INTRODUCTION TO LAW AND GOVERNANCE

TOPIC 11

NEGOTIABLE INSTRUMENTS

NATURE AND CHARACTERISTICS

What is a negotiable instrument?

This is a document which represents money and the title in passes to a bona fide transferee
free from only defect. It is a chose in action. Negotiable instruments are transferable by
reason of law or trade usage or custom.

Characteristics of Negotiable Instruments

1. Consideration is presumed to have been provided i.e. past consideration is good
consideration.
2. A bona fide transferee of a negotiable instrument need not be notified before it is
negotiated.
3. A holder for value can sue on it in his own name.
4. If payable to the bearer, it is negotiable by delivery.
5. If payable to the order of specified person, it is negotiable by endorsement/
endorsement and delivery.
6. The party liable on a negotiable instrument needs to be notified before it is
negotiated.

Examples Include: Cheques, bills of exchange, promissory notes, share warrants, dividend
warrants, bearer debentures etc.

TYPES: CHEQUES, PROMISORY NOTES, BILLS OF EXCHANGE

CHEQUES
Under Section 74(1) of the Bill of Exchange Act, a cheque is a bill of exchange drawn on a
banker, payable on demand. It is a negotiable instrument negotiable by delivery or by
endorsement and delivery. It differs from a bill of exchange in various ways: -

1. It can only be drawn on a banker

2. It is payable on demand
3. It does not require acceptance
4. Non-presentation does not discharge it
5. It is less negotiable
6. It may be crossed generally or specially

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7. Notice of dishonour is not necessary

Types / classification of cheques

Cheques may be classified on the mode of payment and to whom payable:

1. Bearer cheque: This is a cheque whose proceeds are payable to the holder.
2. Order Cheque: This is a cheque whose proceeds are payable to specified person or
his order. Whereas a bearer cheque is negotiable by delivery an order cheque is
negotiable by endorsement or delivery.
3. Open Cheque: This is a cheque whose proceeds are payable across the counter.
4. Crossed Cheque: Is a cheque that contains two parallel transverse lines on its face
with or without account. A crossing is an instruction to the banker not to pay the
proceeds across the counter.

Types of crossing

A cheque may be crossed generally or specially:

1. General Crossing: Consist of two parallel transverse lines on the fact of the cheque
with or without the words “and Co.” “Account payee” “Not negotiable” etc. A cheque
crossed generally may be crossed specially by the drawee,
2. Special Crossing: Consists of two parallel transverse lines of the face of the
chequewith the name of the banker in told.

Banker-customer relationship

There is a simple contractual relationship between the banker and customers. It is a debtor
credit or relationship which imposes upon the parties certain legally binding obligations.

DUTIES OF THE CUSTOMER

1. Duty of Care: The customer is bound to the exercise reasonable care when
drawingcheques to guard against alterations. The banker is not liable for any loss
arising if the customer has failed to exercise reasonable care.

In London Joint Stock Bank v. Macmillan & Arthur, A clerk of M draw a cheque for
M‟s is signature and indicating the amount payable as £2 in figures but not in words.
M signed the cheque, the clerk added 2 figures to the two to make it £120 and stated
the amount in words. The customer subsequently sued the banker for the loss. It was
held that the bank was not liable as M had failed to exercise reasonable care.

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2. Notice of irregularities: The customer is bound to notify the banker of any

irregularities affecting the accounts e.g. forgeries or unauthorized which the
customer is estopped from relying on the irregularity.

As was the case Greenwood v. Martins Bank where a husband had noticed that his
wife had withdrawn monies from his account by forging signature but to avoid
publicity, he did not notify the bank. Subsequently his wife shot herself dead. He
then notified the bank of the irregularities. The House of Lords hold that the bank
was not liable as the customer had failed to notify if of the irregularity. He was
estopped from relying on it.

DUTIES OF THE BANKER

Paying Bank: This is the banker on which the cheque is drawn. It is the banker liable for
the amount.
Collecting Bank: This is the bank in which the cheque is deposited for payment.

