transportation under DIF contracts. FOB contracts assign these costs to the buyer. CIF contracts are more expensive but FOB contracts give the buyer greater control over how their goods are transported and insured.

Insurance Coverage:

Under CIF, the seller arranges and pays for insurance coverage during transit, while with FOB, the buyer is responsible for obtaining insurance.

Risk Transfer Point:

With CIF, the risk transfers to the buyer once the goods reach the designated destination port, whereas with FOB, the risk transfers when the goods are loaded onto the ship at the port of origin.

Conclusion

FOB (free on board) is a term in international commercial law specifying at what point respective obligations, costs, and risk involved in the delivery of goods shift from the seller to the buyer under the Incoterms standard published by the International Chamber of Commerce. FOB is only used in non-containerized sea freight or inland waterway transport. As with all Incoterms, FOB does not define the point at which ownership of the goods is transferred.

Cost, insurance, and freight (CIF) and free on board (FOB) are international shipping agreements used in the transportation of goods between buyers and sellers. They're among the most common of the 11 international commerce terms (Incoterms) which were established by the International Chamber of Commerce (ICC) in 1936.

A negotiable instrument is a written document which includes the legal characteristics of negotiability. It promises a payment to a specified person or assignee. It is transferable, so it allows the holder to take the funds as cash, then use the money as they see fit.

It is a document that guarantees payment of a specific amount of money to a specified person (the payee). A negotiable instrument ensures payment of a specified amount to a designated person, either on-demand or at a set time. It functions like a contract, containing vital details like principal amount and signatures

References

Textbook