- Published on
Malaysian Negotiable Instruments-The Concept of Negotiability
One of the easiest ways to understand negotiability is by comparing it with the ordinary transfer of property. Although both involve transferring ownership from one person to another, the legal consequences are different.
The key difference lies in whether the transferee can obtain a better title than the transferor.
Understanding the Principle of
Nemo Dat Quod Non Habet
Definition
The common law principle nemo dat quod non habet means:
“No one can give what he or she does not have.”
This means that if a person has no legal ownership or has a defective title to property, that person generally cannot transfer a better title to someone else.
Example 1 – Ordinary Property
Scenario
Daniel finds an expensive designer watch that actually belongs to Michael. Instead of returning it, Daniel sells the watch to Sophia.
Sophia:
Although Sophia acted honestly and paid valuable consideration, she does not acquire good title to the watch.
This is because Daniel was not the lawful owner and therefore had no legal title to transfer.
The rule of nemo dat quod non habet applies.
Principle
For ordinary property:
Example 2 – Negotiable Instrument
Scenario
Daniel unlawfully obtains a bearer cheque belonging to Michael and transfers it to Sophia.
Sophia:
Because the bearer cheque is a negotiable instrument, Sophia generally acquires good title to the cheque.
Although Daniel’s title was defective, Sophia may enforce payment because she received the instrument:
This is an important exception to the ordinary rule of nemo dat quod non habet.
A negotiable instrument allows an innocent transferee to acquire a better title than the transferor in appropriate circumstances.
Example 3 – Non-Negotiable Instrument
Scenario
Daniel unlawfully obtains a non-negotiable bearer cheque belonging to Michael and transfers it to Sophia.
Sophia:
Although Sophia acted honestly and gave valuable consideration, she does not obtain better title than Daniel.
A non-negotiable cheque may still be transferred, but it does not possess the full attribute of negotiability.
Sophia receives only whatever title Daniel had.
Since Daniel had no valid title, Sophia likewise acquires no better title.
Why Is a Non-Negotiable Instrument Different?
A non-negotiable instrument remains transferable, but it loses one of the most important characteristics of negotiability.
Key Facts
Comparison in Note Form
Ordinary Property
Rule
Daniel sells Michael’s watch without authority.
Sophia buys it honestly but does not become the lawful owner.
Negotiable Instrument
Rule
Effect
Daniel transfers a bearer cheque obtained unlawfully to Sophia.
Sophia receives it honestly, pays value, and has no notice of the defect.
Sophia generally acquires good title and may enforce payment.
Non-Negotiable Instrument
Rule
Daniel transfers a non-negotiable bearer cheque obtained unlawfully to Sophia.
Although Sophia acts honestly and gives value, she does not obtain better title because Daniel had no valid title to transfer.
Key Examination Notes
Ordinary Property
Negotiable Instrument
Non-Negotiable Instrument
Examiner’s Tip
A common examination question asks students to distinguish between ordinary property, negotiable instruments, and non-negotiable instruments.
Remember the following:
One of the easiest ways to understand negotiability is by comparing it with the ordinary transfer of property. Although both involve transferring ownership from one person to another, the legal consequences are different.
The key difference lies in whether the transferee can obtain a better title than the transferor.
Understanding the Principle of
Nemo Dat Quod Non Habet
Definition
The common law principle nemo dat quod non habet means:
“No one can give what he or she does not have.”
This means that if a person has no legal ownership or has a defective title to property, that person generally cannot transfer a better title to someone else.
Example 1 – Ordinary Property
Scenario
Daniel finds an expensive designer watch that actually belongs to Michael. Instead of returning it, Daniel sells the watch to Sophia.
Sophia:
- honestly believes Daniel is the owner;
- pays RM8,000 for the watch; and
- has no knowledge that the watch belongs to Michael.
Although Sophia acted honestly and paid valuable consideration, she does not acquire good title to the watch.
