TOPIC FIVE NEGOTIABLE INSTRUMENTS NATURE AND CHARACTERISTICS

TOPIC FIVE

NEGOTIABLE INSTRUMENTS

 

NATURE AND CHARACTERISTICS

What is a negotiable instrument?

This is a document which represents money and the title in passes to a bona fide transferee free from only defect. It is a chose in action. Negotiable instruments are transferable by reason of law or trade usage or custom.

Characteristics of Negotiable Instruments

  1. Consideration is presumed to have been provided i.e. past consideration is good consideration.
  2. A bona fide transferee of a negotiable instrument need not be notified before it is negotiated.
  3. A holder for value can sue on it in his own name.
  4. If payable to the bearer, it is negotiable by delivery.
  5. If payable to the order of specified person, it is negotiable by endorsement/ endorsement and delivery.
  6. The party liable on a negotiable instrument needs to be notified before it is negotiated.

Examples Include: Cheque, bills of exchange, promissory notes, share warrants, dividend warrants, bearer debentures etc.

TYPES: CHEQUES, PROMISORY NOTES, BILLS OF EXCHANGE

CHEQUES

Under Section 74(1) of the Bill of Exchange Act, a cheque is a bill of exchange drawn on a banker, payable on demand. It is a negotiable instrument negotiable by delivery or by endorsement and delivery. It differs from a bill of exchange in various ways: –

  1. It can only be drawn on a banker
  2. It is payable on demand
  3. It does not require acceptance
  4. Non-presentation does not discharge it
  5. It is less negotiable
  6. It may be crossed generally or specially
  7. Notice of dishonour is not necessary

Types / classification of cheques

Cheques may be classified on the mode of payment and to whom payable:

  1. Bearer cheque: This is a cheque whose proceeds are payable to the holder.
  2. Order Cheque: This is a cheque whose proceeds are payable to specified person or his order. Whereas a bearer cheque is negotiable by delivery an order cheque is negotiable by endorsement or delivery.
  3. Open Cheque: This is a cheque whose proceeds are payable across the counter.
  4. Crossed Cheque: Is a cheque that contains two parallel transverse lines on its face with or without account. A crossing is an instruction to the banker not to pay the proceeds across the counter.

Types of crossing

A cheque may be crossed generally or specially:

  1. General Crossing: Consist of two parallel transverse lines on the fact of the cheque with or without the words “and Co.” “Account payee”, “Not negotiable” etc. A cheque crossed generally may be crossed specially by the drawee.
  2. Special Crossing: Consists of two parallel transverse lines of the face of the cheque with the name of the banker in told.

 

BANKER-CUSTOMER RELATIONSHIP

There is a simple contractual relationship between the banker and customers. It is a debtor credit or relationship which imposes upon the parties certain legally binding obligations.

 

Duties of the customer

  1. Duty of Care: The customer is bound to the exercise reasonable care when drawing cheques to guard against alterations. The banker is not liable for any loss arising if the customer has failed to exercise reasonable care.
  2. Notice of irregularities: The customer is bound to notify the banker of any irregularities affecting the accounts e.g. forgeries or unauthorized which the customer is estopped from relying on the irregularity.

 

Duties of the banker

Paying Bank: This is the banker on which the cheque is drawn. It is the banker liable for the amount.

Collecting Bank: This is the bank in which the cheque is deposited for payment.

  1. Duty of Care: The banker is bound to exercise reasonable care and skill in his dealings with the customer. The standard of care and skill is that of a reasonably competent banker. If the banker fails to exercise such care and skill, the customer has an action in damages for any loss arising for professional negligence.
  2. Professional Advice: The banker is bound to give the customer professional advice on request. He is bound to give advice on investments as and when requested failing which he is liable in damages.
  3. Duty to Honour Cheques: The banker is bound to honour all cheques drawn by the customers provided: –
  1. The cheque is complete and regular on the face of it
  2. The customer‟s account has sufficient funds
  3. The cheque is presented at a reasonable hour on a business hour and business day.
  4. The payee identifies himself to the satisfaction of the banker.
  5. If a banker fails to honour a cheque in breach of this duty, the customer has an action in damages.
  6. Duty of Secrecy: The banker is bound to maintain confidentially in his dealings with customer. He must not discuss to 3rd parties any information which comes to him in the course of his dealings with the customer. The duty of secrecy was laid down in Tournier v. National Provincial and Union Bank of England which the English Court of Appeal insisted of the upholding of the duty. However the court was emphatic that the duty may be qualified in certain circumstance where personal information relating to the customer may be discharged to 3rd parties e.g.
  7. Where disclosure is provided for by the law
  8. Where the banker has the customer convent to disclose
  9. Where disclosure is necessary in the public interest
  10. What it is necessary to protect the banker
  11. Duty not to pay without Authority: The banker must not pay any monies out of the customer’s account without his express or implied authority failing which he is liable in damages for breach of duty. However, banker losses his authority to pay in various ways:-
  12. Countermand of payment: This is an express instruction by the customer to his banker not to honour a particular cheque
  1. b. If the banker has notice of the customer’s death
  2. If the banker has notice of the customers‟ unsoundness of mind
  3. If the banker has notice of presentation of a bankruptcy petition against the customer in court.
  4. If the cheque is irregular e.g. amounts in words and figures do not tally.
  5. If the customer’s account has been frozen by a court order.
  6. If the cheque is presented before time (post dated cheque) or after six months (stale cheque)
  7. If the payee has no title thereto
  8. The customer’s account has insufficient funds
  9. The customer has since closed his account.

