LESSON 6

NEGOTIABLE INSTRUMENTS AND SECURITIES LAW

CONTENTS
1. Read the Study Text provided below
2. Attempt the reinforcing questions given at the end of the lesson
3. Compare your answers with those given in lesson 9
4. Read Chapters 10, 11, 12, 13, 14, and 15 of Hussain

STUDY TEXT

6.1 NEGOTIABLE INSTRUMENTS

6.1.1 Definition: A negotiable instrument cannot be defined with precision, but can be described as a
commercial document which represents money. It passes to a bonafide transferee free from
any defect.

6.1.2 EXAMPLES OF NEGOTIABLE INSTRUMENTS

The common examples of negotiable instruments are:

(a) Cheques—Read S.73 of the Bills of Exchange Act.

(b) Bills of Exchange—Read S.3 of the Bills of Exchange Act, Bearer debentures
(c) Promissory Notes—Read S.84 of the Bills of Exchange Act.
(d) Share warrant, dividend warrant.

The above documents acquired their negotiability by commercial usage in England, which was codified
in 1882 in the Bills of Exchange Act 1882.

This Act was introduced in Kenya on 14th May, 1927, and is the current law relating to negotiable
instruments. There are other negotiable instruments in commercial use but they are irrelevant for the
purposes of these notes.
6.1.3 ADVANTAGES OF NEGOTIABLE INSTRUMENTS:

(i) A negotiable instrument provides a creditor with a better remedy, because, once it has been issued
(or accepted where applicable) it settles the amount of the debt owing and makes a legal remedy
easier to obtain than would have been the case under an ordinary contract. For example, there is no
need to explain the terms of the contract which creates the debt.

(ii) A negotiable instrument may be discounted. Thus anybody who holds the instrument, and is
entitled to claim the money on due date, can discount it by taking it to a bank or discounting
house. The bank will in many cases, be willing to take the instrument off the holder's hands, pay
him the agreed value and collect the money when due.

(iii) A negotiable instrument can be negotiated. Anyone who holds a negotiable instrument, such as a
bill of exchange, can transfer it to a creditor in payment and the payee could, if he chose, use it in
this manner to settle his debt with another party.

6.1.4 CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS:

(i) If made payable to bearer, the title to it is negotiable by delivery. If made payable to order, the
title to it passes by endorsement and delivery. Read Sec.31 (2) and 31 (3) of the Bills of Exchange
Act.

(ii) No notice of the transfer is required to be given to the person liable on the instrument.

(iii) The holder in due course may sue on the document in his own name if it becomes necessary, and
is not affected by the privity of contract rule.

(iv) Valuable consideration for it may be constituted by "an antecedent debt or liability" and the
common law rule against past consideration does not apply. Read Sec. 27 (1) of the Act.

NOTE: If the brothers-in-law in Re McArdle had given their sister-in-law a promissory note or bill
of exchange payable after the death of their mother, they would have been liable to her and
ordered to pay the £488.

(v) A bona fide transferee of a negotiable instrument takes it free from any defects in the title of the
transferor, and the common law rule "nemo dat quod non habet" does not apply to negotiable
instruments, unless the instrument is a cheque crossed "not negotiable".

6.1.5 BILLS OF EXCHANGE

A bill of exchange is defined by Section 3 of the Bills of Exchange Act as:

"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 or to the order of a specific person or to bearer".

£100 Nairobi, 1st November 1993

Sixty days after date pay to the order of Tom Ochieng the sum of one hundred pounds for value received.

To: Paul Kamau Signed:

P O Box 595758
NAIROBI John Onyango
6.1.6 PARTIES TO A BILL

The various parties to a bill are:

(a) The drawer (John Onyango)

(b) The drawee (Paul Kamau)
He becomes the acceptor by writing his name across it.
(c) The payee (Tom Ochieng).

6.1.7 REQUISITES IN FORM

To conform to the statutory definition the document alleged to be a bill of exchange must be:

(a) Unconditional. For example, if the drawer stipulates 'provided that the receipt form at the foot
hereof is duly signed', this is not a bill of exchange since there is a condition imposed: Bavins,
Junior and Sims v London and South Western Bank Limited.

(b) An "order". To say "I shall be pleased if you will pay .... " is not an order but a mere request, but
the expression "please pay..." is a polite order.

(c) "In writing". This includes print and typewriting.

(d) "Signed" by the drawer. However, a person's signature can be put to a bill by his agent.

(e) An order "to pay". S.3(2) provides that "which orders any act to be done in addition to the
payment of money is not a bill of exchange."

(f) An order to pay a sum "certain in money". S.9 provides that pay a sum is certain within the
meaning of the Act, although it is required to be paid:

(i) with interest;

(ii) by stated instalments;
(iii) by stated instalments, with a provision that upon default;
(iv) according to an indicated rate of exchange or according to a rate of exchange to be
ascertained as directed by the bill. S10(1) provides that a bill is payable on demand, or at
sight, or "on presentation"; or
(v) in which no time for payment is expressed.

(h) Payable "at a fixed or determinable future time; if it is not payable on "3 months after the date"
(i.e. after the date of the bill) or "30 days after.

This maturity date of the bill may be fixed by reference to the occurrence of some event and this
will be valid, provided the event is something that is "certain to happen" e.g. 3 months after my
death". If the event is not certain to happen (e.g. "3 months after I marry") the document will not
be a bill of exchange, and the occurrence of the event will not make it valid.(S. 11 (2))

(j) Expressed to be made "to bearer", (payable to order). This means that the holder of the bill when
it is duly presented for payment i.e. the bill specifies no particular payee, or the only or last
endorsement thereon is "in blank" (s.7).

(k) Payable "to or to the order of" a named payee.

6.1.8 THE PAYEE

(i) Section 7(1) provides that where a bill is not payable to the bearer, the payee must be named
otherwise indicated therein with reasonable certainty.

(ii) Section 7(3) provides that where the payee is a fictitious or non existent person, the bill may be
treated as payable to bearer.

(iii) Section 7(2) provides that a bill may be drawn payable to two or more payees jointly, or be drawn
payable to one of two (or several) payees.

(iv) Section 7(2) also provides that a bill may be drawn payable to the holder of an office.

6.1.9 THE DRAWEE

The following points about the drawee should be noted. S.4(2) (a) provides that:

(i) Where the drawee is dead or bankrupt, or is a fictitious person, or a person not having the capacity
to contract, the holder may treat it as dishonoured by non-acceptance.

(ii) Where the drawee is not indicated with reasonable certainty, but someone "accepts" it, the
instrument may be treated as a promissory note Mason v Lack

(iii) S.6(2) provides that a bill may be addressed to two or more drawees, whether they are partners or
not but an order addressed to two drawees in the alternative, or to two or more drawees in
succession, is not a bill of exchange.

6.2.10 ACCEPTANCE

1. Meaning

The term "acceptance" used in relation to bills of exchange has a special meaning.

Acceptance of a bill of exchange is the signification by the drawee that he accepts the order of the
drawer to pay over the sum stated to the payee. A bill of exchange is used by a debtor to settle his
account with his creditor but, being an order to someone else to pay the sum stated (as opposed to
a promise by the drawer to pay), the creditor is not normally going to take the bill in settlement
unless the drawee acknowledges that he will meet the bill (and, in addition, is a person of
substance); until he does make such acknowledgement, the drawee is under no liability on the bill.

In practice, the bill is normally handed to the payee to present it to the drawee for acceptance. If
the drawee agrees to pay the bill, he will sign his name across it, and by that act he accepts the
liability to meet the bill when it is duly presented for payment.

2. Rules Relating To Acceptance

(a) Presentment for Acceptance

Although a bill must be presented for acceptance and be accepted by the drawee in order to
render him liable on the bill, it is not in fact necessary, as a general rule, for the holder of a
bill to present it for acceptance. He can hold on to it, unaccepted, until maturity or he can
negotiate to a third party, although a bill that has not been accepted will in practice be
much harder to pass on for value.
 The only occasions when the Act actually stipulates that a bill must be presented for
acceptance are :

(i) Where the bill is payable at a certain period "after sight". In this case, the bill must
be presented for acceptance in order to fix the maturity date.

(ii) Where the bill expressly stipulates that is shall be presented for acceptance.

(iii) Where the bill is drawn payable elsewhere than at the residence or place of business
of the drawee. (Section 39).

