UGANDA CHRISTIAN UNIVERSITY

FACULTY OF LAW
MODULE: BANKING AND NEGOTIABLE INSTRUMENTS
LLB IV

LECTURE NOTES: PART 10

NEGOTIABLE INSTRUMENTS
INTRODUCTION
A Negotiable Instrument is a document that has legal rights attached to it. It can be
transferred from one person to another, simply by delivery of the document. However, in
some cases it may also require endorsement. A person who receives a negotiable
instrument receives a good title even if the person from whom they receive it does not
have a good title.
Negotiable instruments include cheques, treasury bills, bank bonds etc. but herein it is
intended to discuss the most common of these; that is, cheques.
Negotiable instruments provide an efficient means of facilitating commerce by affording
a convenient and secure method of payment. It is useful if payment is to be made at a
future date or to a third person. The elimination of cash as a method of payment is thus
an advantage conferred using negotiable instruments. A negotiable instrument is a safe
substitute for actual currency. A cheque is probably the commonest of all negotiable
instruments.
Negotiable instruments deal with the process of transfer of title from one party to another.
These rights are transferable merely by delivery of the bill from one person to another.
However, bills made payable to order require an endorsement. Under Section 1 of the Bills
of Exchange Act, defines delivery to mean the transfer of possession, actual or
constructive from one person to another.
The transferee of a negotiable instrument doesn't take it subject to equities. He is not
affected by the defects in title of the transferor if he is a holder in due course. The acceptor
of a bill of exchange is under the duty to pay the holder or bearer of the instrument. The
holder of a negotiable instrument can sue in his or her own name.
The feature that makes an instrument "negotiable" is a quality the instrument possesses.
This quality is “negotiability". Negotiability avoids the consequences of the nemo dat
rule- which provides that you cannot give what you do not have. Negotiability is an
exception to the nemo dat rule. It provides that some instruments (documents) can be
transferred from one person to another and that the person receiving will get good title,
even if the transferor did not have a good title.
a) Assignability v Negotiability
An instrument is assignable if it is capable of being transferred from one person to another
while Negotiability includes the concept of assignability but in addition, it allows a good
tile to pass to the transferee. This is despite any defect in title of the transferor. Some
instruments may be assignable (i.e. capable of being transferred) but may not be
negotiable. If they are not negotiable, the transferee cannot obtain better title than the
transferor. Negotiable instruments are both assignable and negotiable.

BILLS Of EXCHANGE
a) Definition
A ’Bill of Exchange' is a type of negotiable instrument. It is a document that proves a debt
A creditor can sue on a bill of exchange without having to refer to the original contract to
prove the debt. A bill confers a unique advantage to the bearer in that it can be transferred
easily from one person to another and removes the uncertainties involved in transferring
hard cash.
The law with respect to bills of exchange is contained in Bills of Exchange Act, Cap 68.
This Act reproduces the provisions of the Bills of Exchange Act 1882 of England which set
out "to codify the law relating to Bills of Exchange
Section 2(1) of bill 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 or to the order of a specified,
person, or to bearer.
b) Definition Unpacked.
i. An unconditional order: The bill will be invalid if a condition is attached to the order
(e.g. pay when X attains majority age)
ii. The document must be entirely in writing. It can be printed or handwritten or be a
combination of two.
iii. The person who is drawing the bill is called the drawer, and the person to whom it
is drawn is called the drawee.
 iv. The drawer or their authorized agent must sign it, if the signature of a drawer is
forged, it will not be a valid bill.
v. A bill will satisfy the requirement of being payable at a “determinable future time".
The sum of money payable must be clear, and certain.
c) Uses of Bills of Exchange
▪ It is common for bill of exchange to be used when goods are shipped to buyers for
both imports and exports. A bill of lading is the document that proves title to the
goods being shipped. A bill of lading can be attached to a bill of exchange and sent
through an intermediate bank. The bank's services can be used for the purpose of
having the bill presented to the drawee, and, if it is necessary having it cleared
before the documents are handed over to the purchaser.

