RELEVANCE OF NEGOTIABLE INSTRUMENTS IN THE MODERN ERA
Introduction
An instrument is a document that contains a payment obligation, and whoever holds it (after any
necessary endorsement) is considered entitled to receive the payment it represents. Essentially, it is a title
document for money. The following is a famous definiton of a negotiable instrument as given in the
English case of Crouch v Credit Foncier of England Ltd1
“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.”
The banking system has developed multiple payment methods, with negotiable instruments being one of
the most popular. Cheques, promissory notes and Bills of Exchange, are considered as common forms of
negotiable instruments which are transferable by endorsement and delivery. In order to have a broader
understanding of the negotiable instrument, let us look into the historical background of Bills of
Exchange, Cheques and Promissory notes.
Historical Background
Bill of exchange
The bill of exchange originated in medieval Europe as a response to the increasing complexity of trade.
Arab merchants used a similar instrument as early as the 8 th century, but the bill of exchange in its current
form gained prominence during the 13th century among the Lombards of northern Italy. These instruments
allowed merchants to settle accounts and conduct transactions over long distances without the need for
physical currency. Bills of exchange became essential in international trade, enabling secure and efficient
payment methods. 2
Cheques
The concept of the cheque can be traced back to 13 th century Venice, where it was created to facilitate
international trade without the need to carry large amounts of silver or gold. In England, cheques evolved
from letters written to goldsmith bankers, allowing customers to make payments to third parties without
withdrawing money themselves. Over time, cheques became more standardized and secure, with features
1
(1837) LR 8 QB 374
2
A.H. Pressner, The Earliest Traces of Negotiable Instruments, Vol. 44, No. 2 (Jan. , 1928)
such as watermarks and micro printing to prevent counterfeiting. Despite the rise of digital payment
methods, cheques have adapted and continue to be used in certain scenarios. 3
Promissory Notes
Promissory notes have a long history dating back to ancient times. They were used in various forms in
ancient Greece and Rome, where they served as written promises to pay a specific amount of money.
During the Renaissance in Europe, promissory notes became more formalized and widely used as a
means of financing trade and commerce. These notes typically included the principal amount, interest
rate, repayment terms and the signatures of the involved parties.4
Legal Framework
The negotiable instruments introduced above are regulated by the Bill of Exchange Act of 1967 of
Malawi.5
Bill of Exchange
In accordance with section 3 of the Act, a bill of exchange is defined as an unconditional order in writing,
addressed by one person to another, signed by the person giving it, requiring determinable future time a
sum certain in money to or to the order of a specified person, or to bearer.
Thus, an instrument which does not comply with the above definition or which orders an act to be done in
addition to the payment of money is not a bill of exchange. 6 It is also worth noting that subsection 3 of the
section 3 provides that an order to pay out of a particular fund is not unconditional within the meaning of
subsection (1); but an unqualified order to pay is unconditional if coupled with; an indication of a
particular fund out of which the drawee is to reimburse the drawer, or a particular account to be debited
with the amount or a statement of the transaction which gives rise to the bill, is unconditional. However, a
bill is not invalid because, it is not dated, it does not specify the value given, it does not specify the place
where it is drawn or the place where it is payable.7
By an unconditional order, implies that there must be no qualification which would make the payment
uncertain or give rise to some cumbersome inquiries. In the case of Bavins and Sims v London and South
Western Bank,8 emphasizes that an instrument which requires a condition of payment of a receipt by the
3
Ibid
4
Ibid
5
Chapter 48:02
6
Section 3(2)
7
Section 3(4)
8
[1900] 1 QB 270
payee on the front or the reverse of the document is not a negotiable instrument. In the said case for
instance, an instrument in the form of a cheque which was received by the Plaintiff read, pay to the
plaintiff provided that the receipt form at the foot is duly signed and dated. This instrument was however
stolen from the Plaintiff, with an endorsement on it and the receipt form signed. In an action by the
Plaintiff against the collecting bank, the court held that the instrument contained a condition to be met
before same is paid, it cannot be said to be a cheque.
It must however be distinguished as was held in the case of Nathan v Odgen9 that where a condition on
the face of a cheque or embodies therein is not to be fulfilled by the drawee bank but a direction to the
payee, the said order remains unconditional. Thus, where a cheque is drawn in the ordinary form,
requiring a receipt on the back of it to be signed by the payee, such a requirement in so far as it is directed
to the said payee alone and not to the drawee bank, would suffice to make the instrument an unconditional
one.
A simple request will not satisfy the requirements of an order. The phrase “we hereby authorize you to
apply on our account” was held not to be an order in Hamilton v Spottiswoode.10 That phrase did not
create a clear obligation to pay. The words “I should be obliged if you would arrange to pay” will also not
qualify as an order.
Relevance of Bill of Exchange
In the modern world and the coming in of e-commerce, a bill of exchange is used in international trade to
help importers and exporters fulfill transactions by also helping buyers and sellers deal with the risks
associated with exchange rate fluctuations. While a bill of exchange is not a contract itself, the involved
parties can use it to specify the terms of a transaction, such as the credit terms and the rate of accrued
interest. In the case of Smith v Lloyds TSB Group plc,11 the court examined the enforceability of a bill of
exchange in an international transaction.
If the funds are to be paid immediately or on demand, the bill of exchange is known as a sight draft. In
international trade, a sight draft allows an exporter to hold title to the exported goods until the importer
takes delivery and immediately pays for them. However, if the funds are to be paid at a set date in the
future, it is known as a time draft. A time draft gives the importer a short amount of time to pay the
exporter for the gods after receiving them.