In the case of (i) above, section 40 of the Act qualifies the above, in that the holder of a bill
payable "after sight" need not present it for acceptance if he is able to negotiate it to a third
party within a reasonable time of it coming into his hands. But if he fails either to present
the bill for acceptance or to negotiate it within a reasonable time, then the drawer and all
endorsers prior to the holder will be discharged from liability.

S.41 (1) provides that a bill is presented for acceptance which is presented in accordance
with the following rules-

(i) the presentment must be made by or on behalf of the holder to the drawee or to
some person authorised to accept or refuse acceptance on his behalf at a reasonable
hour on a business day and before the bill is overdue;

(ii) Where a bill is addressed to two or more drawees, who are not partners, presentment
must be made to them all, unless one has authority to accept for all, then
presentment may be made to him only;

(iii) Where the drawee is dead, presentment may be made to his personal representative;

(iv) Where the drawee is bankrupt, presentment may be made to him or to his trustee;

(v) Where authorised by agreement or usage, a presentment through the post office is
sufficient.

(b) Requisites of Acceptance

S.17 (2) provides that an acceptance is invalid unless it complies with the following
conditions:

(i) It must be written on the bill and be signed by the drawee; the mere signature of the
drawee without further words is sufficient.

(ii) It must not express that the drawee will perform his promise by any other means
than the payment of money.

Acceptance is incomplete and revocable and does not bind the acceptor, until the bill has
been delivered—that is to say, handed back to the person presenting it.
 In Baxendale v Bennett: The defendant received from H a draft in blank as to the drawer's
name, writtten in H's handwritting. The defendant wrote his name across the draft as
acceptor and sent it to H who, finding he did not need it, returned it to the defendant. The
defendant placed it in an unlocked drawer in his chambers in the Temple, from which it
was taken. When it came into the hands of the plaintiff, a bona fide holder for value, the
document had been completed by the insertion of the name of W. Cartwright as the drawer.
No such person as Cartwright was known to the defendant, and the name was inserted
without his knowledge or consent. It was held that the defendant was not liable on the
document, as, although he had accepted it, he had not delivered it.

3. Dishonour by Non-Acceptance

If the drawee is not prepared to meet the bill, he will return it to the holder with a note to this
effect, and the bill is then said to be dishonoured by non-acceptance. The holder then knows that
the debtor has given him a valueless scrap of paper, and will commence proceedings against him
(the debtor, the drawer of the bill, not the drawee) to recover his debt. Technically, such action is
not an action on the debt but an action on the bill, for in drawing the bill the drawer "engages that
in due presentment it will be accepted and paid according to its tenor and that if it is dishonoured
he will compensate the holder..." (Section 55(1)).

In certain circumstances, the bill can be treated as dishonoured by non-acceptance without ever
having been presented for acceptance. These circumstances are:

(a) Where the drawee is dead or bankrupt.

(b) Where the drawee is a fictitious person.
(c) Where the drawee is a person not having the capacity to contract.
(d) Where, after the exercise of reasonable diligence, such presentment cannot be effected.
(e) Where, although the presentment has been irregular, acceptance has been refused on some
other ground.

4. Qualified Acceptance

It may be that the drawee is prepared to accept the bill but only subject to some modification. Any
acceptance that varies the effect of a bill as originally drawn is termed as a qualified acceptance. A
qualified acceptance may be any of the following:

(a) Partial
An acceptance to pay only part of a bill; e.g. a bill drawn for the amount of £5,000 may be
accepted for £4,000 only.

(b) Local
An acceptance to pay the bill only at a certain place; or if the acceptor stipulates that he
will pay the bill at this place only, and nowhere else.

(c) Conditional
An acceptance to pay the bill only at a certain place; the acceptor stipulates that he will pay
the bill on delivery of the bills of landing.

(d) Qualified as to time

An acceptance to pay a bill drawn payable after one month, only after six months.

(e) Acceptance by some only of several drawees

An acceptance will be construed as general unless clearly qualified, the acceptance being
construed most strongly against the acceptor (Smith v Vertue).
 If the holder of the bill takes such a qualified acceptance, this has the effect in most cases
of discharging from liability all prior parties to the ball except in so far as any prior party
does not object. In the case of a partial acceptance, prior parties are only discharged if the
holder fails to give notice that he has taken the qualified acceptance. They have no right to
object thereto. On the other hand, the holder of a bill who is offered only a qualified
acceptance is entitled to reject it and to treat the bill as dishonoured by non-acceptance.

6.1.11 TRANSFER OF BILLS OF EXCHANGE (NEGOTIATION)

1. Manner of Transfer

One of the features of bills of exchange is that where A gives B a bill accepted by X in settlement
of his debt, this same instrument may be passed on by B to C in settlement of a debt between them
—both B and C relying on the credit of X. The transfer of a negotiable instrument is termed as
"negotiation", and Section 31 of the Act provides as follows:

(a) A bill is negotiated when it is transferred from one person to another in such a manner as to
make the transferee the holder of the bill.

(b) A bill payable to order is negotiated by the endorsement of the holder completed by
delivery.

Transfer of the instrument in this way is enough to vest the property represented thereby in the
transferee and no further formality is required.

Where an order bill is transferred without the endorsement of the transferrer, the transferee is
entitled to call for the missing endorsement to complete this title.

Until this is done, he holds the bill subject to any defence that could be raised against the
transferor's and the endorsement will not have any defect in the transferor's title of which the
transferee had notice before the endorsement was obtained (Whistler v Forster).

The following points should be noted on the question of endorsement:

(a) The endorsement must be written on the bill itself (usually on the back) and signed by the
endorser (Section 32). It usually consists of the words "Please Pay ..." (then the name of the
endorsee) followed by the signature of the endorser. The simple signature of the endorser
on the bill, without additional words is sufficient and is called endorsement "in blank".

(b) An endorsement should always correspond with the drawing. In Slingsby v District Bank
Limited it was held that a bill payable to "AB per X" must be endorsed "AB per X" and not
"X". (Where the endorsee's name is incorrectly spelt, he should endorse in the incorrect
spelling.)

(c) An endorsement cannot purport to split the bill. If the endorser directs that only part of the
bill is to be payable to the endorsee, or that the bill is to be paid to two or more endorsees
severally, the endorsement is inoperative.

(d) Where the bill is payable to two or more payees or endorsees not being partners, all must
join in the endorsement.

(e) No endorsee is specified in an endorsement in blank, and a bill so endorsed becomes

payable to bearer (Section 34 (1)).

(f) A "special" endorsement specifies to whom, or to whose order, the bill is to be payable
(Section 34 (2)).
 It is however, important to note that a bill payable to order can be changed into a bearer bill
by the holder's endorsing it "in blank" can be converted back to an order bill by the holder
adding the name of a particular person to the blank endorsement.

(g) A "restrictive" endorsement is one which prohibits further negotiation of the bill. If a holder
endorses a bill "pay AB only", this operates to destroy the negotiability of the bill, so that
no person taking the bill thereafter can be "a holder" in due course. Such endorsement, as it
appears, operates to prohibit further transfer of the bill, so that no person taking a bill so
endorsed will obtain a title to it even if the transferor's title was perfectly in order.

(h) Conditional endorsement.

2. Transferor's Title (Holder in Due Course)

The position of the transferee of a bill of exchange depends to a large extent on whether or not he
is 'holder in due course'.

(a) Holder in Due Course

Section 29 of the Act defines "a holder in due course" as "a holder who has taken a bill,
complete and regular on the face of it, under the following conditions:

(i) That he became the holder of it before it was overdue and without notice that it had
been previously dishonoured, if such was the fact.

(ii) 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 the title of the person who
negotiated it.

(b) holder for value

This is a holder of a bill of exchange who has actually provided or who is deemed to have
provided consideration on it.

(c) Rights of Holder in Due Course

A holder in due course enjoys the following privileges:

(i) He holds the bill free of prior defects.

(ii) He can pass on this perfect title to a subsequent transferee.
(iii) He can sue on the bill in his own name.

(c) Holder or Other Holder in Due Course

The holder of a bill of exchange who does not come within the statutory definition of a
holder in due course holds the bill subject to prior equities and his title may be upset if the
title of prior holder was defective; he does have remedies against intervening parties, but
the general rule of "nemo dat quod not habet" applies.

