Negotiable instruments

Course: negotiable instruments

- Definitions
- Parties and essential elements of a bill
- Negotiation and delivery
- Signatures
- The holder
- Crossings on cheques
- Electronic and card payments

Definitions

Negotiable instruments: a document that entitles its holder to payment of a sum of money,
which document is transferable by delivery or by delivery and endorsements.

Cambial obligation: a negotiable instruments represents both a payment and an

underlying contract; payment governed by law of negotiable instruments and the
contract by law of contract. E.g. cheque for a sale transaction. So the cheque is
governed by the law of negotiable instruments and the sale contract is represented by
law of contract.

A holder: the person who possesses the negotiable instrument. In certain

circumstances, a holder is also a person entitled to payment in terms of the negotiable
instrument.

Importance of negotiable instruments:

- Cash is used less frequently in current times and thus the importance of negotiable
instruments.
- Negotiable instruments are safer and more convenient.
- Negotiable instruments are transferable.
Three principle types of negotiable instruments: a bill of exchange, cheque and promissory
notes.

1. Bill of exchange: 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 a specific person, his order or to bearer.
2. Cheque: an unconditional order in writing addressed by one person to a bank, signed
by a person giving it, requiring the bank to pay on demand a sum (certain in money)
to a specified person, his order or to bearer.
3. Promissory note: an unconditional promise in writing made by one person to another
signed by the maker and engaging on demand or at a fixed or determinable future
time a sum (certain in money) to a specified person, his order or to bearer.
In order for a document to be any negotiable instrument (any of the above), it needs to
meet each component of the applicable definition.

Characteristics of a negotiable instrument:

1. Simplicity of transfer of title

- Easy to make another person entitled to payment.
- In order for it to be a negotiable instrument, it must be transferable
- Where the instrument is payable to order, payment can be given to another person
by the holder signing the back of the instrument and handing it over to the second
person (known as an endorsement).
- Where the instrument is payable to bearer, payment can be given to another person
simply by the holder handing the document to the second person.
- A non-transferable cheque is not a negotiable instrument
2. Transferability free from equities
- No one can transfer a right to a person if they don’t have that right themselves
- The Law of Negotiable Instruments is different in certain circumstances (exception
to law of contract – in certain circumstances).

Parties and essential elements of a bill

 Parties to a bill of exchange: drawer, drawee, payee

- Drawer: the person who makes the order

- Drawee: the person to whom the order is made
- Payee: the person who is entitled to receive the payment

Parties to a cheque: drawer, drawee, payee

- Drawer: person who makes the order

- Drawee: to whom the order is made: is always the bank
- Payee: the person who is entitled to receive the payment

Parties to a promissory note: maker, payee

- Maker: person who promises to pay

- Payee: the party to whom payment is promised

Other important definitions

- Indorsement: the signature on the instrument of the party who transfers it

- Indorser: the person who indorses the bill
- Indorsee: the person to whom the bill is transferred by way of indorsement; if the
name of the endorsee has not been specified, it (the indorsement) is then known as
an indorsement in blank.
- Bearer: person in possession of an instrument which is payable to bearer [e.g. in a
cheque, the payee is “bearer” so whoever bears (holds/ is in possession) of that
cheque, receives that payment].