 

PROTECTION OF PAYING BANKER

Section 4(1) of the Kenyan Cheque Act provides that where a banker, in good faith and in the ordinary course of business, pays a prescribed instrument ( a cheque or draft) drawn on him to a banker, he does not in doing so incur liability by reason only of absence of or irregularity in endorsement of the instrument. The statutory protection is available to a paying banker when he pays the cheque in the following circumstance:

  1. Forged endorsement:  where a banker pays against a cheque drawn on him in good faith and in ordinary course of business, he can debit the account of such a drawer with the amount so paid even though the endorsement of payee subsequently proves to be forged. A banker who pays a crossed cheque is also protected against a forged endorsement provided he has acted without negligence.
  2. The cheque act provides that a paying banker paying a cheque drawn on him in good faith and in ordinary course of business which is not endorsed or irregularly endorsed incurs no liability because of absence or irregularity of endorsement

NOTE: the paying banker receives ‘no protection’ if it pays a customer’s cheque when his signature has been forged. This is because the banker has specimen signature of the customer.

PROTECTION OF COLLECTING BANKER

Section 3(2) of Kenya Cheque Act affords protection to the collecting banker who, in good faith and without negligence and in ordinary course of business;

  1. Receives payment for the customer of a prescribed instrument to which the customer has no title or has defective title; or
  2. Credits the customer’s account with the amount of a prescribed instrument to which the customer has no title or has a defective title.

Negligence of collecting Banker

The following acts have been held amounting to negligence on the part of the collecting banker:

  1. Opening a current account for someone without making proper enquiries
  2. Collecting payment for a customer of a cheque which is made out the customer’s employer
  3. Paying a cheque into customer’s private account which is payable to him in an official capacity
  4. Where a customer presents a cheque crossed “account Payee” and he is not the payee named.

 

PROMISSORY NOTES

Under Section 84 (1) of the Bill of Exchange Acts, a promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person or bearer.

Characteristic/Elements/Essential of Promissory Note

    1. It is an unconditional written promise made by a person to another
    2. It must be signed by the maker
    3. It contains a promise to pay a sum certain in money.
    4. The sum is payable on demand or at a fixed or determinable future time.
    5. The sum is payable to a specified person, his order or the bearer

Under Section 85(1) of the Act, a promissory note remains incomplete until it is delivered to the promisee. If a note is drawn by two or more persons, all are jointly and severally liable on it.

Once a note is delivered to the promisee, it may be negotiated to other persons or it may be discounted.

A promissory note differs from a bill of exchange in that: –

  1. It is a promise to pay made by the debtor
  2. It does not require presentation for acceptance nor does it require acceptance. However, it is a negotiable instrument capable being negotiated by one person to another in commercial transactions.

BILL OF EXCHANGE

The law relating to Bills of Exchange in Kenya is contained in the Bill of Exchange Act1. This statute is a carbon copy of the English Bills of Exchange Act, (1882). It codifies the law relating to bills of exchange.

Section 3(1) of the Bills of Exchange Act defines a Bill of Exchange 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 fixed or determinable future time a sum certain in money to or to the order of a specified person or to the bearer.

Elements or essentials of the definition

  1. It is an unconditional written order i.e. Not a request.
  2. Addressed by person to another
  3. It must be signed by the person giving it
  4. It demands payment of a sum certain in money.
  5. The sum must be paid on demand or at a fixed or determinable future time.
  6. The sum is payable to a specified person, his order or the bearer.