Where the bill has been endorsed by a holder in due course after the defect of title arose,
any person holding the bill thereafter will not be affected by the defect and will enjoy a
perfect title to the bill.
6.1.12 INLAND AND FOREIGN BILLS

1. Distinction between Inland and Foreign Bills

An "inland" bill is defined by S.A(1) as "a bill which is or on the face of it purports to be:

(a) both drawn and payable within East Africa or

(b) drawn within East Africa upon some person resident therein.

The section further provides that "any other bill is a foreign bill".

S.4 (2) provides that "unless the contrary appear on the face of the bill the holder may treat it as an
inland bill". S. 4(3) defines "East Africa" as Kenya, Tanganyika, Uganda and Zanzibar.

6.1.13 BILLS IN A SET

In order to facilitate the international use of bills of exchange, the bill may be drawn in a set of two or
more parts. Each part appears as a bill, but is numbered and contains a reference to the other parts and the
whole of the parts constitutes the whole bill. The different parts of the bill are sent to the drawee by
different posts so as to ensure safe arrival of at least one part. The first part to arrive is accepted, and the
other parts when they arrive in due course are attached to the first part.

There are obvious dangers in this practice, and S.71 makes a number of provisions to deal with the
situation:

(a) Acceptance should be written on one part only, and if the drawee accepts more than one part and
various accepted parts get into the hands of different holders in due course, the acceptor will, be
liable on each such part as if it were a separate bill.

(b) When the acceptor of a bill drawn in a set pays it without requiring the part bearing his acceptance
to be delivered up to him, and that part at maturity is outstanding in the hands of a holder in due
course, he is liable to the holder thereof.

(c) Where the holder of a bill drawn in a set endorses two or more parts to separate persons, he is
liable on every such part, and every endorser subsequent to such holder is liable on the part he has
endorsed.

(d) Where two or, more parts of a set are negotiated to different holders in due course, the holder
whose title first accrues is, as between such holder, deemed the true owner of the bill. This
provision, however, is not to affect the rights of a person who in due course accepts or pays the
part first presented to him.

6.1.14 DISCHARGE OF BILL

A bill is said to be discharged when all rights of action on it are extinguished.

A bill may be discharged in any of the following ways:

(a) "Payment in due course", (S.5 (a)). This means "payment made at or after the maturity of the bill
to the holder thereof in good faith and without notice that his title to the bill is defective" (S.59 (1)
(b)).

(b) Acceptor the holder at maturity

When the holder of a bill is or becomes the holder of it at or after maturity in his own right. This is
known as a merger.

(c) Non-presentation for payment

 (d) Renunciation or waiver

When the holder of bill at or after its maturity, absolutely and unconditionally renounces his rights
against the acceptor. (S. 62 (1)). This is known as "waiver".

(e) Cancellation

Where a bill is intentionally cancelled by the holder or his agent, and the cancellation is apparent
thereon (S.63 (1)). S. 64 (1) provides that where a bill or acceptance is materially altered without
the assent of all parties liable on the bill, the bill is avoided, except against a party who has
himself made, authorised or assented to the alteration, and subsequent endorsers.

(f) Material alteration – Section 64(1) of the Act.

6.1.15 ACCOMMODATION BILLS

An accommodation bill is a bill drawn, accepted, and put in to circulation without any consideration
passing.

An accommodation party to a bill is a person who has signed a bill as a drawer, acceptor or endorser
without receiving value therefore, and for the purpose of lending his name to some person.

An accommodation party is liable on the bill to a holder for value; and it is immaterial whether, when
such holder took the bill, he knew such party to be an accommodation party or not.

6.1.16 NOTING AND PROTESTING

"Noting" or "protesting" of a bill occurs in the event of a bill of exchange being dishonoured.

(i) Noting the bill is making of a minute by a Notary Public, who has to present the bill either at the
acceptor's office if it is made payable there, and if made payable at a bank then to that bank, and
gets the answer given for non-payment of the bill. Then he affixes to the bill a slip of paper which
has briefly typed (or written) on it the fact that he presented this bill to "......" and that it was
dishonoured by non-payment with answer (specified). He then appends his signature and affixes a
stamp, this being the stamp required on a legal document.

(ii) "Protest" is a more formal form of noting. Sections 51 (7) provides that a protest must contain a
copy of the bill, and must be signed by the notary making it, and must specify:

(a) the person at whose request the bill is protested;

(b) the place and date of protest, the cause or reason for protesting the bill, the demand made,
and the answer given, if any, or the fact that drawee or acceptor could not be found.

6.1.17 REFEREE IN CASE OF NEED

The drawer of a bill and any endorser may insert the name of a person on the bill to whom the holder of
the bill may resort in the event of a bill being dishonoured. The holder has the option whether or not he
will obtain payment from the referee in the case of need, but if he does so the bill must be noted before
the action is taken.

When the drawee of a bill refuses to accept a bill of exchange, some other person may step in and offer to
accept the bill in his place for the honour of the drawer or an endorser. This can only be done if the
following conditions are satisfied.
 (a) The holder agrees to such acceptance.
(b) The bill is not overdue.
(c) The person accepting "for honour" must not already be a party to the bill.
(d) The bill must first be noted or protested.

The acceptance must show clearly that it is an acceptance for honour and should indicate the person for
whose honour he accepts. If no person is named, it is presumed to be for the drawer's honour.

The acceptor for honour engages that he will, on due presentment, pay the bill according to the tenor of
his acceptance if it is not paid by the drawee, provided that it has been duly presented for payment, and
protested for non-payment, and that he receives notice of these facts. He is liable to the holder of the bill
and to all parties to the bill subsequent to the party for whose honour he has accepted.

If an acceptor honour pays, his rights are those of a payer for honour.

When a bill is dishonoured by non-payment, any person may intervene and pay it supra protest for the
honour of any party liable thereon. Before such payment is made, the bill must be noted and protested and
the protest must be attended by a declaration on the part of the person making payment that he is paying
the bill for honour and for whose honour he is paying.

Where the bill is paid for honour in this way, all parties subsequent to the party for whose honour the bill
is paid are discharged, but the person making payment for honour is subrogated to the holder (stands in
his place, with the same rights and duties) as regards the party for whose honour he has paid and all prior
parties liable to that party.

6.1.18 MEASURE OF DAMAGES

In the event of a bill being dishonoured, the holder and, in turn, every other party to the bill who is
compelled to pay it, may recover from any proceeding party liable:

(a) The amount of the bill.

(b) Interest by way of damages, such interest to be calculated from the date of presentment for
payment if the bill is payable on demand, and from the date of maturity of the bill in any other
case.

(c) The expenses of noting and (if necessary) protesting the bill.

6.1.19 LOST BILLS

Section 6a provides:

(1) "Where a bill has been lost before it is overdue, the person who was the holder of it may apply to
the drawer to give him another bill of the same tenor, giving security to the drawer, if required, to
indemnify him against all persons whatever in case the bill alleged to have been lost is found
again.

(2) If the drawer on request as aforesaid refuses to give such duplicate bill, he may be compelled to do
so." As it is possible that the lost bill may get into the hands of some person who takes it
innocently, it is possible under certain circumstances for the drawer to be called upon to pay both
the original and the duplicate instrument. It behoves him, therefore, to satisfy himself before he
issues a duplicate that the original is in fact lost or destroyed and, in addition, to see that adequate
security is granted to him against the eventuality.

6.1.20 OVERDUE BILLS

A bill is overdue:
 (a) In the case of a bill payable 'on demand', when it has been in circulation for more than a
reasonable length of time. What is a reasonable time is a question of fact to be determined in each
case.
(b) In the case of a bill payable on a fixed or determinable future date, prima facie on that date.
However, three "days of grace" are always added (unless the bill is drawn 'without grace'), so that
a bill prima facie payable on 24th February will not in fact be deemed to be overdue until 28th
February. In this connection:

(i) If the last day of grace is a Sunday, Good Friday, Christmas Day or a Day of Public
Thanksgiving, the bill is due on the preceding day at the latest.

(ii) If the last day of grace is a Bank Holiday, then the bill is due on the next succeeding day at
the latest.

In calculating days, the day from which the time starts to run is excluded but the day of payment is
included, so, "10 days after date", the bill being dated on Ist July, plus 3 days of grace, i.e. to 14th
July. If the period for maturity is expressed in months, this means calender months. A bill dated
31st January due one month after date will fall due on 28th or 29th February; as the case may be,
but adding days of grace on, the 3rd of March in either case. A bill dated 31st January and payable
"30 days after date" will be due on 2nd March in an ordinary year and Ist March in a leap year,
again, with three days of grace to be added.

