Negotiable Instrument. Flashcards
What is and nature of negotiable Instrument
What are Payment Methods
- They are the procedures, instruments, and institutions that enables one to meet his/her payment obligations.
- Payment methods have been traditionally classified as credit or debit transfer
- Payment methods are either paper based, electronic or a combination of both.
Holder for value
A person who holds or is in possession of a bill for which consideration as been given by the holder or someone else
Holder in due course
A person who obtains the instrument bona fide for consideration before maturity without any knowledge of defect in the title of the person transferring the instrument.
Instruments
A document of title of money
Debit transfer
Payment transactions originated by the payee, based on the payer’s authority, instructing the payee’s bank to collect money from the payee’s account.
Credit transfer
Is a payment instruction from a payer to its bank or financial service provider to transfer an amount of money to another account
Negotiable Instrument
A signed document that promises a sum of payment to a specified person or the assignee
Nature of Negotiable Instrument [5]
- Negotiable instruments are substitutes for money.
- They are treated as documents of tittle to money
- Like money [and unlike ordinary contracts] consideration, good faith, etc are all presumed.
- Negotiable instruments may be transfered from one person to another either by simple delivery only or by indorsement and delivery [without any need to give anyone notice]
- The transferee is able to sue upon it his own name all parties to the instrument.
Section 6 of the Bill of Exchange Act
What bills are negotiable
“Nemo dat quod non habet”
Nobody may give what he does not have.
Examples of Negotiable Instrument [5]
- Cheques
- Promissory note
- Bankers draft [cashiers Cheques]
- Money orders
- Bills of exchange
Bill of Exchange [what section of Act 55?]
“An unconditional order in writting, 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 bearer.” section 1(1)of the Bills of Exchange Act, 1961 (Act 55)
A bill
A bill is an order by one person to another, requiring that person to pay money to a third party, or to a bearer
[T/F] The drawer will probably be asked to accept the bill as well as pay it
True.
[T/F] if the drawee accept the bill by signing it, he or she will take primary responsibility for its payments
True.
[T/F] Cheques are not usually accepted, the bank merely acts as the drawee and is however liable to the payee for the money.
False. Wrong conclusion
[T/F] A bill may be negotiated/ sold at a discount before maturity
True
[T/F] A bill which has not been accepted by a reliable person or bank can be negotiated for sale before maturity
False. It has to be accepted
[T/F] To transfer an order bill, the payee must indorse(sign) the bill to another person to give a good title
True.
[T/F] The indorser is the same as the holder
False. The indorsee is the same the holder
[T/F] A bearer bill can not be easily transferred, it must be indorsed
False. A bearer bill need not indorsement to transfer
Requirements of the BOE
- Must be unconditional
- Must be in writing
- Signed by the drawer
- It may be payable on demand or
- At a fixed or determinable future time, and
- Amount must be certain in money.
An Unconditional order
Means that there must be no qualification which would make payment uncertain or give rise to cumbersome inquiries
[T/F] payment conditioned to contingencies render the BOE or instrument invalid
True. And the happening of the event does not cure the defect.
[T/F] an instrument which requires as a condition of payment of a receipt by the payee on the front or reverse of the document is not a negotiable Instrument.
True. See Bavins and Sims V London and South Western Bank [1990] 1 Q. B. 270
Bavins and sims v London and South Western Bank
[1990] 1 Q. B. 270
- Plaintiff reccieved an instrument in the form of a cheques which read “pay to….provided the receipt form at the foot is duly signed and dated”
- the instrument was stolen from the plaintiff, an indorsement was forged on it and the receipt form signed.
- in an action by the plaintiff against the collecting bank, it was held that the instrument was not a cheque; it depended upon the receipt being signed and was not therefore an unconditional order.
[T/F] a cheque with a requirement directly to the payee and not the bank is an unconditional order.
True. See Nathan v Ogden [1905] 94 L. T126
Nathan v Ogden
[1905] 94 L. T. 126
- A cheque drawn in the ordinary form contained a clause requiring a receipt on the back of the cheque to be signed by the payee.
- the court held that the condition requiring the payee’s signature on the receipt was addressed to the payee alone, and not the bank; consequently in this case, the instrument was a cheque.
Thairlwall v Great Northern Railway Company
[1910] 2K.B 509
- A dividend warrant contained a note that it would not be honoured after three months of the date of issue.
- The court held that the instrument was a cheque and the note did not make the order conditional. The words were a definition of what was considered a reasonable time within which the warrant were to be presented for payment. And more over a direction only to the payee.
[T/F] An order requiring payment from a particular account is invalid
True. Because there might be inadequate funds when payment was required.
Clear order to pay. [Little v Slackford]
1829 1 M. & M. 171
- An instrument in the form “please to let the bearer have £7…and you will oblige your humble servant…” was held to be a mere request and not a demand on the bank.
[T/F] there must be one drawee or joint drawees.
True. There shouldn’t be drawees in tandem
If the drawer and the drawee are the same person, the payee or holder may treat the instrument as…
A bill of exchange or a promissory note.