Essential elements of a bill

- Order
- Unconditional
- In writing
- Addressed by one person to another
- Signed by person giving it
- Requiring person to whom it is addressed to pay
- On demand or a fixed or determinable time
- A sum certain in money
- To person….
1. Order: there must be an order to pay – the words must be imperative i.e. it must
not be a request, not be an authorisation. The entire document/ instrument must
be examined to determine whether it contains an order. No order = no valid
bill.
2. Unconditional: this order must be unconditional. If the order is dependent on
the fulfilment of a condition, it is not unconditional. E.g. “pay once
countersigned,” a condition to get a second signature -- even if the bill is
subsequently witnessed -- makes the bill invalid (because, there is a condition).
3. In writing: includes all modes of reproducing words. This can include
typewriting…
4. Addressed by one person to another: drawer to a drawee (the drawee must be
named or indicated with reasonable certainty). A bill may be addressed jointly
to two or more drawees, but not in alternative (no “or”) and not in sub session
(no “thereafter”).
5. Signed by the person giving it: the drawer should sign; without a signature, a
bill is not valid. It could either be a drawer or someone duly authorised to sign
on behalf of the drawer.
6. Requiring person to whom addressed to pay: the drawee. Cheque – drawee is
always the bank.
7. On demand or a fixed or determinable future time:
- A bill is payable on demand if it is expressed to be payable on demand or if no time
for payment is expressed.
- It is payable on a fixed or determinable future if the future time is mentioned on the
bill. When the time is unclear – e.g. it’s labelled “June” (no day, no year specified)
– then it is not payable at a fixed or determinable future time.
- Where the bill is payable on an expiry fixed period or after the occurrence of a
specific event, which is certain to happen, the bill is valid even though the time of it
happening is uncertain. E.g. 1 “payable on death” – event certain, time uncertain.
E.g. 2 “payable on Aunt’s death” – event uncertain, time also uncertain: therefore,
invalid.
 8. A sum certain in money: bill must be specified in money. It cannot state
something in addition to money. If it provides for a sum certain in money +
bank charges – the bill is also invalid, because on the face of the bill, bank
charges are not evident. Same applies to interest charges.
- However there is an exception - lawful interest: Prescribed Rate of Interest Act (no.
55 of 1975) section 1(1). If an amount bears interest, and the rate of interest is not
governed by any law, agreement or trade custom, or any other manner, then the
interest is calculated at the prescribed rate of interest.
- The date in which the lawful interest runs from is the date specified in the bill. If no
date is not specified in the bill, the date is then the date of issue of the bill.
9. To a specified person or his order or to bearer.
- To a specified person: the payee must be named or indicated with reasonable
certainty. For example, a cheque must indicate Timothy Smith.
Bearer bill – transferable by delivery. Order bill – transferable by
indorsement and delivery.
- Words which prohibit transfer/ negotiation: if a bill contains words prohibiting
transfer or indicating an intention that it should not be transferred, the bill is valid
between the parties to the bill but may not be negotiated. “Non-transferable,” “not
transferable” or “Timothy Smith (payee) only” – these are words prohibiting
transfer of a bill.
- A crossing on the cheque or the words, “non-negotiable” does not affect the
transferability or negotiability of the cheque.
- A bill payable to order: in two circumstances -- (1) if it is expressed to be so
payable (2) if it is expressed to be payable to a particular person and does not
contain words prohibiting transfer or indicating an intention that it should not be
transferable.
- A bill is payable to bearer: in three circumstances – (1) expressed to be so payable
(2) if the only or last indorsement is an indorsement in blank (3) if it is expressed to
be payable to:
 “Cash”,
 “Bearer”,
 -- If the payee section is left blank,
 “to order,”
 “Cash or order” or
 “Cash or order or bearer.”
Holder

Holder v the true owner

True owner: person who will suffer due to loss of bill. The payee is the true owner if
it was lost after it came into his/ her possession. The drawer is the true owner if the
bill was lost prior to it being delivered to the payee.

Definition of a holder:

1. Holder of an order cheque: payee or endorsee of a bill who is in possession of it

2. Holder of a bearer cheque: the person in possession of it, who is the bearer.

Possession: possession forms the basis of being a holder, in order to be a holder, one
needs to be in possession of the cheque or bill. In addition, one needs to be either an
endorsee, a payee or a bearer.

The acquisition of possession need not be lawful. An unlawful possessor can also be
a holder, e.g. a thief, who has acquired possession unlawfully. Exception: possessor
who has acquired possession through a forged or unauthorised endorsement is not the
holder of the bill.

The Holder as agent

Agent: person acting on behalf of someone else.

1. The person in which the agent acts on behalf is the principal or owner.
2. The holder may also be an agent who acts on behalf of the principal or owner.
This agent -- “Nominal holder”
3. Nominal holder is entrusted with collection and instituting legal action.
4. When legal action is instituted by the agent, nominal holder, the action is in the
name of this agent -- the nominal holder (not the principal or owner).
5. When legal action is instituted by the nominal holder, s/he enforces the rights of
the principal as the result of the principal being the creditor of the bill. The
 nominal holder stands in the shoes of the principal, the nominal holder is then
subjected to the same defences and defects as the principal.

The holder has four rights:

1. To negotiate the cheque

2. To sue on the cheque in his own name
3. To supplements deficiencies in the form of the cheque (e.g. date on the cheque was
not written, the holder can right the date on the cheque).
4. To obtain a duplicate of the lost cheque

Enforcing payment of a bill:

The acceptor: is the drawee of the bill who has signified his assent to the order of the
drawer of the bill. He is the principal debtor of the bill as by virtue of his
acceptance he undertakes to pay the holder.