1. Duty of Care: The banker is bound to exercise reasonable care and skill in his
dealings with the customer. The standard of care and skill is that of a reasonably
competent banker. If the banker fails to exercise such care and skill, the customer has
an action in damages for any loss arising for professional negligence.
2. Professional Advice: The banker is bound to give the customer professional advice
on request. He is bound to give advice on investments as and when requested failing
which he is liable in damages.
3. Duty to Honour Cheques: The banker is bound to honour all cheques drawn by the
customers provided: -
a. The cheque is complete and regular on the face of it
b. The customer‟s account has sufficient funds
c. The cheque is presented at a reasonable hour on a business hour and business
day.
d. The payee identifies himself to he satisfaction of the banker.
e. If a banker fails to honour a cheque in breach of this duty, the customer has an
action in damages.
4. Duty of Secrecy: The banker is bound to maintain confidentially in his dealings with
customer. He must not discuss to 3rd parties any information which comes to him in
the course of his dealings with the customer. The duty of secrecy was laid down in
Tournier v. National Provincial and Union Bank of England which the English
Court of Appeal insisted of the upholding of the duty. However the court was
emphatic that the duty may be qualified in certain circumstance where personal
information relating to the customer may be discharged to 3rd parties e.g.
a. Where disclosure is provided for by the law
b. Where the banker has the customer convent to disclose

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c. Where disclosure is necessary in the public interest

d. What it is necessary to protect the banker
5. Duty not to pay without Authority: The banker must not pay any monies out of the
customer’s account without his express or implied authority failing which he is liable
in damages for breach of duty. However, banker losses his authority to pay in
various ways:-
a. Countermand of payment: This is an express instruction by the customer to
his banker not to honour a particular cheque
b. If the banker has notice of the customer’s death
c. If the banker has notice of the customers‟ unsoundness of mind
d. If the banker has notice of presentation of a bankruptcy petition against the
customer in court.
e. If the cheque is irregular e.g. amounts in words and figures do not tally.
f. If the customer’s account has been frozen by a court order.
g. If the cheque is presented before time (post dated cheque) or after six
months (stale cheque)
h. If the payee has no title thereto
i. The customer’s account has insufficient funds
j. The customer has since closed his account.

PROMISSORY NOTES

Under Section 84 (1) of the Bill of Exchange Acts, a promissory note is an unconditional
promise in writing made by one person to another, signed by the maker, engaging to pay on
demand or at a fixed or determinable future time, a sum certain in money to or to the order
of a specified person or bearer.

Characteristic/Elements/Essential of the Definition

1. It is an unconditional written promise made by a person to another
2. It must be signed by the maker
3. It contains a promise to pay a sum certain in money.
4. The sum is payable on demand or at a fixed or determinable future time.
5. The sum is payable to a specified person, his order or the bearer
Under Section 85(1) of the Act, a promissory note remains incomplete until it is delivered
to the promisee. If a note is drawn by two or more persons, all are jointly and severally
liable on it.
Once a note is delivered to the promisee, it may be negotiated to other persons or it may be
discounted.

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A promissory note differs from a bill of exchange in that: -

1. It is a promise to pay made by the debtor It does not require presentation for
acceptance nor does it require acceptance. However, it is a negotiable instrument
capable being negotiated by one person to another in commercial transactions.
BILL OF EXCHANGE

The law relating to Bills of Exchange in Kenya is contained in the Bill of Exchange Act1.
This statute is a carbon copy of the English Bills of Exchange Act, (1882). It codifies the
law relating to bills of exchange.
Section 3(1) of the Bills of Exchange Act defines a Bill of Exchange 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 specified person or to the bearer.

Elements or essentials of the definition

1. It is an unconditional written order i.e. Not a request.
2. Addressed by person to another
3. It must be signed by the person giving it
4. It demands payment of a sum certain in money.
5. The sum must be paid on demand or at a fixed or determinable future time.
6. The sum is payable to a specified person, his order or the bearer.

Parties to a bill of exchange

Parties to a bill of exchange are the drawer and the drawee. The drawer is the person who
draws the bill demanding payment. The drawee is the person to whom the bill is drawn.
This is person to pay the amount due. The person to whom the amount is paid the payee.