6.2 CHEQUES

6.2.1 DEFINITION

S.73 of the Bills of Exchange Act defines a cheque as follows:

"A cheque is a bill of exchange drawn on a banker payable on demand"

6.2.3 REQUISITES IN FORM

A cheque, being a bill of exchange, must conform to the requisites prescribed by the Bills of Exchange
Act as necessary to constitute a bill, namely:

It must be unconditional.

Instruments which require as a condition of payment the signing of a particular form of receipt are
not cheques: Bavins, Junior and Sims v London and South Western Bank.

However, where the condition is not imposed on the drawee or banker but is addressed to and
affects only the payee or holder, this does not make the cheque conditional.

In Bavins, Junior and Sims v London and South Western Bank Limited the Court of Appeal
(England) had to deal with an instrument in the form of a cheque given to the plaintiffs by the
Great Northern Railway Company for work done. The instrument read as follows:

"The Great Northern Railway Company No.1 Accountants drawing account London, 7 July 1898,
the Union Bank of London Limited ... Pay to J. Bavins Jnr and Sims the sum of sixty-nine pounds
seven shillings, provided the receipt form at the foot hereof is duly signed, stamped and dated
£69 7s".

It was held that the instrument was not a cheque within the definition given by the Bills of
Exchange Act, 1882 (which is the identical with the Kenya Bills of Exchange Act) because it was
not an unconditional order. The bank was not to pay the instrument unless the receipt was signed.

The bank lost its protection because the instrument was not a cheque and had been collected by
the bank for a person who had stolen it. The bank was liable in conversion to the true owner,
 Bavins.

NOTE:

(i) Bankers usually obtain an indemnity from customers having receipt forms on their
cheques. This indemnity protects the bank if it incorrectly treats an instrument requiring a
receipt as a cheque, although the bank should be protected by the Cheques Act, 1968.

(ii) Receipts on the backs of cheques are not common now because of S.4(2) of the Cheques
Act 1968 which provides that a prescribed instrument which is not endorsed but which
appears to have been paid by the banker on whom it is drawn is evidence that the payee
has been paid by the banker the sum of money specified in the instrument.

(iii) Where receipts are used they must, by reason of banking practise, carry a large "R" on the
face because bankers are not required to look for endorsements on cheques under the
Cheques Act 1968. Furthermore, if an unconditional instrument was not regarded as a
cheque a banker should still be protected by the Cheques Act, 1968 since it protects a
banker who collects an instrument which is not a cheque or pays an instrument which is
not.

In Nathan v Ogdens Limited (1906) the instrument had printed on its face the words "The receipt
at the back hereof must be signed, which signature will be taken as an endorsement of the cheque".

It was held that the order to pay was unconditional and therefore the cheque was valid. The words
could be taken as addressed to the payee and not to the bank.

It must be an order.

A cheque must be an order; it must be imperative in its terms, not precative, though the insertion
of mere terms of courtesy will not make it precative.

It must be addressed by one person to another

A cheque must be addressed by one person to another. There must be one person as drawer,
another, a bank, as drawee.

The head office and branches of a bank constitute for this purposes only one legal entity. It is for
this reason that drafts by one branch of a bank on another branch or head office are not cheques or
bills so far as the bank is concerned. This was explained in London City and Midland Bank
Limited v Gordon.

. It must be signed by the person giving it

Under S.23 of the B.E.A. "no person is liable as drawer, endorser or acceptor of a bill who has not
signed it as such". Section 24 of the Act further provides that a forged signature on a bill is
"wholly inoperative": unless the party against whom it is sought to retain or enforce payment of
the bill is precluded from setting up the forgery.

If must be payable "on demand"

S.10 of the Bills of Bills of Exchange Act provides that a bill is payable on demand:

(a) which is expressed to be payable on demand or at sight or on presentation; or

(b) in which no time for payment is expressed. Because a cheque is payable on demand, it
 cannot be "accepted": Punjab National Bank v Bank of Baroda.

The sum payable must be a sum "certain in money"

Section 9 provides that the sum payable by a bill of exchange is a sum certain within the meaning
of the Act although it is required to be paid:
(a) with interest;

(b) by stated instalments;

(c) by stated instalments, with a provision that upon default in payment of any instalment the
whole shall become due;

(d) according to an indicated rate of exchange or according to a rate of exchange to be

ascertained as directed by the bill.

S.9 (2) also provides that where the sum payable is expressed in words and also in figures, and
there is a discrepancy between the two, the sum denoted by the words is the amount payable.

It must be payable to, or to the order of, a specified person.

This provision is already explained in paragraph 6.1.8. However, cheques are sometimes drawn
"pay cash". "Cash" cannot be a payee but bankers generally treat cheques so drawn as payable to
bearer after the holder has endorsed it in blank.

6.2.3 DIFFERENCES BETWEEN CHEQUES AND OTHER BILLS OF EXCHANGE

The following are some of the differences between cheques and other bills of exchange:

(a) A cheque is drawn on a drawee called "banker" and cannot be drawn on any other drawee.

A bill of exchange which is not a cheque can be drawn on anybody, whether an individual, a firm
or a body corporate.

(b) A cheque is payable on demand and cannot be paid at a fixed or determinable future time.

A bill of exchange which is not a cheque can be drawn payable at a fixed or determinable future
time.

(c) Because it is payable on demand, a cheque cannot legally be accepted by the drawee: Bank of
Baroda v Punjab National Bank.

A bill of exchange other than a cheque can be accepted if it is not drawn payable on demand but is
payable at a fixed or determinable future time.

(d) A cheque can be crossed while other bills of exchange are not legally crossed.

6.2.4 NON-PAYMENT OF CHEQUES:

A banker's authority to pay a cheque will be determined or terminated by:

(a) Countermand of payment, under s.75 (a).

The Act does not prescribe the mode in which the countermand is to be effected. It may therefore
be done orally or in writing. However, as a means of obtaining the evidence of the countermand,
bankers usually require a written notice.
 A cheque is countermanded when the drawer instructs the bank not to honour the cheque when
presented for payment. To be effective, therefore, the notice must be given to the banker before
the cheque is paid. If, despite the countermand, the bank pays the cheque, it will be liable to
refund the money to the drawer: Burnett v Westminster Bank Limited.

(b) Notice of the customer's death

Cheques drawn by a customer before his death are valid but as a precaution the banker will not
honour them.

(c) the customer’s account has insufficient funds

(d) Notice of the presentation of a bankruptcy petition against the customer.

This terminates a banker's authority because of technical reasons under the Bankruptcy Act.

(e) Where the cheque has been altered.

(f) Where the cheque is irregular

(g) Garnishee Order

A Garnishee Order is an order of the Court to a bank manager freezing the account of a customer
till further notice from the court.

(h) Insanity of the drawer.

6.2.5 RELATIONSHIP BETWEEN BANKER AND CUSTOMER:

The relationship between a banker and the customer is a debtor-creditor relationship which was
articulated in the leading case of Joachimson v Swiss Bank Corporation and may be summarised as
follows:

(i) If the account reflects a credit balance, the banker is a debtor and the customer a creditor of the
bank.

(ii) If the account reflects a debit balance, the customer is the debtor and the banker a creditor of the
customer.

The banker as a debtor is not under any legal obligation to repay the "loan" unless and until an effective
demand for repayment is made by the customer.

6.2.6 CROSSED CHEQUES

A crossing on a cheque may be general or special.

(a) General Crossing

S.76 (1) provides that where a cheque bears across its face an addition of:

(a) The words "and company" or any abbreviation thereof between two parallel transverse
lines, either with or without the words "not negotiable", or ;

(b) two parallel transverse lines simply, either with or without the words "not negotiable", that
 addition constitutes a crossing, and the cheque is crossed generally"

The following are the general crossings provided for by this provision:

(b) Special Crossing

S.76 (2) provides that "where a cheque bears across its face an addition of the name of a banker,
either with or without the words "not negotiable", that addition constitutes a crossing, and the
cheque is crossed specially and to that banker".

The following are examples of Special Crossing:

for collection Pay to A. Bank

signed:
National Bank of Kenya
Harambee Avenue
Nairobi
 S.77 provides that:

(a) A cheque may be crossed generally or specially by the drawer.

(b) Where a cheque is uncrossed, the holder may cross it generally or specially.

(c) Where a cheque is crossed generally, the holder may cross it specially.

(d) Where a cheque is crossed generally or specially the holder may add the words "not
negotiable".