This is because Daniel was not the lawful owner and therefore had no legal title to transfer.
The rule of nemo dat quod non habet applies.
Principle
For ordinary property:
- A person cannot transfer better ownership than he or she possesses.
- An innocent purchaser generally receives only the same title as the seller.
Example 2 – Negotiable Instrument
Scenario
Daniel unlawfully obtains a bearer cheque belonging to Michael and transfers it to Sophia.
Sophia:
- honestly believes Daniel is entitled to transfer the cheque;
- pays RM8,000 for it;
- receives the cheque in good faith; and
- has no knowledge that Daniel obtained it unlawfully.
Because the bearer cheque is a negotiable instrument, Sophia generally acquires good title to the cheque.
Although Daniel’s title was defective, Sophia may enforce payment because she received the instrument:
- in good faith;
- for value; and
- without actual notice of the defect.
This is an important exception to the ordinary rule of nemo dat quod non habet.
A negotiable instrument allows an innocent transferee to acquire a better title than the transferor in appropriate circumstances.
Example 3 – Non-Negotiable Instrument
Scenario
Daniel unlawfully obtains a non-negotiable bearer cheque belonging to Michael and transfers it to Sophia.
Sophia:
- honestly believes Daniel owns the cheque;
- pays RM8,000 for it;
- acts in good faith; and
- has no knowledge that Daniel obtained it unlawfully.
Although Sophia acted honestly and gave valuable consideration, she does not obtain better title than Daniel.
A non-negotiable cheque may still be transferred, but it does not possess the full attribute of negotiability.
Sophia receives only whatever title Daniel had.
Since Daniel had no valid title, Sophia likewise acquires no better title.
Why Is a Non-Negotiable Instrument Different?
A non-negotiable instrument remains transferable, but it loses one of the most important characteristics of negotiability.
Key Facts
- It can still be transferred from one person to another.
- The transferee may become the holder if the transfer is valid.
- However, the transferee cannot obtain a better title than the transferor.
- Therefore, the rule of nemo dat quod non habet continues to apply.
Comparison in Note Form
Ordinary Property
Rule
- Governed by the principle of nemo dat quod non habet.
- A purchaser cannot obtain better ownership than the seller possesses.
Daniel sells Michael’s watch without authority.
Sophia buys it honestly but does not become the lawful owner.
Negotiable Instrument
Rule
- An innocent transferee who takes the instrument:
- in good faith;
- for value; and
- without notice of any defect,
Effect
- The transferee may obtain a better title than the transferor.
Daniel transfers a bearer cheque obtained unlawfully to Sophia.
Sophia receives it honestly, pays value, and has no notice of the defect.
Sophia generally acquires good title and may enforce payment.
Non-Negotiable Instrument
Rule
- The instrument remains transferable.
- However, the transferee cannot obtain a better title than the transferor.
- The protection available under negotiability is removed.
- The rule of nemo dat quod non habet applies.
Daniel transfers a non-negotiable bearer cheque obtained unlawfully to Sophia.
Although Sophia acts honestly and gives value, she does not obtain better title because Daniel had no valid title to transfer.
Key Examination Notes
Ordinary Property
- Governed by the nemo dat principle.
- A purchaser generally acquires only the seller’s title.
Negotiable Instrument
- Transferable.
- A good faith transferee for value without notice generally acquires good title.
- This is an exception to the nemo dat rule.
Non-Negotiable Instrument
- Still transferable.
- The transferee cannot obtain a better title than the transferor.
- The nemo dat principle continues to apply.
Examiner’s Tip
A common examination question asks students to distinguish between ordinary property, negotiable instruments, and non-negotiable instruments.
Remember the following:
- Ordinary property → No better title can be transferred.
- Negotiable instrument → A good faith transferee for value may acquire better title than the transferor.
- Non-negotiable instrument → Transfer is possible, but no better title can be acquired. The transferee receives only the title that the transferor actually possesses.
0 Comments