Pay on demand
A bill is said to be payable on demand when it is immediately expressed to be payable, or when it is payable at sight or on presentation, or when no time for payment is expressed.
Payable at sight
A bill is payable at sight when it is seen for acceptance or for payment.
Williamson v rider
The majority of the English CA came to the conclusion that an instrument expressed to be payable “on or before” a particular date is not valid because the phrase does not state a fixed or determinable time; the words give the payer an option to repay on any day of his choosing before the date.
[T/F] A holder may insert the “True date of issue” on an undated bill
True. If the bill is said to be payable at a fixed period after but the bill is undated
[T/F] If a wrong date is inserted, a holder in due course may not obtain payment.
False. A holder in due course may still obtain payment, on the date which should have been inserted, not on the incorrect date.
[T/F] Dates on a bill are presumed to be incorrect unless the contrary is proved
True.
[T/F] An ante-dated and a post-dated bill is invalid
False. They are valid
[T/F] A post-dated cheque is payable on demand because it is a valid bill.
False. A post-dated cheque is not a true cheque.
A bearer bill [section 6(3)]
A bill is payable to bearer which is expressed to be so payable or on which the only or last endorsement is an endorsement in blank
[T/F] The parties who sign a bill undertake liabilities which interlock and can be thought of as a chain of liabilities and rights
True.
The payee cannot be the holder due course because…
Bills are not negotiated to the payee. The payee can only be a holder
[T/F] The liability of signing a bill is co-extensive with the right to contract
True. And any person with the capacity to contract may sign a bill.
[T/F] Forgery of the drawer’s or indorser’s signature invalidates the instrument as a bill so that a holder cannot obtain a good title to it.
True. Although he or she is given personal rights (by estoppel) against other parties.
Promises to Pay, examples
Promissory notes and certificates of deposit
Orders to pay, examples
Cheques, drafts, bills of exchange
Acceptance
Consists of the signification of the assent of the drawee completed by delivery or notification of the assent to the holder of the negotiable instrument
Maker
The party who makes an instrument in the form of a promissory note.
Delivery. [what section of Act 55?]
Transfer of possession of an instrument from one person to another whether actual or construction. [section 97 of Act 55]
Issue [what section of Act 55?]
The first delivery of an instrument, complete in form, to a person who takes it as a holder. [section 97 of Act 55]
Negotiation
When an instrument is transferred for value to a person who then becomes entitled to hold it and can sue on it in his or her own name.
A bill payable to bearer is negotiated by… [what section of Act 55]
Delivery. Section 29(2)
A bill payable to order is negotiated by… [what section of Act 55?]
The holder’s endorsement completed by delivery. Section 29(3)
Endorsement
Takes place when the name and/ or the signature of the transferor is written on the instrument and it is completed by delivery to the transferee.
Endorsement in blank
When the endorser only signs on the bill without specifying the payee
Bearer
The person in possession of an instrument payable to bearer or on which the last endorsement is an endorsement in blank
Certificate of deposit
This is a promise to pay issued by a banker where the bank acknowledges that it has received a deposit from the depositor and promises to repay the depositor upon demand.
Promissory note [what section of Act 55?]
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 to bearer.” section 83(1) of Act 55.
Cheques. Including money orders. [what section of Act 55?]
“a cheque is a bill of exchange drawn on a banker payable on demand”. Section 72 of Act 55
Money order
A payment order for a prepaid specified amount of money.
A crossed cheque
Acrossedcheque is acheque that has been marked specifying an instruction on the way it is to be redeemed.
A common instruction is for the cheque to be deposited directly to anaccount with a bank and not to be immediately cashed by the holder over the bank counter.
Banker’s draft.
Is a payment on behalf of a payer that is guaranteed by the issuing bank.
It is like asking a bank to write a cheque for you. You give them your money and they give you a cheque to give to the person you’re owing.
Inchoate instrument [what section of Act 55?]
Signing an inchoate instrument gives the person in possession of it a prima facie authority to fill up the omission in any way he thinks fit - section 18(1)
Such filling up should be within reasonable time (which is a question of fact) and strictly within the authority given - section 18(2).
[Valid or invalid] on or before a given date [williamson v. rider <1963>]
Invalid
[Valid or invalid] twelve months after date
Valid
[Valid or invalid] after sight
Invalid. Note, the distinction with at sight
[T/F] Sums in words trump sums in figures in cases of discrepancies
True. Section 7(2)
A sum is certain even if it is required to be paid:
- With interest
- By stated installments
- By stated installments but with provision on full becoming due on default
- According to an indicated rate of exchange to be ascertained as directed by the bill.
[T/F] A bill is invalid because no value is given
False.
[T/F] A bill is invalid because it is not dated
False.
[ T/F] A bill is invalid because it does not specify place where drawn or payable
False.
What is the legal effect of endorsing a bill on the part of the endorser to pay the immediate or any succeeding endorsee or bearer in case of the acceptor’s default?