(e) Where a cheque is crossed specially, the banker to whom it is crossed may again cross it
specially to another banker for collection.

(f) Where an uncrossed cheque, or a cheque crossed generally, is sent to a banker for
collection, he may cross it specially to himself.

The essence of a general crossing are the two parallel transverse lines while the essence of a
special crossing is the addition of the name of a banker.

6.2.7 EFFECT OF A CROSSING

The effect of the various crossings are as follows:

(i) The "Not Negotiable" Crossing

"The "not negotiable" crossing is often misunderstood, many people believing that a cheque so
crossed is not transferable, but payable only to the payee through his banker. Even Lindley L. J., in
National Bank v Silke (1891), uses words which might be so interpreted. "Not negotiable" is
often intended to mean not transferable, and it is only by reference to S.81 (of the Bills of
Exchange Act) that the true effect of the crossing is arrived at. The effect is that the cheque
remains transferable, but is deprived of the full character of negotiability. However honestly
and for value a transferee may take it, he cannot acquire any better title to the cheque or its
proceeds, or any better right against any prior party to it, than his transferor had. So long as there is
no defect of title, or failure of consideration the cheque may pass from hand to hand just as if it
was an open cheque or a simply crossed cheque, and each successive holder acquires full rights
and title thereon". (Paget's Law of Banking, 8th Edition, pp:250 - 251).

In Great Western Railway Company v London and County Banking Company (1900) Lord
Lindley stated:

"Everyone who takes a cheque marked 'not negotiable' takes it at his own risk, and his title to the
money got by its means is a defective as his title to the cheque itself... Whether the (title to)
cheque was void or only voidable ... appears to me really immaterial. Be it void or be it voidable,
it was not negotiable; and by s.81 of the Bills of Exchange Act Higgins (the holder) was not
capable of giving a better title to the cheque than he had himself."

However, it should be noted that the words "not negotiable" have no statutory effect unless
combined with one of the regular crossings. A cheque bearing these words without one of the
regular crossings is not a crossed cheque.

In Wilson and Meeson v Pickering the plaintiffs drew a cheque in blank after crossing it 'not
negotiable'. They told the secretary to write in X's name as payee and a specific amount. The
secretary dishonestly wrote in the defendant's name and a larger amount and gave it to him in
settlement of her personal debt. It was held that, as the Secretary had no title to the cheque, the
defendant had also no title to the cheque and, despite his innocence, he must refund to the plaintiff
 the money which he had been paid by the plaintiff's bankers.

(ii) The "Account Payee" Crossing

"Words such as 'account payee', 'account of A.B' are frequently added to the crossing of a cheque.
They are in no way authorised or recognised by the Bills of Exchange Act... National Bank v
Silke (1891) shows that such an addition to the crossing does not prevent the cheque from being
transferable ... It may, however, be briefly stated here that, apart from the possible question of the
duty of the paying banker where these words are found together with endorsements—an obviously
inconsistent combination—the words only constitute a direction to the collecting banker,
signifying the account to which the proceeds of the cheque when received are to be placed,
which he disregards at his peril. If received by that banker for anyone other than the customer
indicated, such receipt is not 'without negligence', and excludes the banker from the protection of
S.82 (of the bills of Exchange ... even though the crossed cheque be payable to 'A.B. or bearer'.
(Paget's Law of Banking, 8th Edition, p.256 - 257).

In Bevan v National Bank, Limited it was held that it would be negligence to take a cheque
marked 'account payee' for an account other than that of the payee.

In Morison v London County and Westminster Bank Limited Lord Reading stated:

"The words 'account payee' ... are only to be found on the crossed cheques made payable to Abbot
or Order or Abbott or bearer, defendants or bearer and defendants or order. The words
'account payee' are a direction to the bankers collecting payment that the proceeds when collected
are to be applied to the credit of the account of the payee designated on the face of the cheque".

The now general practice of bankers, except where the customer is undoubted, is to collect crossed
cheques marked 'account payee' for the account of the payee designated on the face of the cheque
and not for any other account.

(iii) "Account 'Payee' Only" Crossing

"It would seem to follow, ... that the only meaning which can be given to the word 'only' is that it
requires the paying banker to pay the payee only, in account, which would mean that the
collecting banker must indemnify the paying banker either specifically or pursuant to the general
agency arrangements between the banks. The same effect could, of course, be reached by drawing
the cheque in favour of the payee 'only'. On the whole, it would seem wise for banks to discourage
the use of the word "only" and for the drawer to be content with the protection afforded by the use
of "account payee" simply. In no sense is he justified in placing an extra burden on the banks".
(Paget's Law of Banking, 8th Edition, pp.259 - 260).

6.2.9 CROSSING A MATERIAL PART OF A CHEQUE

S.78 provides that "a crossing authorised by this Act is a material part of the cheque; it shall not be lawful
for any person to obliterate or, to add or to alter the crossing".

6.2.10 LEGAL PROTECTION OF BANKERS

1. Paying Banker
A paying banker is protected by the following:

(i) Bills of Exchange Act, S.60

(a) Subsection (1)

 (i) This subsection is concerned only with indorsement and affords no protection to the
banker where the customer's signature as Drawer is forged. An instrument
purporting to be a cheque, but to which the drawer's signature is forged, is not a
cheque at all, is not drawn on a banker and is outside the subsection altogether.

(ii) The protection conferred by the subsection is limited to "bills" and does not extend
to a banker's draft: London City and Midland Bank Limited v Gordon.

(iii) The words "deemed to have paid the bill in due course" are intended to equate the
person in possession of a cheque under a forged indorsement with a holder in due
course, and to protect the banker accordingly. This is a purely technical provision
since, as a matter of substantive law, a person in possession of a cheque under a
forged indorsement is, UNDER s.24 of the Bills of Exchange Act, neither payee,
indorsee nor bearer to whom a payment can ever be a payment in due course within
S.59(1). Section 24 declares total inefficacy of a forged indorsement to convey any
title or the right to give a discharge.

(b) Subsection (2)

(i) This subsection incorporates S.19 of the U.K. Stamp Act 1853 into the Bills of
Exchange Act and regulates the protection of the banker with regard to drafts or
orders which are not cheques or bills within the definition in the Bills of Exchange
Act.

(ii) It does not expressly require the payment to be made "in good faith" and in the
ordinary course of business".

2. (ii) Bills of Exchange, Act S.80

A banker paying a crossed cheque bearing a forged indorsement is protected against his
own customer and against the true owner of the cheque provided that he paid the cheque
IN GOOD FAITH AND WITHOUT NEGLIGENCE.

(iii) The Cheques Act 1968, S.3

The protection which this section offers is additional to that given by ss.60 and 80 of the
Bills of Exchange Act and, therefore, the banker is entitled to whatever advantage he can
gain from all or any. It specifically protects the banker in cases where the indorsement is
irregular or absent.
3. Collecting Banker

A collecting banker is protected by the following provisions:

(i) Bills of Exchange Act.

S.82 (1) provides that where a banker in good faith and without negligence receives
payment for a customer of a cheque crossed generally or specially to himself, and the
customer has no title or a defective title thereto, the banker shall not incur any liability to
the true owner of the cheque by reason only of having received such payment.

(ii) The Cheques Act, S.32 (2).

In Capital and Counties Bank Limited v Gordon the legal conception of the collecting
banker was that of a mere conduit pipe, receiving the cheque from the customer and then,
and not till then, placing it to the customer's credit, exercising function strictly analoguous
to those of a clerk of the customer sent to a bank to cash an open cheque for his
employer.

In that case the House of Lords held that the bank had not acted as such conduit pipe, had
not received payment for the customer but for itself and so lost the protection of S.82 of the
Bills of Exchange Act 1882, because it had credited the customer with the face value as
cash on receipt for collection and before clearing. This has been changed by S.82 (2) of
the Kenya Act.

(iii) The Cheques Act 1968 S.4

Unless the banker can bring himself within the conditions formulated by the section, he is
left with his common law liability for conversion or money had and received, in the event
of the person from whom he takes the cheque for collection having no title or a defective
title thereto.

In Turner v London and Provincial Bank Limited (1903) evidence was admitted, as
proof of negligence, that the customer had given a reference on opening the account and
that this was not followed up.