 The acceptor and the maker undertake to pay unlike a drawer and an
endorser who undertakes to guarantee payment.
 By accepting, the acceptor undertakes to pay according to the tenor (the
contents of the bill) of his acceptance.
 The maker undertakes to pay according to the tenor of the (promissory)
note.
 Should the acceptor or maker fail to pay, the holder may enforce payment.
A drawer can also enforce payment against an acceptor (drawee).
In the event that a drawer instituted legal action against the drawee, the
defence which may be raised by the drawee is insufficient funds.
Insufficient funds = drawer has not supplied enough funds for the drawee to
pay the holder.

Holder has 4 duties… (Slides)

The holder for value: giving value means that the cheque was not merely a gift.
Where value has been given for the cheque, the holder is deemed to be a holder for
 value. Holder for value must comply with requirements for holder and provide
something in exchange of a bill.

Holder in due course

Holder in due course is a holder who has taken a bill, complete and regular on the face
of it under the following circumstances:

a) (Slides on iKamva)…

Requirements for a person to be a holder in due course:

1. Person must be holder

2. Bill/ cheque must be negotiated to that person
3. Bill/ cheque must be regular and complete on face of it…
4. …
i) Person must be a holder: with an order bill, person must be a payee or endorsee, in
possession of the order bill. In a bearer bill, the person must be a bearer and be in
possession of the bill.
ii) The bill/ cheque must be negotiated to that person: order bill – indorsement and
delivery is negotiation. Bearer bill – delivery is negotiation. *can the first payee of
an order bill be a holder in due course? When the first payee receives the cheque, it
is not negotiated because there’s no indorsement. The first payee, endorser, receives
payment be delivery only. With a bearer bill, the first payee can be a holder in due
course, because the first payee receives (or is in possession of bill) by delivery.
iii) The bill/ cheque must be regular and complete on the face of it:
- If an essential element of form is missing when the holder takes it, s/he cannot be a
holder in due course even though the holder has the power to fill in an omission.
- If s/he takes the bill when it is regular and complete on the face of it, s/he may be a
holder in due course.
iv) The person must take the bill/ cheque before it is overdue: s/he must take the bill
prior to it being overdue/ stale. This is prior to the date on the bill as being the date
on which payment is due. Once a cheque/bill is overdue, the holder cannot be a
holder in due course.
 v) The person must take the bill/ cheque without any notice of it being previously
dishonoured:
- The bank usually stamps a cheque/ bill to confirm that it has refused to pay. If the
holder takes a cheque knowing it was dishonoured, holder is not a holder in due
course.
vi) The person must take the bill/ cheque in good faith and without any notice of
any defect in the title of the transferor: section 94 of the Bills of Exchange Act
provides that a thing is deemed to be done in good faith if it is done honestly,
irrespective of whether it is done negligently; without any defect in the title --- no
fraud or forgery, without notice of dishonour.
vii) The person must take the bill/ cheque for value
Something must be given in order to receive the cheque.

Presumption of holder in due course

Section 28(2) of the Bills of Exchange Act:

Every holder of a bill is deemed to be a holder in due course provided that -- if in an

action on a bill it is admitted or proved that the acceptance issue or negotiation of the
bill is affected by fraud or illegality the burden of proof is shifted unless and until --
the holder proves that the subsequent alleged fraud/ illegality value was given in
good faith.

Action on lost or destroyed bill

- General rule: enforcement of rights is dependent on possession.

- This rule leads to undesirable consequences. The owner of a lost or destroyed bill
would then be unable to enforce payment because he cannot be a holder.
- This implies that the owner may only enforce legal action once possession is
recovered.
- Section 67 of the Bills of Exchange Act: the section authorises the person who
was the holder of a lost or stolen bill/ note to request another bill/ note from the
drawer or maker before it is overdue. In the event of the bill being stale, I cannot
request another bill.
Duties of the holder:

1. The holder may present cheque for payment

2. Protests against cheque being dishonoured
3. Give notice of cheque being dishonoured.

To present the cheque for payment:

- Cheque must be presented in accordance with the provisions of section 43,

otherwise the drawers and endorsers are discharged (i.e. released).
- Where the holder of a bill presents it for payment, he must exhibit it to the person
from whom he demands payment and when the bill is paid, the holder loses
ownership in the bill.
- Presented for payment must be made by the holder or a person authorised to act on
behalf of the holder.