▪ Bills of Exchange allow for the avoidance of multiple transfers of actual cash which
can be dangerous. Bills of Exchange can be discounted. This is usually done by
selling the bill to a bank. The bank provides the holder of the bill with funds to the
value of the bill less a discount. The discount is taken for providing the service. The
benefit of discounting from the holder's perspective is that the holder has
immediate use of the funds. There is one disadvantage with discounting bills, if the
bill is dishonored, the recipient of the funds will be liable to the bank for the full
amount of the bill.
e) Liability of Parties on a bill of exchange.
Generally, a party will not be liable on a bill of exchange unless they have signed it. There
are exceptions to this rule where a party’s signature is forged. If a bill has been dishonored
by nonacceptance, the holder has rights against the drawer and prior endorsers of the bill.
If a bill has been dishonored by nonpayment, the holder has similar rights to recover
against the drawer and prior endorsers. In case of dishonor by non-acceptance or non-
payment where the endorser has paid the amount of the bill, they can sue the acceptor,
the drawer, or any prior endorser for recoupment. This is an application for indemnity.
A liability is dependent on signature people who are signing in a representative capacity
e.g. a director of a company should take care. Their signature should be followed by a
statement that they are acting in a representative capacity only and not personally.
f) Endorsement of a bill of exchange.
Certain rules must be satisfied before a bill can be regarded as endorsed. The
endorsement must be written on the bill and signed by the endorser. A signature without
words will be sufficient. The whole bill must be endorsed. It would not be permissible to
seek to transfer a portion of the amount payable.
If a bill is payable to more than one person, then all persons must endorse it. This is so
unless one person has the authority to endorse on behalf of the other.
g) Discharge of a bill of exchange.
Section 58 of the Bill of Exchange Act specifies when a bill will be discharged.
i. Payment at or after maturity of the bill to the holder in good faith with no notice
of any defect in title will discharge a bill,
ii. When the acceptor of a bill becomes its holder (in their own right) the bill is
discharged.
iii. A bill will be discharged if it intentionally cancelled by the holder or their
authorized agent, and if the cancellation is apparent on the bill.
iv. A person waives a right if they renounce or disclaim it. A holder of a bill, at or
after its maturity, can absolutely and unconditionally renounce their rights
against the acceptor. This will discharge the bill. The waiver must be in writing
and the bill must be delivered to the acceptor.
h) Alteration of a Bill of Exchange.
A. bill that has been altered materially without the assent of all parties will be void except
against the parry making, authorizing or assenting to the alteration and against
subsequent endorsers. The following will be regarded as material alterations.
▪ alteration to the date
▪ the sum payable
▪ The place of payment and if a bill has been accepted generally, the addition of a
"place" of payment without the assent of the acceptor.