In Ladbroke & Company v Todd the bank was held negligent because they did not make
enquiries about a proposing customer. This was described as an ordinary precaution other
banks took—bankers or bank officials having given evidence that they made enquiries in
such cases.
6.3 PROMISSORY NOTES

6.3.1 Defination

S.84 (1) defines a 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". S.84 (2) provides that an instrument in the
form of a note payable to maker's order is not a note within the meaning of S.84 (1) unless and until it is
endorsed by the maker.

6.3.2 Specimen

The following is one form of promissory note:

Nairobi,
July 1, 1993

I promise to pay on demand XYZ or order the sum of £100 for value received.

Signed
AB.

6.3.3 Liability of maker

S.89 provides that the maker of a promissory note by making it:

(a) Engages that he will pay it according to its tenor; and

(b) Is precluded from denying to a holder in due course the existence of a payee and his then capacity
to endorse.

S.90(3) provides that the following provisions as to bills do not apply to notes namely, provisions relating
to:

(a) Presentment for acceptance;

(b) Acceptance;
(c) Acceptance supra protest;
(d) Bills in a set.

Where a foreign note is dishonoured, protest thereof is unnecessary.

6.4 Securities Law

6.4.1 Contracts of guarantee

A contract of guarantee or suretyship is a contract by one person to answer for the debt, default or
miscarriage of another. Whether a particular contractual promise constitutes a guarantee depends upon the
words used to express the intentions of the parties.

In order to understand the nature of guarantee, consider the following example.

Onyango is in need of some goods but does not have the money to pay for them. He asks Mutiso, a rich
friend of his, to go with him to Kamau's shop in order to persuade Kamau to sell the goods to him
(Onyango) on credit. Mutiso agrees and they go to Kamau's shop. In the course of their conversation with
Kamau Mutiso tells him:

"Let Onyango have the goods, and if he does not pay you, I will".

These words legally constitute a contract of guarantee and Mutiso is said to have guaranteed the credit
sale to Onyango.

The characteristics of a contract of guarantee are:

(a). There must be three parties: the creditor, the debtor and the guarantor or surety.

(b) There must be a primary liability in some person other than the guarantor; the guarantor must be
liable only secondarily, to pay if the debtor does not pay.

The assumption of personal liability is not essential in a guarantee. The provision of security is
enough: Re Conley.

(c) The guarantor is totally unconnected with the contract except by means of his promise to discharge
the debtor's liability if he does not do so.

(d) Must be evidenced by some note or memorandum.

6.4.2 Contracts of Indemnity

Indemnity is the undertaking of primary responsibility to see that a certain act is performed.

Whether a particular contractual promise constitutes an indemnity depends upon the words used to
express the intentions of the parties. If in the example given above Mutiso had told Kamau:

"Let Onyango have the goods, I will see you paid", these words would legally constitutes a contract of
indemnity.

A contract of indemnity differs from a guarantee in the following respects:

(a) There are only two parties.

(b) The person giving the indemnity is primarily liable and there is no secondary liability.

(c) The person giving the indemnity has some interest in the transaction apart from his indemnity.
6.4.3 Liability of the guarantor

A guarantor's liability does not arise until the principal debtor has made default, although notice of the
default need not be given to him unless it is expressly agreed to be given. It is not necessary for the
creditor to request the debtor to pay or to sue the debtor, unless this is expressly stipulated for, before
taking proceedings against him.

If the transaction is void as between the principal debtor and the creditor, the guarantor is not bound:
Coutts & Company v Browne-Lecky.

Similarly the guarantor is not bound if the principal debtor is discharged, e.g. by statute: Unity Finance
Limited v Woodcock (1963) 1W. LR. 455.

Any conditions precedent to the guarantor's liability must be fulfilled before recourse can be had to him.

If several guarantors have agreed to become co-sureties for definite amounts, and the creditor allows the
amounts to be altered by one guarantor without the consents of the others, the guarantee will not be
binding. This can be illustrated by the case of Ellesmere Brewery Company v Cooper (1896) 1&.B.75, in
which the facts, briefly, were as follows:

A firm of brewers employed C and required him to execute a bond with sureties for the faithful discharge
of his duties. The bond was drawn up with four sureties, N. and E. being liable to the extent of £50 each,
and P and B. to the extent of £50 each, and P and B to the extent of £25 each. P, B and E all signed, but
N, who was the last to sign, added "£25 only" to his signature. The brewers accepted the bond so signed.
It was held that none of the guarantors was liable on the bond.

6.4.4 Continuing guarantees

A continuing guarantee is a guarantee which extends to a series of transactions, and is not exhausted
by or confined to a single credit or transaction. The liability of the guarantor in such a case extends to all
the transactions contemplated until the revocation of the guarantee.

Whether a guarantee is continuing or not depends on the language of the guarantee, the subject-matter
and the surrounding circumstances. An example would be the guarantee of a company's overdraft by the
directors up to a specified limit during a given period, e.g. 2nd January to 31st December.

Guarantor's rights against the creditor

The rights of the guarantor are:

(a) At any time after the guaranteed debt has become due and before he has been asked to pay it, to
require the creditor to sue for and, collect the guaranteed debt: Rouse v Bradford Banking
Company (1894) 2 ch, 75.

(b) On being sued by the creditor, to rely on any set-off or counterclaim which the debtor possesses
against the creditor.

(c) On payment of what is due under the guarantee, to be subrogated to all the rights of the creditor in
respect of the debt to which the guarantee relates: Re Lamplugh Iron ore Company Limited
(1927) 1 Ch.308.

(d) On payment of what is due under the guarantee, to have assigned to him every judgement or
security held by the creditor in respect of the debt.

(e) On payment of what is due under the guarantee, to all equities which the creditor could have
enforced not only claiming through him: Imperial Bank v London and St. Katherine Docks
Company. (1877) 5 Ch. D. 195.
6.4.5 Guarantor’s rights against the debtor

The guarantor's rights against the debtor are:

(a) Before the payment has been made, to compel the debtor to relieve him from liability by paying of
the debt. This right can be exercised by one of several co-sureties without consulting the others.

(b) After payment has been made, to be indemnified by the principal debtor against all payments
properly made.

A right to indemnify arises immediately a payment has been made under the guarantee, and on
payment the guarantor becomes a simple contract creditor of the principal debtor. He is
entitled to recover the amount he has paid with interest, and if he has sustained damage beyond
that, he is entitled to recover that damage also in Bradeley v Consolidated Bank (1887) 34 Ch.
D., 556 Stirling, J. stated:

"If a surety could prove that by reason of non-payment of the debt he had suffered beyond the
principal and interest which he had been compelled to pay, he would be entitled to recover that
damage from the principal editor".

(c) When sued by the principal creditor, the guarantor can issue a third party notice against the
principal debtor and claim an indemnity.

6.4.5. Rights of co-guarantors among themselves

A guarantor who has paid more than his share under the guarantee is entitled to contribution from his co-
guarantors, whether they are bound by the same or different instruments, and whether he knew or not of
the existence of co-guarantors at the time he became bound. This is because the doctrine of contribution
is not founded on contract, but is the result of general equity on the ground of equality of burden and
benefit.

To obtain contribution, all the guarantors must have guaranteed the same debt. There is, therefore, no
right of contribution.

1. When each guarantor has expressly agreed only to be liable for a given portion of one sum of
money.

2. When guarantors are bound by different documents for equal portions of a debt due from the same
principal, and the guarantee of each is a separate and distinct transaction.

6.4.6 Discharge of the guarantor

The guarantor will be discharged in the following events:

(a) If the contract between the principal debtor and the principal creditor is varied without the consent
of the guarantor: Holme v Brunskill (1877) 3 Q.B.D. 495.

(b) If the creditor makes a binding contract to give time to the principal debtor.

Mere omission to press the debtor or delay in suing him is not such conduct as to release the
guarantor. The contract, to have this effect, must be one which is legally enforceable.

In Croydon Gas Company v Dickinson P and C guaranteed the performance by D. of his

contract with a gas company. Under that contract, D. undertook to pay for each month's supply
within 14 days. In July the company not being paid in 14 days took a promissory note from D. It
was held that this was binding agreement to give time and discharged P and C from liability for
the July account.
 (c) If the creditor omits to do something which he is bound to do for the protection of the surety, such
as omitting to take up an award until the time for its performance is past (Re Jones), or if he omits
to register a deed giving security so that the deed becomes inoperative and the creditor unsecured.

(d) If the creditor relinquishes any security held by him in respect of the guaranteed debt. On payment
of the debt the guarantor is entitled to have handed over to him all the securities held by the
creditor in respect of the debt in the same condition as he received them. If the creditor, by any act
or neglect on his part, is unable to hand over the securities in their unimpaired condition, the
guarantor will be, to that extent, discharged.

