Negotiation of Bills

Question 1

What is the negotiation of bills concerned with?

Answer 1

This concerns the transfer of bills and is governed by ss 31-38.

The first thing to be aware of is that sometimes a bill will not be treated as a normal bill of exchange as a result of certain words on the front of it. E.g ⁃	"not negotiable": ⁃	this means that the bill is transferrable but it does not prevent the operation of the assignatus utitor jure auctoritis rule. So if the original debtor had a defence against the original creditor and the bill states "not negotiable", this defence will be equally good against any successors. So the bill can be transferred but it is subject to good defences. ⁃	"not transferable" ⁃	This means that the bill is not transferrable at all.  ⁃	"a/c payee only" ⁃	This is written on cheques. The effect is that the bill is not transferable.

Question 2

How do you transfer a bearer bill?

Answer 2

To transfer a bearer bill you transfer possession. Whoever acquires possession becomes entitled to payment on the bill.

Question 3

Can you incur liability on a bearer bill even though they are not signed?

Answer 3

⁃ Yes - under s 58(3) provides that “a transferor by delivery who negotiates a bill thereby warrants to his immediate transferee being a holder for value that the bill is what it purports to be, that he has a right to transfer it, and that at the time of the transfer he is not aware of any fact which renders it valueless.” This is effectively a warrandice - a guarantee to title which is given by the transferor to the transferee. Therefore if there are any problems with the bill and the transferee can’t get paid, they can raise an action to claim payment for breach of warrandice under s 58. [NB this principle applies to both transfer of bearer bills and order bills].

Question 4

How do you transfer an order bill?

Answer 4

You transfer an order bill by indorsing it - indorsement is a signature on the back of the bill. If you transfer it without indorsing the bill, under s 31(4) of the 1882 Act, the person to whom the bill is transferred has a right to require the transferor to indorse it. With indorsement of the bill you sign it on the back. The rules concerning valid indorsement are contained in s 32 of the 1882 Act.

Question 5

What are the two types of indorsement?

Answer 5

There are two types of indorsement which you encounter in practice (s 34):

1) Blank indorsement
⁃ Simply a signature. This converts the bill from being an order bill to being a bearer bill (it now becomes transferable by handing over possession). (Possession is the only requirement).

2) Special indorsement
⁃ You specify who you are wanting to be paid and then you sign. A special indorsement means that the bill remains an order bill. You nominate a special person who becomes holder of the bill. (s 34(2)[ This is from the tutorial - I think it is correct but check.])

Question 6

If you have a blank indorsement which has converted the bill into a bearer bill, can you convert it back into an order bill?

Answer 6

⁃ [There are some possible reasons why you might want to do this - if you have a bearer bill the person who has possession is entitled to claim payment on it. Thus you might want to protect your position if you are in possession to make sure that you are the only person who can receive payment - so if someone steals the bill they can’t sell it on.]
⁃ Yes you can - by virtue of s 34(4) you can convert a bearer bill back into an order bill. If you have a blank indorsement the third party can write “Pay John Smith [usually their own name]” above the previous indorser’s signature. This converts the blank indorsement that had been made by the previous indorser into a special indorsement (converting the bearer bill into an order bill).

Question 7

Who is entitled to receive payment on a bill of exchange?

Answer 7

The holder of the bill is entitled to payment. The holder is defined in s 2 as the “payee[ The initial holder.] or indorsee[ The person to whom the bill has been transferred if it is an order bill] of a bill or note who is in possession of it, or the bearer thereof[ If it is a bearer bill.]”.

Question 8

What are the powers of the holder?

Answer 8

Powers of the holder
⁃ The holder can retain possession.
⁃ The holder can negotiate the bill (e.g. transfer it to third parties)
⁃ The holder (and only the holder) can present the bill to the drawee for acceptance and is entitled to present the bill to the drawee for payment.
⁃ The holder can convert indorsement from a blank indorsement to a special indorsement (covered already under s 34)
⁃ The holder (usually the holder in due course - not too clear about this but I think it means that sometime the payee may not take the bill free of defences) takes the bill free of any defences. Defined in s29 - holder in due course when “you hold a bill which is complete and regular, under the conditions of

Question 9

What are the types of holder?

Answer 9

Holder for value (s 27)
⁃ A holder for value is someone who has paid for their bill of exchange. [This provision is particularly important in England due to their requirements of consideration - so it is not very important in Scotland at all.]

Holders in due course (s 29)
⁃ Section 29(1): “A holder in due course is a holder who has taken a bill, complete and regular on the face of it, under the following conditions; namely -
⁃ (a) that he became the holder of it before it was overdue, and without notice that it had previously been dishonoured, if such was the fact;
⁃ (b) that he took the bill in good faith and for value, and that at the time the bill was negotiated to him he had no notice of any defect in title of the person who negotiated it to him.”

Question 10

So when are you a holder in due course?

Answer 10

To be a holder in due course the requirements are:
⁃ Must be a holder
⁃ Bill must be complete and regular on the face of it[ I.e. must be a valid bill under s 3 - if it’s not a valid bill under s 3 you cannot become a holder in due course.]
⁃ Became holder before the bill was due[ So the bill must not be overdue on transfer.]
⁃ No notice of previous dishonour
⁃ Took the bill in good faith[ s 90 and note s 30] and for value
⁃ No notice of the defect in title

Question 11

Can the payee be a holder in due course?

Answer 11

The payee cannot be the holder in due course as the bill is issued to him/her and not negotiated to him or her.