CHEQUES
a) Definition of a cheque
Section 72 (1) of the Bills of Exchange Act defines a cheque as a bill of exchange, drawn
on a banker and payable on demand. A bill of exchange is defined in Section 2(1) of the
same Act as an unconditional order in writing addressed by one person giving it requiring
‘the person to whom it is addressed to pay on demand or at a fixed determinable, for the
time, a sum certain in money to or to the order of a specified person or bearer.
S.2 (2) of the Bills of Exchange Act provides that any instrument which doesn't comply
with these conditions or which for the payment to be made an act must be done is not a
bill of exchange.
b) Characteristics of cheques
1. There are 3 parties to a cheque:
▪ The drawer i.e. the person who draws the cheque
▪ The drawee i.e. the bank on whom the cheque is drawn
▪ The payee i.e. the person supposed to receive payment on the cheque, if the drawer
is the person supposed to receive payment on the cheque, then the drawer and the
payee are the same person, and the instrument is still a cheque.
2. The order must be unconditional.
In jBo-Fms Jamor &Sims v London & South-Western Bank Ltd (1899)81 LT
655, an instrument was in the form of a cheque, but the payment order was followed by
the words, "provided the receipt form at the foot hereof is duly signed” lt was held that
the receipt requirement at the end was a condition which disqualified the instrument from
being a cheque.
3. The cheque must be addressed by one person as the drawer to another person as the
drawee.
Section 4(2) of the Bills of Exchange Act provides that where the drawer of the bill and
the drawee are the same person, the holder may treat the instrument as a bill of exchange
or a promissory note. A holder is defined in Section l of the Act to mean the payee or the
endorsee of the bill who is in possession or the bearer thereof.
4. A cheque must be payable on demand.
Sec.9 of the Act provides that a bill is payable on demand which is expressed to be payable
on demand or at sight or the presentation in which no time for payment is expressed.
However, the fact that a cheque contains instructions that it should be presented within
a given period for it to be paid does not mean that it’s not payable on demand.
b) Comparison between a Cheque and a Bill of Exchange
Although both are types of negotiable instruments, there are several distinguishable
elements between the two.
i. For a bill of exchange, there are rules with respect to presentation and
acceptance. These don’t apply to cheques. A cheque must be payable on
demand whereas, a bill maybe payable on demand or at a fixed or determinable
future date.
ii. A cheque must be drawn on a financial institution whereas a bill of exchange
can be drawn on anyone.
iii. A cheque can be crossed whereas a bill of exchange cannot. If a cheque is
crossed "not negotiable" it is still assignable but no longer negotiable.
 iv. A cheque must be presented for payment within a reasonable time while a bill
is payable on demand is deemed to be a continuing security.
Ante-dating and Post dating
It was generally thought that a postdated cheque would not have qualified as a cheque
because s. 72 defines a cheque inter alia as being payable on demand. In Brien v. Dwyer
(1979) 22 ACR 485, Barwick CJ suggested that a postponed cheque constituted a bill of
exchange payable at a future date, rather than a cheque which had to be payable on
demand.
The law inclined to the view that a postdated cheque is valid in all regards. The reasoning
is based on section 12(2) of the Act, under which a bill is not invalid by reason of its being
postdated, ante-dated or undated.
It appears therefore that postdated cheques are within the meaning of s.72 and s.12 (2)
was not necessary to make them cheques.
However postdated cheques should always be handled with care as they can both be
‘troublesome and dangerous for bankers’
First, under s. 74 the death of the customer which comes to the knowledge of the banker
determines the customer’s mandate and consequently all outstanding cheques cannot be
honored by the banker
Secondly s.74 gives the customer the right to determine the bankers duty and authority
by countermand of payment, that is to withdraw his or her mandate before the cheque
has been honored. This means that a person holding the cheque cannot get payment from
the bank. In the case of Thaker Singh (Electrician) and Sons v. Quarbanlite Ltd
9178 (2) ALT Comm. 324 where the Court of Appeal of Kenya held that when a
negotiable instrument was taken in lieu of money payment, there was a presumption that
the parties intended it to be a conditional discharge only, and that their original rights
were to be restored if the cheque were dishonored or if the drawer acted in a manner
inconsistent with giving of the cheque such as by countermanding payment.
Thirdly, the bankruptcy of the customer may create problems for the banker because of
the doctrine of relation back. Under this doctrine bankruptcy is deemed to have started
on commission of the first available act of bankruptcy.
Fourth, if the bank mistakenly honours a postdated cheque and dishonours other cheques
drawn on it by the customer, it will be liable to the customer for wrongful dishonour.
Inchoate Cheques.
Section 19 of the Bills of Exchange Act deals with inchoate or incomplete cheques. This
provides for a situation where the drawer signs the cheque and leaves another person to
complete it. It also provides that when an instrument is wanting in any material
particular, the person in possession of it has prima-facie authority to fill up the omission
in anyway he or she thinks fit.
In order that any such instrument when completed may be enforceable against any person
who became a party to it prior to its completion, it must be filled up within a reasonable
time, and strictly in accordance with the authority given. Reasonable time for this purpose
is a question of fact; but if any such instrument after completion is negotiated to a holder
in due course, it shall be valid and effectual for all purposes in his or her hands, and he or
she may enforce it as if it had been filled up within a reasonable time and strictly in
accordance with the authority given.