In Re Darwen and Pearce (1927)1 Ch. 176, X and Y held partly paid shares in a company and D
and P guaranteed the payment of their unpaid calls to the company. The company called upon X
and Y to pay the calls and, on default being made, forfeited the shares under a power given in the
articles. It was held that the company, by forfeiting the shares, had deprived D and P of lien on
shares to which they would have been entitled had they been compelled to pay the calls, and they
were therefore discharged from their liability as sureties under the guarantee.

(e) If the creditor expressly or impliedly discharge the debtor.

(f) If the creditor discharges a co-guarantor or does any act whereby the right of contribution between
the co-guarantors is destroyed or prejudiced. The discharge of one guarantor from whom his co-
guarantors could have obtained contribution is a discharge of those co-guarantors.

(g) If the guarantee is revoked.

6.4.7 Bailment

(a) Definition

Sir William Jones has given the following definition of bailment:

"A delivery of goods upon trust on a contract, express or implied, that the trust shall be duly
executed, and the goods re-delivered as soon as the time or use for which they were bailed shall
have elapsed or been performed".

It must, however, be borne in mind that although for the most part a bailment does arise under a
contract, express or implied, there are cases of bailment arising without any agreement between
the parties. Thus there is the case of involuntary bailment e.g. where unknown to X, A slips into
X's pocket a packet of diamonds which belongs to B. X, upon discovering this, has a certain duty
of care imposed upon him by the law. He is not entitled to damage or dispose of the diamonds,
otherwise he will be liable to pay damages. It cannot be contended that the bailment which was
thrust on X without his knowledge arose from any agreement, express or implied, as the above
definition would suggest.

The owner of the goods bailed is called the "bailor" and the party to whom they are entrusted is
known as "bailee".

Bailment involves goods. It has no application to land.

(b) Classification or Types of Bailment

Bailments may be divided into the following:

(i) Exclusively for the benefit of the bailor

(a) Depositum (gratuitous deposit).

(b) Mandatum (goods entrusted to another to work upon without payment).
 (ii) For the Exclusive Benefit of the Bailee

Commodatum (a gratuitous loan).

(iii) For the Benefit of both Bailor and Bailee

(i) Locatio (the hire of a thing for payment).

(ii) Vadium (pledge).
(iii) Locatio operis faciendi (goods entrusted to another to work upon for
payment).
(iv) Contract of carriage of goods.

(c) Constitution of bailment

There are two essentials for the constitution of bailment of goods.

1. Change in Possession of the Goods

This change of possession can occur in three ways:

(a) Where there is a delivery of the goods themselves to the bailee for the purpose of giving
him exclusive control. The delivery need not necessarily be made by the bailor in person. It
may be effected by his agent.

(b) By taking of the goods with the owner's consent e.g. a waiter in a restaurant takes the hat
and coat which the customer has laid upon a chair.

(c) By a change in the character of the possession. The following are examples:

(i) A, the owner, who has possession, agrees that he will hold his goods as bailee for X.
Or A, a bailee for X, agrees with X's consent that he will hold as bailee for Y. In
both cases the transaction is known as bailment by attornment.

(ii) A has lent his book to X to read, and later A tells X that he can keep the book as a
gift. S's possession is changed from that of bailee for A to that of owner in his own
right.

2. Assent of the bailee to receive possession

It makes no difference that the bailee has no intention of acting honestly in respect of the
goods. He none the less can become bailee.

Folkes v King (1923): Folkes owned a motor car which he delivered to a mercantile agent
with instructions to sell it for not less than £575. The mercantile agent sold the car to King
for £340 and misappropriated the money. King bought in good faith and without any notice
of the fraud. Folkes sued to recover the car from King. The Court held that King's title was
good because the car was in the possession of the mercantile agent with Folkes' consent for
the purpose of sale.

There is, however, the case of the involuntary bailee where his consent to receive the goods
is lacking. The law treats the involuntary bailee as if he were a finder of goods. He is not
liable for conversion in tort if he hands the goods to one who wrongfully pretends to be the
owner, provided that he has not been guilty of negligence. But should the involuntary
bailee meddle with the goods he will be liable for damage caused through his negligence.

In Newman v Bourne and Holligsworth Limited: Here it was decided that where a shop-
assistant had found a jewel which had been dropped by the plaintiff in the shop his
 employers (the defendants) were liable for damage caused to the jewel by their shop-
assistant.

(d) Duties of the Bailee of Goods

There are three situations to consider; where the bailment is for the:

(i) Sole Benefit of the Bailor

(1) As there is no consideration afforded by the bailor if follows that the bailee
cannot be compelled to do anything at all. In other words he is not liable for
non-feasance Elsee v Gatward (1793).

(2) However, if the bailee does enter upon the bailment, the mere fact of
accepting the goods acts as a consideration. The consideration is really the
fact that the bailor has parted with the possession.

(3) The bailee is liable for loss arising from gross negligence.

In Coggs v Bernard (1703): The defendant promised to take up some casks of

brandy and to lay them down in another cellar, without payment. Owing to the
negligence of the defendant one of the casks was staved in and the brandy wasted. It
was held that the defendant was liable inspite of the fact that he was acting
gratuitously.

(ii) Benefit of Both Parties

(1) Locatio Rei (Hire for Payment)

The bailee must display ordinary care, and is liable for his negligence. He
must pay the hire price and must use the chattel only for the purpose for
which it was bailed for him.

(2) Vadium (Pawn or Pledge)

(i) Here also the pledgee must display ordinary care. To constitute a valid
pledge there must be actual or constructive delivery of chattel. The
pledgor remains still liable to repay the loan with interest should the
chattel become lost or damaged through no fault of the pledgee, e.g.
where it is stolen. But the onus is upon the pledgee to prove that there
was no negligence on his part.

(ii) The pledgee must not use the chattel without consent of the pledgor,
unless the chattel is of such nature that the pledgee is put to expense
in keeping it e.g. a horse.

(iii) The remedy of the pawnee to recover his money is to sell the chattel if
there has been no repayment of the loan at the agreed date; if there
was no agreed date, then after reasonable notice has been given to the
pledgor that he should pay and redeem. In addition to the remedy of
sale, the pledgee can, of course, sue the pledgor for the amount of the
loan plus interest thereon.

(iv) The pledgee may alienate his own interest in the pledge, or he may
effect a sub-pledge.

The pledgor is always entitled to have his goods back upon repayment of the loan
 and interest. Goods pledged may be seized by the pledgee's execution creditors, but
only to the amount of the debt and interest due thereon.

(3) Location Operis Faciendi (Goods being worked on by Another for Payment)

Here the bailee is only liable for ordinary care.

But where goods are delivered to those who exercise a public calling e.g. a common
carrier or inkeeper, the Common Law imposes a strict liability.

3. Sole Benefit of the bailee

(a) The bailee will be responsible for the loss or damage to the goods bailed due to
negligence. But he will not be responsible for inevitable accident, or theft of goods,
unless due to his own default. In cases of theft is the rule in all classes of bailment
that the onus is upon the bailee to prove care. It is not upon the bailor to show
negligence.

(b) The bailee may only use the chattel bailed for the purpose for which it was lent. He
must not lend it to another, not even to his own servant.

He must return the chattel bailed at the proper time in as good a condition of repair
as when he received it, "fair wear and tear excepted".

(c) A loss caused by an act not authorised by the terms of the bailment (even though not
a negligent act) will fall on the bailee.

Lilley v Doubleday: here the bailee was instructed to keep the goods in a particular
warehouse. He removed them to another warehouse as he thought they would be
safer there. A fire occurred in this warehouse and he was held liable.

(d) It is possible, by the express terms of the contract, for the bailee to be relieved from
liability for negligence.

Where a bailee accepts goods and by notice as to conditions he excludes his liability
for damage or loss "however caused", this will relieve him for responsibility arising
through the negligence of his servants. (Travers v Cooper.)

(e) It is the duty of every gratuitous bailee to take care of the goods in his charge and
the burden of proof lies on the bailee to show that he was not negligent.

In Houghland v R.R. Low (Luxury Coaches) Limited (1962):

Houghland, a passenger on a coach belonging to Low, handed her suitcase to the driver,
who placed it in the luggage boot. After a journey involving a breakdown and transfer of
the passengers and luggage to another coach, Houghland arrived at her destination to find
that her suitcase could not be found. Low was found liable, because he had to show that he
was not negligent, and he failed to do so.