To protest against the cheque being dishonoured:

- Protest: a formal declaration, in writing, generally by a notary who records that the
bill has been dishonoured and that the holder intends to recover all expenses which
he may incur as a result.
- Notary: person entitled to perform certain legal formalities i.e. a legal specialist.

To give notice of the cheque being dishonoured:

- Notice of dishonour must be given to the drawer and each endorser if the bill has
been dishonoured. Any drawer or endorser to whom notice of dishonour is not
given is discharged.
- Notice of dishonour is given to inform prior parties of the dishonour so that they are
able to exercise their rights of recourse against parties prior to them.
- The liability of the drawer and endorser is conditional on the giving of notice of
dishonour.

The unavailability of defences

Section 36 (b) of the Bills of Exchange Act:

A holder in due course holds the bill free from any defect in the title of prior parties as
well as from defences available to prior parties and may enforce payments against all
parties liable under the bill. The title is defective if the bill is obtained by fraud or
illegality.

Absolute defences:

1. Non est factum

2. ….
3. ….
1. Non est factum:

A person who signs a bill not knowing it is a bill may raise this defence, unless when
s/he signed the bill s/he was negligent or careless creating the impression that he
intended to bind himself. For example, executive always signing documents and
signs without knowing it is a bill, however if it was bold printed “bill of exchange” -
then he was negligent and cannot use this defence.

2. Non-delivery of incomplete instrument:

A person who signs either an incomplete bill or a blank paper which is subsequently
converted into a bill is not liable.

3. Vis absoluta:

By raising this defence, a person alleges that his signature does not constitute a legal
act because he was forced to sign it.

4. Lack of capacity:

A lack of capacity which exists both at the time of the signature and of delivery is a
defence. (Lack of capacity = age or mental incapacity). It has to be both at time of
 signature and of delivery. Example, if mental incapacity is present at the time of
signature but not at the time of delivery, the person cannot raise this defence.

5. Forged or unauthorised signature:

Section 21 of the Bills of Exchange Act: no person is liable as drawer, acceptor or

endorser if he has not signed it as such. If his signature was forged, he cannot be held
liable.

6. Material alteration:
- Material alteration: an alteration which would alter the liability of any of the parties
to the bill. An alteration can be added, however a material alteration (such as
substituting the name of a payee).
- Section 62 of the Bills of Exchange Act: if a bill or acceptance is materially
altered, the liability of all the parties to the bill at the date of the alteration and who
did not ascent (or agree) to the alteration will be regarded as if the alteration did not
happen.

Negotiation and delivery

Negotiable instrument: A document that entitles its holder to payment of a sum of money,
which document is transferable by delivery or by delivery and indorsement and on which the
holder is entitled to sue in his own name.

Negotiation: A bona fide (good faith) holder for value can acquire ownership of instruments
even if they were purchased from one not entitled to dispose of them. In this sense,
“negotiate” means that the purchaser in good faith can acquire more rights than his
predecessor.

Issue:

- The issue of a bill is a particular form of transfer.

- It is the first delivery of a bill, complete in form, to a person who takes it as holder.
 - The contract of the drawer is concluded when the instrument is issued; the issue
also transfers the right of ownership in the bill to a holder.
- Issue determines the date from which an undated bill’s interest will run.

Indorsement: the signature on the instrument of the party who transfers it

Requirements for a valid indorsement:

1. To be valid, the indorsement of an order cheque requires signature and the

intention to endorse and undertake the liabilities of an endorser.
2. The signature does not require any additional words and no date of indorsement
needs to be written. Sometimes it’s better for a date to be included, however the
exclusion of a date does not invalidate the indorsement.
3. Where several undated indorsements are made on the back of the same cheque, it
is presumed that they were made in order of appearance. In the event where
signatures are scattered all over the place, the endorsers will have to prove date of
indorsement.
4. An indorsement must be for the whole amount and not just for some of the
amount.
5. If a cheque is payable to two or more payees, they must all endorse the cheque in
order for the indorsement to be valid.
6. In circumstances where the bank requires the drawee of the cheque to sign the
back of it, in order to receive payment over the counter, this signature is not an
indorsement. (The intention is lacking).
7. When the signature is made on the direction of the bank, this signature merely
acts as a receipt or identification of the person receiving payment.

