Negotiable Instruments

What are Negotiable Instruments? “Where an instrument is by the custom of trade transferable like cash, by delivery, and is also capable of being sued upon by the person holding it, it is entitled to the name of a negotiable instrument, and the property in it passes to a transferee who has taken it for value and in good faith” -Crouch Vs. Credit Foncier of England (1873) All negotiable Instruments are governed by the provisions of our Bills of Exchange Ordinance of 1927.

Negotiability Vs. Transferability What is Negotiable? All negotiable instruments are transferable, but not all transferable instruments are negotiable. The term ‘negotiability’ and ‘transferability’ are often regarded as being synonymous. This is a common misunderstanding. Transferability relates to the process of passing title in an instrument. Negotiability usually relates to the quality of the title of the instrument that is passed.

Miller v Race (1758) 1 Burr 425. Both the watch and banknote are transferable, but only the banknote has the quality of negotiability.

Nature of the Negotiable Instrument  Be in writing  Be signed by the maker or drawer  Be an unconditional promise or order to pay  State a fixed amount of money  Be freely transferable from one to another person  Be payable on demand or at a definite time  Be payable to order or to bearer

Bills of Exchange Definition of a Bill of Exchange - Section 3 of the Bills of Exchange ordinance defines a bill of exchange as, “a bill of exchange is 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 bearer”.

Parties to a Negotiable Instrument 1.Drawer - He is the person who draws the bill or making the order to pay money on his behalf. 2.Drawee - The drawee is the person to whom the order is addressed. A drawee is not liable to pay until he accepts the bill, after he accepts the bill he is known as ‘acceptor’. 3.Payee – Payee is the person to whom the money is to be paid. The payee can be a named or a specified person for example “Pay Nizam” or he can be a bearer for example “pay bearer”.

1.Unconditional Order – drawer drawee. It should be an unconditional order between the drawer and drawee. If the drawer asks the drawee to pay money only after certain conditions are fulfilled, then it is not a valid bill of exchange. Bavins Junior and Sims V. London and South Western Bank Ltd – When the words “Pay money provided that the payee duly signs the receipt form” were found. – Court held - It is not a valid bill of exchange, because, it imposes a condition on the drawee before he pays money. This request is addressed to the drawee and not on the payee. – If drawer requests the payee to do something, then it will not invalidate the bill for exchange - “the receipt hereof must be signed by the payee”.

Order - It must be an order. There should be a command or order by the drawer to the drawee and not a request. However using the word “Please” has not been held to be a request. Therefore the words “Pay” or “Please pay” can be used. But phrases such as “I shall be pleased if you would pay” or “We hereby give you authority to pay” cannot be used. Because an obligation to pay is not created by these phrases. Hamilton V. Spottiswoode – A simple request will not satisfy the requirements of an order. – The phrase “we hereby authorize you to apply on our account to the order of …..” was held not to be an order in.

2.In writing – Section 2 deals with this requirement. The whole of the order in the instrument must be in writing. The word “in writing” includes what is typed, printed or written. Either ink or pencil will be sufficient.

3.Signed by the person giving it – This means that the bill of exchange must be signed by the drawer (issuer). It is sufficient, however, if the bill is signed by some duly authorized person on behalf of the drawer. A bill is not signed by the drawer if his signature is forged or placed on the bill by someone without authority. Koster’s Premier Pottery Pty Ltd V. Bank of Adelaide – Forged cheques are not bills of exchange.

4.Requiring the drawee to pay on demand Or at a fixed or determinable future time - This requirement refers to time of payment. On Demand – The term used is pay on “demand”, which means “pay when asked or requested” (demanded). According to section 10 (1) of the Bills of Exchange Ordinance a bill is payable on demand A.Which is expressed to be payable on demand, or sight, or on presentation, or B.In which No time for payment is expressed.