Cheques
9
[1933]
10
(1846) E Exch 200
11
[2003]
A cheque is a bill of exchange drawn on a banker payable on demand. 12 accordingly, the same
requirements that are essential to constitute a bill of exchange are required to constitute a cheque.
However, there is one major difference. To constitute a cheque, the instrument must be drawn on a
banker.13 Thus, no commercial or financial institution other than a bank can pay or collect cheque. This is
a major advantage and privilege that banks enjoy. A person issuing a cheque must receive something in
return for issuing such cheque. In the decision of Sri Lankan Supreme Court in Letchime v Jamison,14 is a
good illustration. In that case the Plaintiff was the defendant’s brother mistress and had two children by
him. When the defendant’s brother was leaving Sri Lanka the defendant as a favour, gave a promissory
note to the plaintiff to maintainable children. The defendant did not receive any consideration from his
brother for making this arrangement, and gave the note of his own accord and not at his brother’s request.
The Supreme Court held that since this was an action based on a promissory note (a bill of Exchange) the
English Law applied and under English law consideration was a requirement. Therefore, the plaintiff
could not sue on the note because it was not given for valuable consideration.
In practice, a cheque play a dual role. On one hand, it is subject to the Bills of Exchange Act and is
considered as a negotiable instrument. On the other hand, from a banker's stand point, it is a mandate (the
cheque) issued by the bank’s customer requiring the bank to pay a stated amount to a stated party on or
after the date of the cheque.
Relevance of Cheque
The cheque dispenses with the need to keep cash with the attendant risks of theft and loss. It can be be
drawn for the exact amount required. It can be dispatched by the debtor to the creditor cheaply and safely
without the risks of loss and inconvenience which can occur when settling debts in cash. Payment by
cheque also provides a simple and authentic record of the payment of the debt. Banks retain paid cheques
for over six years so that you can always get the bank to produce a cheque to prove your payment.
Payment by cheque is generally equated to payment by cash. In the case of Foakes v Beer,15 it was stated
the fact that payment was by cheque made no difference to the principle that late payment of a lesser
amount did not equal satisfaction of the total amount owing. The cheque when given, is a conditional
payment, when honoured by the bank it is actual payment. In the case of D & C Builders v Rees,16
12
Section 73
13
Ibid
14
(1913) 16 NLR 286
15
(1884) 9 App Cas 605
16
2 QB 617
English common law also treats a cheque as an item of property with value equal to the amount for which
it is drawn.
Promissory Notes
Promissory notes are a type of negotiable instruments. Although a promissory note is defined in the Bills
of exchange Act and certain parts of the statute is also made applicable to them. Strictly speaking,
promissory note are not bills of exchange, this is because promissory note involves only two parties, the
maker of the note and the payee/bearer, while a normal bill of exchange involves three parties, namely, (i)
the drawer (ii) the drawee and (iii) the holder.
Promissory note must be distinguished from a cheque, a cheque must always be drawn on a banker, while
a promissory note need not involve a bank at all. Part IV of the Bills of exchange Act deals with
promissory notes it defines promissory note as, 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. 17
A promissory note is complete only upon delivery. Where a note is payable on demand, it must be
presented for payment within a reasonable time. Where it is payable at a particular place, it must be
presented for payment there. In any other case, presentment for payment is not necessary. Presentment for
payment is necessary to make the endorser of a note liable.
Relevance of Promissory notes
A promissory note is essential in any transaction where money is being lent by a person, bank, company,
or other organization to another entity. This document is a contract that protects the lender from the risk
of the borrower not paying the full amount agreed to by both parties. A promissory note provide a clear,
enforceable promise to pay,which is critical for business loans and credit arrangements. Promissory notes
normally are agreed on flexible terms in that they allow for customized repayment plans, which can be
tailored to fit various financial agreement which signifies a formal, binding commitment to repay a debt,
which can enhance trust between parties. Lastly, they offer legal protections for both parties, ensuring that
the lender can enforce the note if necessary.
17
Section 89 (1)
Promissory notes are still widely used in business transactions to formalize agreements and ensure
payment obligations. For example, in Fielding & Platt Ltd v Najar18, the court upheld the enforceability
of promissory notes issued by the Managing Director of a Lebanese company. They offer legal
protections for both parties involved. In Lloyd’s Bank Ltd v Bundy19, the court examined the legal
implications of a promissory note forged by a son to raise money from the bank. Promissory notes allow
businesses to extend credit and manage cash flow effectively. The case of Barclays Bank Plc v O’brien 20,
involved a promissory note given as part of a settlement agreement. They are still used in international
trade to secure payments and mitigate risks. The case of Sheikh Tahnoon Bin Saeed Bin Shakhboot AI
Nehayan v Loannis Kent,21 involved a dispute over a promissory note in a commercial transcation.
Conclusion
In essence, the negotiable instruments discussed above continue to play a pivotal role in the economy by
facilitating secure, reliable and flexible financial transactions. Their importance is underscores in contexts
where digital infrastructure is either not fully developed or where traditional methods provide legal and
financial advantages. Despite the rise of digital transactions, the simplicity and reliability of negotiable
instruments ensure they continue to play a vital role in financial dealings. Bills of exchange, cheque and
promissory notes continue to be a reliable and legally recognized methods of securing financial
obligations, even in the modern era.
18
CA 17 Jan 1969
19
[1975] QB 326
20
[1994] 1 AC 180
21
[2018] EWHC 333 (Comm)