Four types of indorsement:

a) An indorsement in blank:
- An indorsement in blank specifies no endorsee and a bill so endorsed becomes
payable to bearer.
- The endorser signs the back of the cheque and does not indicate the endorsee to
whom payment must be made. *a bearer bill includes an indorsement in blank
b) Special indorsement:
- Specifies endorsee’s name…. (e.g. “Pay Mr Adams”)
- Endorser signs the back of an order cheque and writes a direction that a specific
person or their order should be paid.
c) Conditional indorsement (Section 33 of the Bills of Exchange Act :)
 If a bill purports to be endorsed conditionally, the condition may be disregarded and
payment to the endorsee is valid whether or not the condition is fulfilled.
d) Restrictive indorsement:
- The endorser signs the back of an order cheque and writes a direction affecting its
negotiability. There are two kinds of restrictive indorsements:
- The first kind is an indorsement prohibiting further negotiation. For example, “Pay
Mr Adams only.”
- The second kind of restrictive indorsement allows the endorsee to deal with the
cheque or bill as directed but does not allow ownership to pass. For example, “Pay
Mr Adams for account of XYZ.”
- In the first kind of restrictive indorsement, further negotiation is prohibited.
- In the second kind of restrictive indorsement, where the indorsement merely
expresses an authority to collect payment, the endorsee acquires the right to receive
payment and the relationship between endorser and endorsee is determined by the
mandate.

Indorsement of a bearer bill

A bill payable to bearer is negotiated by delivery alone and no indorsement is required

for its negotiation.

Forging an indorsement

Section 22 of the Bills of Exchange Act: If a signature on a bill is forged or placed

upon without the authority of the person whose signature it purports to be, the forged
or unauthorized signature is wholly inoperative and no rights to retain the bill or to
give a discharge therefore or to enforce payment thereof against any party thereto can
be acquired through or under that signature, unless the party against whom it is sought
to retain or enforce payment of the bill is precluded from setting up the forgery or
want of authority. Some parties are not able to raise forgery or unauthorized
signatures as a defence.

Negotiability
 To be negotiable, a bill must be payable either to order or to bearer. If a cheque
includes words prohibiting transfer, it cannot be an order bill. It, therefore, cannot be
negotiated. In order for it to be negotiated, it should either be an order bill or a bearer
bill.

A bill negotiable in its origin continues to be negotiable until it is restrictively

indorsed or discharged by payment.

Delivery

The Concept of Delivery

- Delivery is defined as the actual or constructive transfer of possession from one to

another.
- The negotiation of a bearer bill is affected by delivery alone. Delivery of a bill is
meant to transfer ownership without incurring liability.
- A bill is payable to order is negotiated by delivery and indorsement. It is delivered
with the object of transferring ownership and the intention of incurring liability.

The methods of delivery

1. Constructive delivery: constructive delivery is effected by agreement between

the parties. The physical transfer of the object plays a secondary role. E.g. A
safety deposit box, when I sell the safety deposit box, I do not physically remove
it from the bank. I just write an agreement (which is delivery).
2. Traditio Brevi Manu:
- The transfer of ownership to a person who is already in the physical possession of
the object. Transferor – person who transfers the object. Transferee – person who
receives the object.
- In the case of tradition brevi manu the transferee is in possession of the object and
only afterwards, the necessary intention of ownership is satisfied. E.g. I take my
watch to a watchmaker for repairs, I phone the watchmaker to tell him I’ve got
another watch. The watchmaker says he does not mind it being sold to him. Only
after the agreement of the ownership transferal, the watch has been delivered.
3. Delivery by constitutum possessorium: takes place where the transferor remains
in possession of the object but transfers ownership to the transferee by agreement.
E.g. I have a motor vehicle and agree to sell the vehicle to someone else,
agreement is present and relevant payments and documents are transferred. At the
same time, an agreement of lease is established, I remain in possession of the
vehicle and I rent it.
4. Delivery by attornment: occurs when an agent agrees to hold the object on
behalf of a new principal instead of the former. E.g. I have an object which is in
possession of my agent, Mr Smith. I sell the object to someone else and it remains
in possession of the agent (the principal changes).