NEGOTIABLE INSTRUMENT

NI are instruments or documents, which the law recognizes as having the quality of transferability. These documents are used in commerce to secure the payment of money. Main examples of NI are: Bills of Exchange; Cheques; and Promissory Notes.

BILLS OF EXCHANGE A BOE constitutes a legally binding written promise by the drawer, that the person who took it in payment will be paid in cash when he presents the bill for payment at the proper time and place. A BOE enables a seller of goods or services to receive his money as soon as possible while enabling his buyer to defer payment for a period. Sec 3(1) BOEA.

CHARACTERISTICS OF BOE There are three parties to a bill. Drawer- The person who gives the order to pay. Drawee- The person to whom the order is addressed and who becomes the ‘acceptor’ when he incurs liability on the bill by signing (accepting) it. The drawee is the party primarily liable on the bill. The drawer and any other person who has signed (indorsed) the bill are sureties for his payment. Payee- The person to whom the payment is to be made. If the bill is negotiated (transferred) to another person, the transferee (the holder of the bill) becomes the payee.

The bill must be “… an unconditional order” (Sec 3(1) BOEA). The bill must contain an order to pay not a mere request. For example: “Pay…” A conditional order is not enforceable. The order must be unconditional between the drawer and the drawee. It must not order any act to be done in addition to the payment of the money. Sec 3(2) BOEA. The bill must be “… in writing…” Sec 3(1) BOEA. The bill must be “… addressed by one person to another…” Sec 3(1) BOEA. The bill must be an order from a drawer to a drawee to pay. Nurnazida Nazri-Faculty of Law 5

The drawee must be named or otherwise identified with reasonable certainty (Sec 6(1) BOEA). The bill may be addressed to two or moew drawees jointly (Sec 6(2) BOEA).

The bill must be “… signed by the person giving it…” (Sec 3(1) BOEA). The signature must be that of the drawer or his authorized agent (Sec 96(1) BOEA). It may also be in a ‘trade name’ or a ‘corporate seal’ (Sec 96(2) BOEA). A signature is required for liability to be incurred on a BOE. The bill must order payment of “… a sum certain money…” (Sec 3(1) BOEA). The payment must be in the form of money, not in the form of goods or services. If there is any discrepancy between the amounts of the bill as it appears in figures and as written in words, the words take priority (Sec 9(2) BOEA).

The bill must be payable “… on demand or at a fixed or determinable future time…” (Sec 3(1) BOEA). ‘Payable on demand’ means the holder is entitled to payment immediately upon demand. Must be payable “…to the order of a specified person or to bearer…” (Sec 3(1) BOEA). All BOE must satisfy all the above characteristics/requirements. If any instrument/document fails to meet those requirements, it is not a BOE.

HOLDER Sec 2 BOEA- A holder of a bill is the person who is in possession of the bill. Two types of holder: Holder in due course- A person who is in possession of the bill after he himself had given value for it. A sold a computer to B. B drew a bill in favour of A as the payment of the computer. A is the holder in due course, as he obtained the bill from B after giving value for it by selling the computer to B. Holder for value- A person who obtained a bill from a person who had given value for it. A who is the holder in due course of the bill, now transfer the bill to C (his son)as his birthday present. C is the holder for value, because C obtained the bill from A (who had earlier given value for it). In this situation, C obtained the bill from his father (A). He got the bill as a birthday gift.

CHEQUES Definition- It is a BOE drawn on a banker payable on demand (Sec 73(1) BOEA). Characteristics- It is an unconditional order in writing; It is issued and signed by the drawer; It is drawn on a banker (drawee bank/paying bank). It orders the drawee/paying bank to pay a sum certain in money on demand. It is drawn in favour of a specified person (payee) or to his order or in favour of a bearer. May be crossed.

ALTERATIONS ON CHEQUES If a cheque has been ‘materially altered’ without the consent of the drawer or subsequent parties liable on the cheque, such drawer and the subsequent parties liable on the cheque are discharged from liablity upon the cheque. The drawee bank (paying bank) cannot debit the account of such drawer or any subsequent parties liable on the cheque. Sec 64(1) BOEA- “Where a bill … is materially altered without the assent of all parties liable on the bill, the bill is avoided…”

PROTECTION OF THE PAYING BANK Who is the paying bank? Is the bank, which issue cheques to its customers. When the customer draws a cheque, the PB (also known as the drawee bank) is under a duty to pay the amount of the cheque to the right person according to its customer’s (drawer’s) mandate. RISKS If the PB pays the amount of the cheque to the wrong person, the bank must bear the loss for its breach of duty towards its customers because of: Non-compliance with the mandate of its customer; Conversion to the true owner of the cheque.