Parties to a bill of exchange

Parties to a bill of exchange are the drawer, the drawee and the payee. The drawer is the person who draws the bill demanding payment. The drawee is the person to whom the bill is drawn.

This is person to pay the amount due. The person to whom the amount is paid the payee.

Types / classification of bills

Bills of Exchange may be classified on the basis of: –

  1. To Whom Payable: A bill may be bearer or order. A bearer bill is a bill payable to the holder or bearer of the instrument. An order bill is a bill payable to the order of a specified person.
  2. Where drawn and a payable: An inland bill is a bill as bill drawn and payable within East Africa. Any other bill is foreign.
  3. When payable:
    1. Sight bill: – This is bill payable on demand
    2. Usance bill: This is bill payable at a fixed or determinable future time.
  4. Whether transferable or not: –
    1. Transferable bill: – This is a bill which is capable of being negotiated by one person to another
    2. Non-transferable bill: – This is a bill which contains a stipulation prohibiting transfer.

A bill drawn and signed by the drawer is referred to as draft and must be presented to the drawee for acceptance.

Rules relating to presentation of bills for acceptance

  1. The bill maybe presented by the drawee or his agent-
  2. It must be presented at a reasonable hour on a business day.
  3. It must be presented to the drawee and if dead, to his personal representative.
  4. If the drawee has been declared bankrupt, the bill must be presented to him or to his trustee in bankruptcy.
  5. If trade custom and usage permits, it may be done thought the post.
  6. However, presentation of a bill for acceptance will dispensed with if:
  1. The drawee is a fictitious person.
  2. ii. It cannot be effected even with the exercise of reasonable diligence.

Acceptance of a bill

This is the signification by the drawee of his assent to the bill. Acceptance of a bill may be general or qualified.

  1. In General acceptance, the drawee accepts the bill in its tenor i.e. without any qualification.
  2. Qualified Acceptance: This acceptance whereby the drawee modifies or varies the bill in various ways: –
  3. Conditional Acceptance: Where the drawee specifies a condition subject to which the bill is payable.
  4. Partial Acceptance: The drawee accepts to pay part of the sum.
  • Local Acceptance: The drawee accepts to pay the bill at a specified place.
  1. Qualified to Time Acceptance: The drawee changes the time of payment
  2. Acceptance by some but not all drawers (where the bill in addressed to two or more drawees).

The drawer is not bound to accept a qualified acceptance. However, if he does, he is bound by its terms. Once a bill is accepted, it becomes a proper bill, capable of being discounted or negotiated.

Discounting a bill: it is the receipt by the payee of the amount of the bill from a bank or financial institution less the discount for the unexpired duration. The bank becomes the payee.

Negotiation of bills: Under section 31 (1) of the Act, a bill is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee as the holder thereof.

A bill may be negotiable in 2 ways namely:

Delivery

Endorsement and Delivery

Bearer Bills are negotiable by delivery. Order bills are negotiable by endorsement and delivery.

 

Endorsement of bills

This is the signing or executing a bill by a party for purpose of negotiating it to another. The party so doing is the endorser while the party to whom it’s endorsed is the endorsee.

Characteristics of an Endorsement

  1. It must be written on the face of the bill, on its reverse side or on a copy where acceptable or slip of paper attached to the bill. This paper is referred to as an allonge.
  2. It must be signed by the endorser
  3. It must be an endorsement of the entire bill.
  4. If payable to the order of two or more endorsers who are not partners, all must endorse unless either of them has authority to endorse in favour of all.
  5. The endorsement may be blank, special, conditional or restrictive

 

Types of Endorsements

  1. Blank: This endorsement which does not specify the endorsee. It converts an order bill to a bearer bill.
  2. Special: This is an endorsement which specifies the person to whom or to whose order, the bill is payable.
  3. Conditional: This is an endorsement which either exempts the endorser from liability if the bill is dishonoured or makes payment of the bill subject to a specified condition.
  4. Restrictive: This is an endorsement which prohibits further negation of the bill. It constitutes the endorsee as the payee who cannot negotiate the bill any further.

Parties to a bill of exchange

  1. Holder for Value: This is a holder of a bill, who has provided valued consideration on it or who is deemed to have so provided the same.
  2. Holder in due course: Under Section 29(1) of the Act, a person is deemed to be a holder of a bill in due course if he holds a bill which is: –
  3. Complete and regular on the face of it
  4. Before it is overdue
  5. In good faith from and for value
  6. Without notice of any previous dishonour
  7. Without notice that the person who negotiated it to him had a defective title
  8. Accommodating Party: Under Section 28 (1) of the Act, an accommodation party is person who has signed a bill of exchange as drawer, endorsee or acceptor without receiving value thereon but for the purpose of lending his name to another party. However, such party is liable to a holder for value.
  9. Referee in Case of Need: Under Section 15 of the Act, a referee in case of need is a person whose name is inserted in a bill by the drawer or endorsed to whom the payee may resort to in the event of its dishonour by non-acceptance or non-payment.

