CHAPTER EIGHT: LAW OF NEGOTIABLE INSTRUMENTS

1.1. Definition of Negotiable Instruments

The word negotiable means ‘transferable by delivery’ and the word ‘instruments’ means a
written document by which a right is created in favor of a person. Thus, the term negotiable
instruments literally refer to a document containing rights that can be transferred by
delivery.
Similarly, Article 715(1) of Ethiopian Commercial Code of 1960 defines the term negotiable
instruments as any document incorporating a right to an entitlement in such a manner that
it is not possible to enforce or transfer the right separately from the instrument.
The rights that could be incorporated in negotiable instruments may be rights for
payment of money arising out of various contracts such as the contract of loan, sale, lease,
or any other contract performed by payment of a certain amount of money. Such rights
may also arise from ownership in companies or loan made to the government or to a share
company. The rights that are incorporated in negotiable instruments may be rights to
receive goods under voyage or deposited in a warehouse. According to this provision, the
holder of negotiable instruments can transfer the rights incorporated in the instrument by
transferring the instrument. Similarly, a person who claims the rights incorporated in
negotiable instruments may enforce or exercise them only if he has possession of the
instrument, i.e., he should be a holder to whom the instrument is issued or transferred
following the rules governing its transfer. He must also present the instrument to the
person who is supposed to perform the obligations arising out of the instrument. (See also
Art 716/1/). The fact that the rights incorporated in negotiable instruments may be
transferred by the transfer of the instrument and the fact that a person may not exercise or
enforce them unless he is in possession of the instrument are the two main features which
distinguish negotiable instruments from other documents evidencing rights such as a title
deeds whose transfer does not transfer the rights they establish. /Refer to Art 1185 and
1195 of the Civil Code/

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 Another point that has to be noted here is that negotiable instruments are issued or
negotiated based on other contracts. For instance, a person may issue a bill of exchange to
repay the money he has borrowed from the payee, the company issues a share certificate or
debenture certificate as evidence of the person’s right arising out of contract of partnership
creating the company or a contract of loan respectively. / Art 211 and 429 of the
Commercial Code/. The warehouse person or the carrier issues the warehouse goods
deposit certificate or the bill of lading / consignment note based on contracts of
warehousing or carriage respectively. Finally, the definition of negotiable instruments
under the Ethiopian law is much wider than the one adopted by most legal systems,
particularly those following the Common Law tradition. This is evident from the Uniform
Commercial Code of the United States and the Bill of Exchanges Act of 1882, which restricts
the concept to bills of exchange, checks and promissory notes.
Based on the purpose and rights incorporated in the instruments, Article 715(2) of the
Commercial Code categorizes negotiable instruments into three main types, i.e.,
Commercial Instruments, [Transferable] Securities and Documents of Title to Goods.
1.2 Nature and Purpose of Negotiable Instruments
Negotiable instruments represent one form of property rights, i.e., exercised over
incorporeal things “chose in action.” In other words, they are property rights in relation to
objects of property which do not have physical or material existence and hence which
cannot be perceived by the senses. A right of action under contract is a class of property
known as ‘chose in action’ and can be distinguished from a corporeal movable property/ a
‘chose in possession’ which represent property rights exercised in relation to objects which
have material or physical existence and hence can be perceived by the senses such as a
book, a table or a watch. A holder of this type of property right must have actual possession
of the object to exercise rights arising there from. Rights incorporated in negotiable
instruments, rights of an inventor arising out of a grant of a patent in respect of his
invention, rights of a copyrights holder, rights of a trader in respect of his trademark, trade
name and goodwill are instances of chose in action.

Negotiable instruments also represent one kind of contract as every instrument embodies a
contract or promise to pay a certain amount of money or to deliver goods according to