Types / classification of bills

Bills of Exchange may be classified on the basis of: -

1. To Whom Payable: A bill may be bearer or order. A bearer bill is a bill payable to
the holder or bearer of the instrument. An order bill is a bill payable to the order of a
specified person.
2. Where drawn and a payable: An inland bill is a bill as bill drawn and payable within
East Africa. Any other bill is foreign.
3. When payable:
a. Sight bill: - This is bill payable on demand
b. Usance bill: This is bill payable at a fixed or determinable future time.
4. Whether transferable or not: -
a. Transferable bill: - This is a bill which is capable of being negotiated by one
person to another

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b. Non-transferable bill: - This is a bill which contains a stipulation prohibiting

transfer.

A bill drawn and signed by the drawer is referred to as draft and must be presented to the
drawee for acceptance.

Rules relating to representation of bills for acceptance

1. The bill maybe presented by the drawee or his agent-

2. It must be presented at a reasonable hour on a business day.
3. It must be presented to the drawee and if dead, to his personal representative.
4. If the drawee has been declared bankrupt, the bill must be presented to him or to his
trustee in bankruptcy.
5. If trade custom and usage permits, it may be done thought the post.
6. However, presentation of a bill for acceptance will dispensed with if:
i. The drawee is a fictitious person.
ii. It cannot be effected even with the exercise of reasonable diligence.

Acceptance of a bill
This is the signification by the drawee of his assent to the bill. Acceptance of a bill may be
general or qualified.

1. In General acceptance, the drawee accepts the bill in its tenor i.e. without any
qualification.
2. Qualified Acceptance: This acceptance whereby the drawee modifies or varies the bill
in various ways: -
i. Conditional: Where the drawee specifies a condition subject to which the bill
is payable.
ii. Partial: The drawee accepts to pay part of the sum.
iii. Local: The drawee accepts to pay the bill at a specified place.
iv. Time: The drawee changes the time of payment
v. Acceptance by some but not all drawers.

The drawer is not bound to accept a qualified acceptance. However, if he does, he is bound
by its terms.

Once a bill is accepted, it becomes a proper bill, capable of being discounted or negotiated.

Discounting a bill: it is the receipt by the payee of the amount of the bill from a bank or
financial institution less the discount for the unexpired duration. The bank becomes the
payee.

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Negotiation of bills: Under section 31 (1) of the Act, a bill is negotiated when it is
transferred from one person to another in such a manner as to constitute the transferee as the
holder thereof.
A bill may be negotiable in 2 ways namely:
 Delivery
 Endorsement and Delivery

Bearer Bills are negotiable by delivery. Order bills are negotiable by endorsement and
delivery.
Endorsement of bills
This is the signing or executing a bill by a party for purpose of negotiating it to another. The
party so doing is the endorser while the party to whom it’s endorsed is the endorsee.
Characteristics of an Endorsement

1. It must be written on the face of the bill, on its reverse side or on a copy where
acceptable or slip of paper attached to the bill. This paper is referred to as an allonge.
2. It must be signed by the endorser
3. It must be an endorsement of the entire bill.
4. If payable to the order of two or more endorsers who are not partners, all must
endorse unless either of them has authority to endorse in favour of all.
5. The endorsement may be blank, special, conditional or restrictive

Types of Endorsements

1. Blank: This endorsement which does not specify the endorsee. It converts an
orderbill to a bearer bill.
2. Special: This is an endorsement which specifies the person to whom or to whose
order, the bill is payable.
3. Conditional: This is an endorsement which either exempts the endorser from liability
if the bill is dishonoured or makes payment of the bill subject to a specified condition.
4. Restrictive: This is an endorsement which prohibits further negation of the bill. It
constitutes the endorsee as the payee who cannot negotiate the bill any further.