At a fixed or determinable future time – Under section 11 (1), a determinable future time may be: a)A stipulated period after a date, or after sight (after acceptance)- – “Pay after 3 months from the date hereof” or “pay within ten days after sight” or b)After the occurrence of a some event which is certain to occur though the time of happening may be uncertain- – If it is stated “pay after the ship arrives” or “pay after Ranil’s marriage”, these are invalid because sometimes these events may not occur. – Banker V. Efford (1873) 4 All AJR 161.

5.A Sum Certain in Money – A sum certain in money should be required to be paid. If it is stated that “pay a reasonable amount” or “About Rs. 20,000/=” will not be valid, because the amount is not certain.

6.Capacity of Parties – Capacity to incur liability as a party to a bill is corresponding with the capacity to contract, Where such capacity is to be determined by the law of Sri Lanka. 7.Consideration – What is consideration…? Valuable consideration for a bill may be constituted by: a)Any consideration which by the law of England is sufficient to support a simple contract; b) An antecedent debt or liability.

8.To or to the order of a specified person or to bearer - It means money should be paid to the payee. The payee should be named or indicated with reasonable certainty. According to Section 3, the payee can be; a.a specified person for example “Pay Poorna” b.to the order of a specified person for example “Pay Poorna or order” c.a bearer for example “Pay bearer”

Endorsement (Indoresement) - What is endorsement…? Writing on the back of a bill of exchange is known as endorsement. The person who signs his name on the back of a bill is known as endorser. The person whose name is written on the back of the bill by the endorser is known as endorsee. In addition to signing on the bill, words also can be written before signing. When the payee endorses, he should write his name as found on the face of the bill. If the payee’s name is wrongly spelt, he should endorse according to the spelling on the bill. An endorsement is irregular where there is a clear and serious difference between the name of the payee or endorser and his endorsement.

Parties when Endorsing 1.Endorser - Endorser is the person who signs his name on the back of an order bill when he transfers it to another person. An endorser can be the payee or any other holder. 2.Endorsee - Endorsee is the person whose name is written on the back of the bill by the endorser. 3.The Holder of a Bill - The Holder is the payee or endorsee of an order bill or the one who is in possession of a bill.

Holder in Due Course A holder in due course is a holder who has received a bill of exchange(after endorsing), in good faith (without knowing the defects) by giving valuable consideration, from a person who does not have any title to it or who has a defective title. He takes the bill Free from all defects. He can therefore, acquire a better title to the bill than that was held by the transferor. He should have received that bill without knowing about the lack of title or defective title of the transferor at the time of receiving it. In addition, there are certain other conditions also should be present to treat him as a holder in due course.

Rights of the Holder in due Course 1.He can sue in his own name against any prior party to the bill. 2.He takes the bill free from equities. – He can defeat any defenses arising from defects of title or from the dealings between prior parties to the bill. – He can therefore, acquire a better title to the bill than that held by his transferor. 3.He can transfer his right to anybody (by negotiation)

Liability of the Parties A party to a bill of exchange is a person who has signed it and thereby incurred liability on it. They are: a.Drawer b.Drawee / Acceptor c.Endorser Conditions for Liability - 1.SIGNATURE - The party (whoever may be) must sign it. (S.23) – – An agent signing on behalf of the principal must make it clear that he is signing in representative capacity by adding the words ‘ Per Pro’ or ‘for and on behalf of’. – The signature is essential for liability to pay the bill. No person is liable as drawer, endorser or acceptor unless he has signed the bill.

Effect of Forged Signature When a signature is forged on a bill, that bill becomes wholly inoperative by S.24, and no rights can be acquired under them thereafter. A.Forgery of Drawer’s Signature: -  If the drawer’s signature is forged, the bill is void. B.Forgery of the Acceptor’s (Drawee’s) Signature: -  The acceptor incurs no liability, but a holder has full rights against other persons whose signatures are genuine. i.e. the drawer and endorsers.

C.Forgery of Endorsement –  If the bill is an order bill, endorsement is essential to effect legal transfer.  Therefore any forgery of such endorsement nullifies transfer. As a result the endorsee of an order bill gets No title to it, even if he is a bona fide holder for value.  Because in law he has taken a bill which was incomplete on the face of it. Therefore, he has no claims against persons who became parties to it before the forgery.