Question 12

What is the advantage of being a holder in due course?

Answer 12

The main advantage of being a HIDC is that you can acquire the bill free from any defects in the title of the transferor and it is this quality that is one of the features that distinguishes a negotiable instrument from a non negotiable one.

Question 13

Is there a presumption of being a holder in due course?

Answer 13

Section 30 states that every party whose signature appears on the bill is deemed to have become a party for value and every holder is deemed to be a holder in due course[ THIS IS VERY IMPORTANT - THERE IS A PRESUMPTION IN FAVOUR OF HTE HOLDER THAT THEY ARE A HOLDER IN DUE COURSE.] (thus there is a presumption that you become a holder in due course - so somebody challenging it would have to show that you didn’t comply with these requirements.)

So despite the requirements set out in s 29 above, s 30 provides a presumption

Question 14

What is the ‘shelter principle’?

Answer 14

Section 29(3) relates to the shelter principle:
⁃	If A[ Drawer.] draws a bill on B[ Drawee] payable to C[ Payee]. B is induced to accept the bill by D's fraud. C does not know of the fraud. C negotiates to E. Is E a holder in due course? Yes (provided the requirements stated above are satisfied) so E takes free of any defences. F knows of D's fraud so is not in good faith. E negotiates to F. Is F a holder in due course? Under s 29(3), F is still a holder in due course. It provides that where "A holder (whether for value or not) who derives his title to a bill through a holder in due course, and who is not himself a party to any fraud or illegality affecting it, has all the rights of that holder in due course as regards the acceptor and all parties to the bill prior to that holder". So F can 'shelter' under the previous holder in due course's good faith and value, even if you know there is something wrong with the bill and become a holder in due course himself.
⁃	*Section 29(3) is what makes the bill of exchange so valuable in commercial transactions.*

Question 15

What can a holder in due course do?

Answer 15

⁃ Demand payment
⁃ You can convert a blank indorsement to a special indorsement.
⁃ They have good title and are not affected by defences.

Question 16

What is presentment for payment?

Answer 16

This is when a bill of exchange is presented for payment.

Question 17

What are the two categories of bill of exchange which are relevant to presentment for payment?

Answer 17

There are two categories of bill of exchange that are potentially relevant:
⁃ 1) Demand bill
⁃ Under s 45(2) a demand bill is to be presented for payment within a reasonable time, otherwise the liability of the people who have signed the bill will disappear.
⁃ 2) Tenor[ A time bill.] bill
⁃ Under s 45(1) presentment must be made on the day it falls due. Thus if you present it on the wrong day then you have not complied with s 45 and thus the drawee is entitled to refuse (this isn’t dishonour).

Question 18

What are the formalities for presentment of payment?

Answer 18

Under s 45 presentment must be:
⁃	1) Proper place
⁃	2) Proper day
⁃	3) By a proper person
⁃	By the holder or agent of

Question 19

What happens if the bill is not presented for payment?

Answer 19

If the bill is not presented for payment then the holder cannot receive the money on the bill unless they can show that they have an excuse for the bill not being presented for payment. If you do not comply with s 45 and do not have an excuse under s 46 then you will lose your enforcement rights.

Question 20

What are the excuses under s 46?

Answer 20

The excuses are set out in s 46:
⁃ “(1) Delay in making presentment for payment is excused when the delay is caused by circumstances beyond the control of the holder, and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate presentment must be made with reasonable diligence.
⁃ (2) Presentment for payment is dispensed with,–
⁃ (a) Where, after the exercise of reasonable diligence presentment, as required by this Act, cannot be effected. The fact that the holder has reason to believe that the bill will, on presentment, be dishonoured, does not dispense with the necessity for presentment.
⁃ (b) Where the drawee is a fictitious person.
⁃ (c) As regards the drawer where the drawee or acceptor is not bound as between himself and the drawer, to accept or pay the bill, and the drawer has no reason to believe that the bill would be paid if presented.
⁃ (d) As regards an indorser, where the bill was accepted or made for the accommodation of that indorser, and he has no reason to expect that the bill would be paid if presented.
⁃ (e) By waiver of presentment, express or implied.”

Question 21

What happens if the bill is not paid?

Answer 21

This is ‘dishonour by nonpayment’ (s 47)
⁃ Like dishonour by non-acceptance the holder must then act to protect their position. In broad terms under s 48-51 if the drawee doesn’t pay then in order to ensure that the drawer and indorsers are liable, the holder must notify them. So the holder must send a notice of dishonour to each person as soon as possible[ ideally same day as disgonour]. If notice of dishonour is not given to them then their liability flies off.

Question 22

What is the process of ‘protest and noting’?

Answer 22

The holder can use a process called ‘protest and noting’ which is governed in part by s 51. If a bill is protested then the front of the bill will have either “pnp” (protested for non-payment) or “pnacc” (protested for non-acceptance). It will then be signed by a notary public and dated. This is a form of protest of the bill which then allows a certificate to be prepared by the notary served on the relevant individuals under s 51 identifying why you are protesting and what you’re protesting for. [Why is this done? In Scotland, if you have this protest and the noting with the certificate then the certificate can be registered in the Books of Council and Session or local Sheriff Court. This means that you are entitled to carry out summary diligence. Under summary diligence the act of registration in the Books of Council and Session is enough to justify you doing diligence - a court order is not needed to seize assets.]

***There is some additional material which wasn’t covered in lectures. Go back through the lecture handouts with textbook and work out what you’ve missed!!!