RIGHTS OF A HOLDER OF A BILL

  1. A bona fide holder acquires a defect-free title
  2. Right to sue on it in his own names
  3. Right to negotiate the bill unless the lost endorsement is restrictive.

DUTIES OF THE HOLDER

  1. It is the duty of the drawer to present the bill to the drawee for acceptance
  2. It is the duty of the payee to represent the bill to the acceptor for payment.
  3. In the event of the dishonour of a bill, it is the duty of the payee: –
  1. To notify the party the fact of dishonour
  2. To have the bill noted and or protested

Presentation of a bill for payment

On maturity of a bill, it must be presented to the acceptor for payment. Its presentation is governed by the following rules: –

  1. If payable on demand, it must be presented within a reasonable time of acceptance or negotiation.
  2. If payable in future, it must be presented on the date it falls due or within three days of grace.
  3. It may be presented by the payee or his agent.
  4. It must be presented to the acceptor at the agreed place i.e. his place of business or residence.
  5. It must be presented to the acceptor, however, if dead to his personal representative.
  6. If the acceptor has been declared bankrupt it must be presented to him or his trustee in bankruptcy
  7. It must be presented at a reasonable hour on a business day
  8. If trade custom or usage permits, presentation may be effected by post.

If on presentation, the amount is paid by or on behalf of the acceptor, the bill is discharged.

However, presentation for payment maybe dispensed with if it is impossible to secure the same even with exercise of reasonable diligence. If the acceptor cannot be found or payment is refused the bill is said to be dishonoured.

Dishonored bills

A bill is said to be dishonoured if:-

  1. Presentation for payment is exercised by law
  2. Payment is refused.

It is the duty of the payee to notify the party liable the fact of the dishonour and to have it noted and or protested.

Rules relating to notice of dishonor

  1. The notice may be given by or on behalf of the payee
  2. It may be given in the agent’s or the payee’s name
  3. The notice may be oral or written
  4. If written it need not signed
  5. It must be given within a reasonable time of the dishonour
  6. Return of the dishonoured bill is sufficient notice.
  7. It must be given at a reasonable time on a business day.
  8. If effected by post it is effective when the letter is posted.

Noting a bill

Once a bill is dishonoured, the payee must present it to notaries public who re-presents it to the acceptor for payment and if payment is refused, the notaries public indicates the date on the bill and later specifies the dishonour in his register by entering the words used by the acceptor in the refusal. This is referred to as Noting the Bill.

Protesting a bill

This is the formal declaration by notaries public attesting the fact of dishonour of a bill. It is conclusive evidence of the dishonour. A protest note must disclose and contain: –

  1. The person for and against whom it is made
  2. Reason for the protest
  • Date and Place of the protest
  1. Particulars of the notaries public

The dishonoured bill or a copy thereof must be attached.

Discharge of a bill

A bill of exchange is said to be discharged when all rights on it are extinguished.

However, a party may still be held liable on it depending on the method of discharge.

A bill may be discharged in any of the following ways: –

  1. Payment in due course: If the bill is paid by or on behalf of the acceptor at or after maturity, it is discharged and parties freed.
  2. Acceptor – holder Maturity (Merger): If the acceptor of a bill becomes the payee of right, at or after maturity, the bill is discharged.
  3. Renunciation or waiver: Under Section62 (1) of the Act, if the holder of a bill at or after maturity unconditionally and absolutely renounces his right against the acceptor, the bill is discharged. The renunciation must be written and the bill must be returned to the acceptor.
  4. Cancellation: Under Section 63 (1) of the Act, if a bill is intentionally cancelled by the payee or his agent, and the cancellation is apparent thereon, the bill is discharged. An unintentional cancellation does not discharge a bill.
  5. Material Alteration: Under Section 64(1) of the Act, a material alteration on a bill discharges all the parties not privy to the alteration. Under Section 64 (2) a material alteration comprises a change in amount payable, time of payment, date and place of payment.
  6. Non-presentation: Under Section 45(1) of the Act, the non-presentation of a bill for payment as prescribed by law discharges the drawer and endorsers.
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