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terms agreed up on. As contracts, the general rules of contract shall apply unless they are
specifically excluded from application by the special law applicable to negotiable
instruments. As a result, the requirements necessary for the formation of a valid contract
must be fulfilled for issuance of a valid and enforceable negotiable instrument. Hence, the
parties who sign a negotiable instrument must have capacity under the law to enter into
juridical acts, i.e., minors and judicially interdicted persons may not create a valid contract
through negotiable instruments. Compare Art 733 of the Commercial Code. Furthermore,
as a contract, any declaration or promise made on negotiable instruments must be
accompanied by the signature of the person bound by such declaration or promise. Art
734/1/ of the Commercial Code and Art 1728 of the Civil Code/. Failure to comply with the
requirements as to capacity and signature may be raised as a defense against any person
who claims based on the instrument even against the holder in due course who, under
other cases, is considered to be free from defenses available against the person who
transferred the instrument to him. Art 717/2/. The parties must give their consent, which
must be free from defects such as mistake, fraud, duress. The object of the contract must
also be legal and possible. Where the contract does not fulfill requirements as to consent
and object, a party affected may raise it as a defense to avoid the contract and liability
under the instrument. Art 717 /1/ of the Commercial Code and Art 1676 /1/ of the Civil
Code./ However, because of the special nature of these instruments, such defenses cannot
be raised against a person who acquires the instrument following the rules of transfer
applicable to the instrument, and in good faith. See Art 717/3/ of the Commercial Code.
Furthermore, the transfer of negotiable instruments has a special effect compared to the
transfer of other forms of property and other contracts. A person to whom such instrument
is transferred, following the rules governing its negotiation or transfer, in good faith, before
its overdue and before it is dishonored / a holder in due course/ will have a better right on
the instrument than the transferor because he acquires it free from claims and defenses
that could have been raised against the transferor. Similarly, a person who has lost or who
is dispossessed of a negotiable instrument may not recover it from the holder in due
course. Hence, the general principle governing contracts which transfer rights to other
forms of property, particularly immovable properties and special movable properties, i.e.,
no one may transfer a better title than he has, does not apply in the case of transfer of

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negotiable instruments. See Art 717 /3/, 751/2/, 752, 849 and 850 of the Commercial
Code. Compare Arts 1161-1167 and Art 1966 of the Civil Code.
The main purpose of negotiable instruments is facilitation of commercial transactions.
Commercial instruments are substitutes for money and are used as means of performance
of money obligations. Dealing with them reduces the risk of loss or theft and the ease with
which they can be transferred creates convenience which will in turn facilitate business.
Transferable securities have the purpose of raising capital in the form of contributions
made by purchase of shares and bonds, which is used for starting new businesses or
expansion of existing businesses thereby increasing the production of goods and services in
the country. A document of title to goods, whose negotiation transfers the goods
represented by them, creates convenience and facilitates transactions involving the goods.
For instance, a person selling warehoused goods can do so by endorsing and transferring
the certificate of deposit and without the need to actually deliver the objects. When we
come to the specific purposes of commercial instruments, promissory notes can be used as
means of borrowing money, buying goods and services on credit and as method of
evidencing a pre-existing debt. Certificates of deposit can be used as “device for
encouraging individuals to deposit funds in banks, in return the holder of the certificate has
the right to receive interest. Bills of exchange on the other hand have the purpose of
collecting accounts financing, the movement of goods, and transfer funds. Checks serve as
“vehicles for transfer of money and also used to aid in keeping records, reduces the risk
of loss and destruction and theft of currencies.”
1.3 Types of Negotiable Instruments
I.Commercial Instruments
Commercial instruments are negotiable instruments incorporating rights for payment of a
specified amount of money. They are issued and negotiated on the basis and with the
purpose of performing an obligation that can be performed by payment of a certain amount
of money. Hence, they are used as a substitute for money. These are bills of exchange,
promissory notes, checks, travelers’ checks and warehouse goods deposit certificates as the
types of commercial instruments recognized under the Ethiopian law.

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 II.Transferable Securities
Securities are negotiable instruments incorporating rights for payment of money. The
sources of such rights may be investments made in companies or loans provided to the
government or its subdivisions through purchase of government bonds and treasury bills
or to companies through the purchase of debentures. A person who invests in a company is
entitled to share in the profits of the company if any, i.e., he has the right to receive
dividends and to share in the assets of the company where the company is dissolved. /Art
345/ On the other hand, the person who has purchased a government bond or a treasury
bill or a company bond, also called a debenture, acquires the right to receive repayment of
the money he has given on loan plus interest. /Art 433/. Refer also to the provisions of
Arts 2490-2511 of the Civil Code.
However, all securities are not negotiable instruments. What makes securities
negotiable instruments is their transferability according to rules of negotiation. Therefore,
if it cannot be negotiated, it is difficult to circulate as money. Bonds, stocks and transferable
shares are instances of securities which are negotiable instruments considered.
III.Documents of Title to Goods
These are negotiable instruments containing rights of ownership over goods that are being
transported or goods which are warehoused and which enable their holders to receive
such goods. Refer Arts 571-576 and 610-619 of the Commercial Code regarding documents
of title to goods under voyage and Arts 2814-2824 of the Civil Code regarding documents of
title to goods warehoused.
Review Questions
1. Define what negotiable instruments are.
2. Pin point the nature and purpose of negotiable instruments.
3. Clearly show the role of negotiable instruments.
4. Discuss commercial negotiable instruments, transferable securities, and
documents of title to goods.
5. Discuss what a holder in due course means in the Ethiopian Commercial Code.