Parties to a bill of exchange

1. Holder for Value: This is a holder of a bill, who has provided valued consideration
onit or who is deemed to have so provided the same.
2. Holder in due course: Under Section 29(1) of the Act, a person is deemed to be
aholder of a bill in due course if he holds a bill which is: -
a. Complete and regular on the face of it
b. Before it is overdue

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c. In good faith from and for value

d. Without notice of any previous dishonour
e. Without notice that the person who negotiated it to him had a defective title
3. Accommodating Party: Under Section 28 (1) of the Act, an accommodation partyis
person who has signed a bill of exchange as drawer, endorsee or acceptor without
receiving value thereon but for the purpose of lending his name to another party.
However, such party is liable to a holder for value.
4. Referee in Case of Need: Under Section 15 of the Act, a referee in case of need is
aperson whose name is inserted in a bill by the drawer or endorsed to whom the
payee may resort to in the event of its dishonour by non-acceptance or non-payment.

RIGHTS OF A HOLDER OF A BILL

1. A bona fide holder acquires a defect-free title

2. Right to sue on it in his own names
3. Right to negotiate the bill unless the lost endorsement is restrictive.

DUTIES OF THE HOLDER

a) It is the duty of the drawer to present the bill to the drawee for acceptance
b) It is the duty of the payee to represent the bill to the acceptor for payment.
c) In the event of the dishonour of a bill, it is the duty of the payee: -
i. To notify the party the fact of dishonour
ii. To have the bill noted and or protested

Presentation of a bill for payment

On maturity of a bill, it must be presented to the acceptor for payment. Its presentation is
governed by the following rules: -

a) If payable on demand, it must be presented within a reasonable time of acceptance or

negotiation.
b) If payable in future, it must be presented on the date it falls due or within three days
of grace.
c) It may be presented by the payee or his agent.
d) It must be presented to the acceptor at the agreed place i.e. his place of business or
residence.
e) It must be presented to the acceptor, however, if dead to his personal representative.
f) If the acceptor has been declared bankrupt it must be presented to him or his trustee
in bankruptcy
g) It must be presented at a reasonable hour on a business day
h) If trade custom or usage permits, presentation may be effected by post.

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If on presentation, the amount is paid by or on behalf of the acceptor, the bill is discharged.
However, presentation for payment maybe dispensed with if it is impossible to secure the
same even with exercise of reasonable diligence. If the acceptor cannot be found or
payment is refused the bill is said to be dishonoured.

Dishonored bills

A bill is said to be dishonoured if:-

1. Presentation for payment is exercised by law
2. Payment is refused.

It is the duty of the payee to notify the party liable the fact of the dishonour and to have it
noted and or protested.

Rules relating to notice of dishonor

1. The notice may be given by or on behalf of the payee

2. It may be given in the agent’s or the payee’s name
3. The notice may be oral or written
4. If written it need not signed
5. It must be given within a reasonable time of the dishonour
6. Return of the dishonoured bill is sufficient notice.
7. It must be given at a reasonable time on a business day.
8. If effected by post it is effective when the letter is posted.

Noting a bill

Once a bill is dishonoured, the payee must present it to notaries public who re-presents it to
the acceptor for payment and if payment is refused, the notaries public indicates the date on
the bill and later specifies the dishonour in his register by entering the words used by the
acceptor in the refusal. This is referred to as Noting the Bill.

Protesting a bill

This is the formal declaration by notaries public attesting the fact of dishonour of a bill. It is
conclusive evidence of the dishonour. A protest note must disclose and contain: -
i. The person for and against whom it is made
ii. Reason for the protest
iii. Date and Place of the protest
iv. Particulars of the notaries public

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The dishonoured bill or a copy thereof must be attached.

Discharge of a bill
A bill of exchange is said to be discharged when all rights on it are extinguished.
However, a party may still be held liable on it depending on the method of discharge.
A bill may be discharged in any of the following ways: -

1. Payment in due course: If the bill is paid by or on behalf of the acceptor at or after
maturity, it is discharged and parties freed.
1. Acceptor - holder Maturity (Merger): If the acceptor of a bill becomes the payee of
right, at or after maturity, the bill is discharged.
2. Renunciation or waiver: Under Section62 (1) of the Act, if the holder of a bill at or
after maturity unconditionally and absolutely renounces his right against the
acceptor, the bill is discharged. The renunciation must be written and the bill must be
returned to the acceptor.
3. Cancellation: Under Section 63 (1) of the Act, if a bill is intentionally cancelled by
the payee or his agent, and the cancellation is apparent thereon, the bill is discharged.
An unintentional cancellation does not discharge a bill.
4. Material Alteration: Under Section 64(1) of the Act, a material alteration on a bill
discharges all the parties not privy to the alteration. Under Section 64 (2) a material
alteration comprises a change in amount payable, time of payment, date and place of
payment.
5. Non-presentation: Under Section 45(1) of the Act, the non-presentation of a bill for
payment as prescribed by law discharges the drawer and endorsers.