Conditional contract
What is the legal effect of endorsing a promissory note on the part of the endorser to pay the immediate or succeeding endorsee or bearer in case of the maker’s default?
Conditional contract
What is the legal effect of accepting a bill, on the part of the acceptor to pay the payee, his order, or the bearer as the the instrument may require?
Absolute contract
What is the legal effect of making a note, on the part of the maker to pay the payee, his order, or the bearer as the instrument may require?
Absolute effect
A bill payable to bearer is negotiated by
Delivery
A bill payable by order is negotiated by
The endorsement of the holder comleted by delivery
The most important type of negotiable Instrument is…
The Bill of Exchange.
[T/F] incase the of negotiable instruments, past consideration is good consideration
True. Example, a cheque is valid even if issued in settlement of an existing debt.
Requirements of negotiability [4]
- Value must have been given.
- The holder of the instrument must have acted in good faith, honestly, without knowledge of any defect in title of a previous holder
- The instrument must be complete and regular - it must not be overdue or show signs of unauthorized alterations.
- The instrument must be deliverable - capable of transfer by being physically handed over
Endorsement
Endorsement takes place when the name and/or signature of the transferor is written on the instrument and it is completed by delivery to the transferee.
Conditions for endorsement [6]
- It must be written on the bill itself and signed by the endorser.
- It must the endorsement of the entire bill.
- Where in a bill payable to order, the payee or endorsee is wrongly designated or the name is misspelt, the payee or endorsee may endorse the bill as described in the bill adding, appropriately, the proper signature of the payee or endorsee.
- Where, in a bill payable to order, the payee or endorsee is wrongly designated or his name is misspelt, he may endorse the bill as therein described, adding, if he thinks fit, his proper signature.
- Where there are two or more endorsements on a bill, each endorsement is deemed to have been made in the order in which it appears on the bill, until the contrary is proved
- An endorsement may be made in blank or special or contain terms making it restrictive.
Blank endorsement
No endorsee is specified and it is payable to bearer
[T/F] A bill endorsed in blank may be converted by any holder into a special endorsement by writing above the endorser’s signature a direction to pay the bill to or to the order of himself or some other person.
True.
Special endorsement
Specifies the person to whom, or to whose order, the bill is to be payable.
Restrictive endorsement
Prohibits further negotiation of the bill
A restrictive endorsement gives the endorsee the right to;
- Receive payment of the bill.
2. Sue any party related to the bill that the endorser could have sued.
Holder
Holder means the payee or endorsee of a bill or note who is in possession of it, or the bearer thereof
[T/F] A person in possession of an unendorsed order bill is a holder nonetheless and can sue in his own name because he gave value for the bill
False [see good v walker(1892) 61 L. J. Q. B. 736.]
[T/F] A drawer of a bill to his own order (even if unendorsed) is the holder thereof (upon its acceptance)
True. [see Walters v Neary (1904)]
Value
Value means valuable consideration [section 97]
[T /F] With knowledge of a defect in the bill, a person can still be a holder for value but not not a holder in due course
True.
Acts that may cause defect in title: when the person negotiating the bill obtained it or acceptance thereof by[7]
- Fraud
- Duress
- Force and fear
- Other unlawful means
- Or for an illegal consideration
- Or when he negotiates it in breach of faith
- Or such circumstances that amounts to fraud.
[T/F] For one to be a holder in due course, the bill must be negotiated to him
True.
Bills payable on demand [section 8(1)]
A bill is payable on demand which is expressed to be payable on demand or at sight or on presentation, or in which a time for payment is not expressed.
When is a bill payable on demand overdue? [section 34(2)]
A bill payable on demand is overdue if it appears on the face of it to have been in circulation for an unreasonable length of time.
Bills payable at a future time [section 9]
A bill is payable at a determinable future time when it is expressed to be payable at a fixed period after date or sight or on or at a fixed period after the occurrence of a specified event which is certain to happen though the time of happening may be uncertain.
When is a bill payable at a future time overdue? [section 12]
A bill payable at a future time is not overdue till after the expiration of the three days of grace.
[T/F] The defect of dishonor will not affect a holder in due course who takes the bill without notice of the dishonor.
True.
Particular notice
Particular notice is where the holder had notice of the particular facts avoiding the bill
General notice
General notice is where the holder had notice that there was some illegality or some fraud vitiating the bill, though he may not have been apprised of its precise nature
Constructive notice
Constructive notice is the legal fiction that someone actually received notice (being informed of a case that could affect their interest) whether or not they truly did receive this.
Promissory note [section 83(1)]
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 to bearer
[T/F] A promissory note is inchoate and incomplete until it is delivered to the payee or bearer
True
Bank draft
A bank draft is a payment on behalf of a payer that is guaranteed by the issuing bank
Order bill [section 6(4)]
A bill is payable to order which is expressed to be so payable or on which is expressed to be payable to a particular person, and does not contain words prohibiting transfer or indicting an intention that it is not transferable.