Conditions contd….. 2.He must deliver it. S 21(1) – There must be actual or constructive transfer of possession of the bill from one person to another. Transfer to an agent is a constructive transfer. 3.He must possess contractual capacity S 22 (1). 4.He must receive consideration- A party to a bill must receive consideration to incur liability or deemed to have received consideration.

PRESENTMENT FOR ACCEPTANCE AND PRESENTMENT FOR PAYMENT After a bill of exchange is issued, it is submitted to the drawee twice A.for acceptance B.for payment But a cheque is submitted to the drawee only once. That is for payment. Because acceptance is not necessary for a cheque. If a bill is either not accepted or not paid after it is presented to the drawee, it is known as dishonor. Therefore a bill of exchange can be dishonored either by; A.Non – acceptance S.43 or B.Non – payment S.47 When a bill is treated as dishonored by non- acceptance or by non-payment, notice of dishonor must be given. Otherwise, the holder will lose his right to remedy against the drawer and indorsers.

1.Presentment for Acceptance - After a bill of exchange has been issued, the holder should present it to the drawee for his acceptance. If the drawee agrees to obey the drawer’s order he will accept it by signing his name on the bill, with or without the word “accepted” (section 17). After acceptance, the drawee is known as the Acceptor. By presenting the bill for acceptance, the holder get the assurance for payment.

Cheques Definition - Section73 defines a cheque as “A cheque is a bill of exchange drawn on a banker, payable on demand”. According to this definition a cheque has all the features of a bill of exchange. But it is always drawn on a Bank and Payable on only Demand. However, there are certain other differences also to be found between a cheque and a bill of exchange. What are the differences….?

Crossing of Cheques Crossing occurs when two parallel lines are drawn on the face of a cheque. Crossing is a direction to the paying banker that the money should not be directly paid to the holder over the counter. Types of Crossing 1.Ordinary Crossing -  This consists two parallel lines across the face of the cheque.  If a cheque is crossed, it can be paid through a bank account and cannot be paid directly to the holder.

2.Special Crossing -  If inside the crossing the name of a bank is written, it is known as special crossing.  If a cheque is crossed specially that cheque has to be deposited in an account of the bank whose name is written inside the crossing. 3.Not negotiable crossing -  Where the words not negotiable are added inside a crossing they are known as not negotiable crossing.  They eliminate the cheque of its negotiability. Therefore, a person taking a not negotiable crossed cheque cannot give a better title to it than what he has.  That means if a cheque is crossed ‘not negotiable’, it will prevent a holder from becoming a holder in due course.

Duties of Customers A customer has certain duties towards his bank when be deals with the bank 1)He should draw cheques carefully London joint stock bank V. Macmillan – “X” told his clerk to prepare a cheque for £2 to settle a loan. – The clerk wrote £ 2 and left the space for the words blank. – After “X” signed the cheque the clerk altered the figure into £120 and obtained money. – Court held - bank is Not liable for the payment. But “X” is liable to bear the loss because it is the duty of the customer to draw the cheques carefully without giving chances for fraud.

2)The customer should reimburse (repay) the expenses incurred by the bank on behalf of the customer. 3)If the customer is aware about any forgery he should inform it to the bank. Greenwood V. Martins Bank Ltd (1933) – A wife who had access to the husband’s cheque book, forged husband’s signature and obtained money from husband’s bank. – Even after knowing about this forgery the husband did not inform the bank, but after the death of the wife, the husband claimed from the bank the money paid to the wife on the cheques which bore the forged signature. – Court held that the husband is not entitled to claim the money. Because even after knowing the forgery he did not inform the bank about it.

Protections Available to a Banker There are certain protections available to a bank under the bills of exchange ordinance. They are: 1.Section 60 (Protection where there is a forged endorsement) - When the paying banker makes payment to a cheque where the endorsement has been forged, the bank is protected by S.60. But there are three conditions to be fulfilled: a.The payment should have been made in good faith b.without negligence and c.During the course of ordinary business of the bank