BAILMENT

This is a contract whereby a party referred to as Bailor delivers goods to another known as
Bailee with specific instructions that the goods be dealt with in a particular manner to be
returned as soon as the purpose for which they were bailed is accomplished.

Bailment involves goods and is for the most part contractual whereas possession changes
hands, ownership does not. However, in certain circumstances, physical possession does not
change hands since the person who becomes the bailor was in possession of the goods in
some capacity. Such a bailment is referred to as a bailment by attonement.

Types of Bailment
1. Hiring e.g. Hire Purchase Agreement
2. Storage or Safe Custody of goods
3. Pledger or Pawn: - This is the use of goods as a security for a loan whereby the
goods are delivered to the lender as security and retains them until the debt is fully
paid. By paying the debt, the borrower reclaims the goods.

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4. For repair or work to be done

5. Carriage of goods from place to place

DUTIES OF THE PARTIES

1. BAILOR
1. He is bound to deliver the goods to the bailee for purposes of the transaction
2. He must disclose any defects in the goods or in the title
3. He is bound to indemnify the bailee for loss or liability arising by reason of defects in
the goods or of title

2. BAILEE
1. To take delivery of the goods, the subject matter of the bailment.
2. To deal with the goods only for the purpose for which for which they were bailed.
3. Take reasonable care of the goods.
4. Insure the goods in his custody.
5. Return the goods to the bailor as soon as the purpose for which they were bailed is
accomplished

A contract of bailment terminates when the purpose for which they were bailed is
accomplished or when the bailor deals with the goods in a manner inconsistent with the
bailment

LIEN
This is a right conferred upon a party by law or trade usage or custom in certain
circumstances and is exercisable as a security for the fulfilment of an obligation owned by
another.

Types of Lien
1. Possessory lien
2. Equitable lien
3. Maritime

1. Possessory lien
This is the right of a party in possession of another’s goods to retain them as a security for
the fulfilment of an obligation. The lien is dependent on possession which must be lawful
and continuous and is enforceable without any court action.

Possessory Lien may be general or particular.

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a. General Lien-This is a possessory lien which entitles the party in possession to

retainthe goods for the fulfilment of any obligation owned by the owner .e.g An
advocate has a general lien on a clients documents for any unpaid fees.
b. Particular Lien-This is a possessory lien which entitles the party in possession to
retain the goods for the fulfilment of the particular owning e.g price of the goods
held.

An unpaid seller’s lien is particular in nature.

2. Equitable lien
This is the right of a party to have certain property in particular manner e.g. in the
dissolution of a partnership every partner is entitled to have the firms assets applied in the
1st instance in the payment of its debts and liabilities and is enforceable by court action.

3. Maritime lien
This is the right of a party to have a ship or its cargo sold and the proceeds applied in a
particular manner e.g a ship captain and crew members have an equitable lien in relation to
unpaid usage. This lien is independent of possession and is enforceable by court action.

Termination of Lien

A lien may come to an end in any of the following ways:

1. Discharge of the obligation owing

2. Mutual agreement between the parties
3. Dealing with the goods in a manner inconsistent with the lien.
4. Waiver by the party entitled to the right.

LETTER OF HYPOTHECATION
This is a document given by the debtor to the creditor as a security when chattels are used
as collateral .The document constitutes evidence of the chattels mortgage. The debtor
retains possession and ownership of the security but under the terms of the letter, the
creditor is entitled to confiscate and sell the security in the event to the default by the
debtor. The document must be executed by the parties and attested to by at least one witness
if not, if, only binds the parties thereto.

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