4. Exemption Clauses

A special contract may be made between the parties exempting the bailee from liability for
negligence.

Rutter v Palmer (1922): A motor car was deposited at a garage for sale on commission.
 The contract contained the clause "Customer's cars are driven by our staff at customer's sole
risk". The car was damaged owing to the negligence of a garage driver. It was held that the
garage was protected from liability by the clause in the contract.

(h) Title of Bailor

It is a general rule that the bailee is estopped from denying the title of his bailor. He must
return the goods to the bailor on termination of the bailment.

It is the duty of the bailee to inform his bailor should third parties make claim to the goods.

Although the bailee can never claim title to the goods himself as against the bailor, if sued
by the bailor, he can plead in defence that he had been ousted by title paramount. But he
cannot plead this if he accepted the goods with notice of the adverse claim.

(j) Termination of Bailment

This will arise either by re-delivery of the chattel bailed to the bailor or at his direction; or
by the bailee doing an act inconsistent with the terms of the bailment. Thus where goods
are let on hire and the bailee sells them, although the purchaser acquires no title thereto, the
bailment is ended.

Where a bailee accepts goods in the course of his business for repair etc, on the terms that
they shall be redelivered to the bailor when the work has been done, and the bailor fails to
pay the bailee's charges and take delivery, the bailee may sell the goods after an interval of
twelve months and after compliance with the requirements of the Act. The bailee can retain
his charges out of the proceeds of sale and the balance is payable to the bailor (Disposal of
Uncollected Goods Act 1987).

6.4.8 PAWN OR PLEDGE

A pawn—also called a pledge—is the delivery of goods by a debtor to his creditor as security for the
debt.

The creditor acquires possession of the goods while the debtor remains with ownership.

6.4.9 LIEN

This is a right conferred upon a person by law in certain circumstances as a security for the fulfilment of
an obligation owed by another.

There are three kinds of lien:

(a) Possessory lien;

(b) equitable lien;
(c) maritime lien

(i) Possessory Lien: This is the right of a party in possession of anothers goods to retain the m as
security for an obligation owned in the owner. The lien exists at common law. (It has been
codified by the Sales of Goods Act in relation to contracts of sale of goods.)

Here, possession is essential, and in order to create the lien the possession must be lawful,
continuous, and not for a particular purpose. Equally, the lien will be lost if the person entitled to it
parts with possession.

(a) General Lien

 A general lien gives the person in possession of goods the right to retain those goods until
any debt due to him by the owner of the goods has been paid—whether the debt is in
respect of those goods or otherwise. Such a lien may be enjoyed by express or implied term
of the contract, or from general custom or usage. For example, advocates, bankers, factors,
stockbrokers and auctioneers have a general lien.

(b) Particular Lien

A particular lien gives the person in possession of goods the right to retain the goods
against the owner only in respect of a debt due to the latter in connection with those
particular goods. Such a lien may arise under the contract, whether express or implied, or
may be given by the Common Law. Examples are carriers (for the freight due on the goods
carried), garages (for their bill of repairs) and the unpaid seller (for the price of the goods
sold).

An inkeeper has a possessory lien over the goods of a guest on his premises; such a lien is
in the nature of a particular lien since it can be exercised only re monies due in respect of
the particular visit—but it really stands in a special class since the inkeepers claim does not
essentially relate to the goods.

The right of lien is not affected by the rights of third parties of which the person exercising
the right of lien is ignorant:

Albermarle Supply Company v Hind and Company Garage proprietors executed repairs
from time to time on three taxi-cabs which were kept at their garage for a person who held
them under hire-purchase agreements. The agreements prohibited the hirer from creating
any lien upon the cabs for any money due in respect of repairs. The garage proprietors, in
ignorance of this provision, executed certain repairs to the cab. It was held that despite the
terms of the hire purchase agreement, prohibiting the hirer from creating any lien on the
cabs, a lien attached to the cabs in favour of the garage proprietors for such repairs as they
had executed.

Where no lien exists by Common Law or by express contract, it may be implied either from
previous dealings or from a general and well-recognised trade usage.

(ii) Equitable lien

An equitable is a right in equity to have certain property applied in a particular way. It

attaches independently of the possession of the property and is enforced by applying to the
Court for an order for sale.

Common examples are the lien of an unpaid seller of land who has moved out of
possession for unpaid purchase money, and the right of partners on dissolution to have
partnership property applied in payment of the firm's liabilities and any balance divided in
profit sharing ratio.

(iii) Maritime Lien

A maritime lien is a right under maritime law to have a ship or its cargo sold and the
proceeds applied in satisfaction of any debt due to the person having the lien. As with
equitable lien, such lien is not dependent on possession, and is enforced by application to
the High Court for an order for sale.

Such maritime liens may arise from salvage or from claims regarding damage of collision.
Also, the master and crew of the ship enjoy such a lien in respect of unpaid wages.

6.4.10 LETTER OF HYPOTHECATION

A letter of hypothecation is a document given by a debtor to a creditor as security for a loan.

It is a means of "mortgaging" goods in such a way that neither possession nor ownership thereof is
transferred to the creditor. The borrower retains possession and ownership of the goods but gives the
creditor a right to in rem over the goods which entitles him to deal with them in the manner specified in
the letter in the event of the borrower failing to repay the loan as agreed. The right usually conferred on
the creditor is the right to confiscate and sell the goods.

S.13 of the Chattels Transfer Act provides that a letter of hypothecation must be attested after being
signed by the borrower. However, it was held in Dodhia v National Grindlays Bank that an unattested
letter of hypothecation is:

(a) valid inter partes;

(b) void vis-a-vis third parties.
REINFORCING QUESTIONS
1. (a) Explain the meaning of "negotiability" in relation to bills of exchange.

(b) John purchased a typewriter from Keith and paid the purchase price of £250 by cheque. After he
had used the typewriter for a short time, John concluded that he would have found a word
processor more suited to his needs. Accordingly, he telephoned his bank, Bank Limited, and
instructed it not to pay the cheque. The assistant who took the telephone call from John forgot to
pass the message to the bank official responsible for John's account. John followed his telephone
instruction with a confirmatory letter.

John did not inform Keith that he had stopped the cheque. Keith presented the cheque which the
bank, mistakenly, paid. Keith has subsequently spent the £250 on a holiday. What is the nature of
the bank's liability to Keith and John?

2. What is a bill of exchange? In what ways, if at all, do cheques differ from other bills of exchange?

3. Write notes on the following:

(a) A cheque.

(b) Qualified acceptance of a bill of exchange.

(c) Transfer of a bill of exchange.

Check your answers with those given in Lesson 9 of the Study Pack
LESSON 6 NEGOTIABLE INSTRUMENTS AND SECURITIES LAW 33

COMPREHENSIVE ASSIGNMENT No.3

TO BE SUBMITTED AFTER LESSON 6

To be carried out under examination conditions and sent to the Distance Learning Administrator for marking by
the College.

EXAMINATION PAPER. TIME ALLOWED: THREE HOURS. ANSWER ALL QUESTIONS

1. What rules and presumptions do courts apply in trying to ascertain the meaning of the words which
Parliament has used, when interpreting statutes?

2. (a) Describe the rules which govern the acceptance of offers in the law of contract.

(b) Arthur has recently advertised in the local newspapers as follows:

"Lost: pet dog, answers to the name of Towser. £100 reward for safe return. Money deposited with
lawyers as evidence of good faith"

Bertram read the advertisement and decided to search for the dog. After three days searching he
found it. Unknown to him, Arthur had put a second advertisement in the newspaper the day before,
cancelling the offer of the reward. Advise Bertram.

3. What are the differences between limited liability companies and partnerships?

4. (a) Explain the nature of the duties owed by a banker to his customer in relation to cheques.

(b) Nationwide Bank Limited, which had been mandated by Faith Company Limited to pay cheques
when drawn by two directors, paid a cheque drawn by one director only. Advise Faith Company
Limited whether the bank can debit their account.

5. (a) In what circumstances will a guarantor be discharged from his guarantee?

(b) What kinds of lien are there?

In what circumstances, if any, may a right of lien give rise to a right of sale by the person entitled
to the lien?

END OF COMPREHENSIVE ASSIGNMENT No.3

NOW SEND TO THE DISTANCE LEARNING CENTRE FOR MARKING