PROTECTION OF THE PAYING BANK UNDER THE ACT BOEA provides some protection for the PB against the loss of the right to debit its customer’s account if the bank paid the cheque to the wrong person. This is because the bank can not be presumed to know the payee or other holders who are not their customers. There are certain conditions to be fulfilled before the PB entitled to be protected under the provisions in the BOEA.

CONDITIONS Payment in due course - Sec 59 BOEA: “A bill is discharged by payment in due course by or on behalf of the drawee…” “Payment in due course” means the payment is made at or after the maturity of the bill to the holder thereof in good faith and without notice that the holder’s title to the bill is defective. This section also protects the PB that pays the bearer of a bearer cheque Forged or unauthorized indorsement - Sec 60 BOEA. A PB is expected to know his customer’s signature. Therefore, the PB will not be protected if he pays a cheque in which the drawer’s signature is forged.

H/ever, a PB is not expected to know the signatures of other persons who are not its customers. T/fore, Sec 60 BOEA protects the PB if he pays a cheque, which bears a forged or unauthorized indorsement in good faith and in the ordinary course of business. No indorsement or irregular indorsement – Sec 82(1) BOEA Sec 82 BOEA protects the PB if the banker pays a cheque which is irregularly indorsed so long as the PB pays it in good faith and in the ordinary course of business. Crossed cheques Proviso to Sec 79(2) BOEA protects the PB if the cheque is paid in good faith and without negligence on which the crossing is not apparent or the crossing has been obliterated, added or altered and this is not apparent.

PROTECTION OF THE COLLECTING BANK CB is the bank, which collects the amount of the cheque from the paying bank (Drawee bank) on behalf of its customers (I.E the payee or the holder of the cheque). The CB is under a duty to collect the amount and credit its customer’s account with such amount. RISKS A CB may be liable on two grounds: To its customers for breach of contract due to the failure of the CB to collect the amount when it was instructed to do so. To the true owner for wrongful conversion when the CB improperly collects on behalf of its customers who was not entitled to the money.

PROTECTION OF THE COLLECTING BANK UNDER THE ACT The collecting banker must acted for its customers. The CB is protected by Sec 85 from any liability towards the true owner so long as he collected the amount on behalf of its customer. The CB must acted in good faith. Sec 95 BOEA – The banker must acted honestly in collecting the amount on behalf of his customer. The CB must acted without negligence. Sec 85 BOEA – If the bank acted in good faith but negligently, the banker will not be protected under Sec 85.

A CB is negligent if he is not making proper enquiries in the following suspicious circumstances: Where a customer presents a cheque drawn in favour of his company, but the amount is to be credited into a private account not into the company’s account. Where a customer presents a cheque drawn in favour of himself in his official capacity, but to be credited into his private account. Where a customer presents a cheque drawn in favour of his principal, but the sum is to be credited into his own account or where a cheque is drawn by the customer on behalf of his principal, but in favour of himself.

Where a customer presents a cheque crossed “account payee” and he is not the payee named on the cheque. Where a customer pays in a cheque for an unusually large amount which is out of character with his normal circumstances. Opening an account without enquiry into the identity and circumstances of the customer. Nurnazida Nazri-Faculty of Law 19

Types of indorsements Blank indorsement – Sec 34(1) The indorsement simply signs his name without adding the name of the transferee / indorsee. If the indorser indorses in the blank the bill becomes payable to the bearer of the bill. The bill may later be negotiated by mere delivery.

b) Special indorsement –Sec 34(2) - the indorser signs his name and adds the name of the transferee / indorsee or to whose order the bill payable - if there is special indorsement , only the indorsee named in the indorsement becomes the holder of the bill and have the title to the bill. - if the indorsee wants to negotiate the bill, he must in turn indorse the bill and transfer it to the transferee.

For the example: Pay D for the account of X. C) Restrictive indorsement –Sec 35(3) - This kind of indorsement prohibits the futher negotiate of the bill or merely gives authority to deal with the bill in the manner directed but not transfer of the ownership For the example: Pay D for the account of X. - It gives the indorsee only the right to receive payment, and not to negotiate it.-sec35(2) Conditional indorsement - The indorsement contains a condition to be fulfilled before making the payment - The payment to be made is dependent on a condition.