Notice of Dishonour.
Section 47 provides that when a bill, such as a cheque has been dishonoured, notice of
dishonour unless excused under s. 49(2) (c), must be given to the drawer. If it is not given
the drawer will be discharged from liability both on the cheque and on consideration for
which it was given.
Notice of dishonour to be valid must be given under the rules specified under section 48
of the Act.
The Court of Appeal of Sudan in the case of Emile Habib Bateekha v. Rosen Alam
Eddin 1970 (1) ALR 205 said that the holder of a dishonored bill, note or cheque may
sue an immediate party liable thereon on the consideration as well as on the instrument,
and where a negotiable instrument has not been protested for non-payment and thus
cannot be sued upon, the drawee can use the instrument as evidence in an action on the
consideration, and if there have been presentment and notice of dishonour the
instrument will prima-facie be evidence, though otherwise it may not be sufficient.
The notice of dishonour must be given by a person entitled to call for payment and must
convey to the recipient that the cheque has been dishonored and that he or she will be
held responsible.
In the case of Obed Tashobya vs. DFCU Bank HCCS No. 742/2004 the issue was
whether the suit cheque was dishonoured and if so whether proper steps were taken on
dishonor. Court held that the telex message and the personal communication of the
dishonor to the Plaintiff by the Defendant are sufficient evidence that the suit cheque was
dishonoured. That all that is required of a collecting bank in these circumstances is to give
notice of dishonor to its client if the cheque is dishonoured.
Payment by a Cheque.
Simply stated the law seems to be that when there is payment by cheque the presumption
is that the parties intended it to be a conditional discharge only and that their original
rights are to be restored if the cheque were to be dishonored or if the drawer acted in a
manner inconsistent with giving of the cheque such as countermanding payment.
The rule was stated by the Court of Appeal of Sudan in Mirghani Shebeika v.
Mohammed Ahmed 1972 (1) ALR. Comm. 346, the general rule is that payment by
cheque or other negotiable instruments is conditional payment and the debtor is not
discharged unless and until the cheque or other instrument is honored, but there is
nothing to prevent a negotiable instrument from being given and taken as absolute
payment if the parties so intend, and the creditor may receive the instrument in absolute
discharge of the debt, trusting solely to his or her remedies on the instrument.
In that case a judgment debtor issued cheques to the judgment creditor. He waited for six
months before presenting the cheques for payment and they were dishonored. Relying on
s. 44 of the Sudan’s bills of Exchange Ordinance which is similar to s.44 Bills of Exchange
Act of Uganda, the court held that if a creditor takes a bill or note as a conditional
payment, and he or she is guilty of laches in respect of it, as where a creditor takes a
cheque and takes an unreasonable time in presenting it, whereby his or her debtor’s
position is altered, the bill or note is then treated as absolute payment., and between the
debtor and creditor the debt is discharged, and six months is not a reasonable time for
the payee of a cheque to wait before presenting the cheque for payment.
Be that as it may, a bill of exchange or promissory note is to be treated as cash and must
be honoured unless there is some good reason to the contrary.

GENERAL CONSIDERATION OF CHEQUES

Holden in his law and practice of banking correctly points out that mere fact that the
drawer fills in blank spaces on a cheque form will not itself make the instrument operate
as a cheque. First, it must be issued. Issue under S.1 BEA means the first delivery of a
cheque which is complete in form to a person who takes it as a holder. Delivery according
to S.1 BEA is transfer of possession actual or constructive from one person to another. A
holder under s. 1 BEA is the payee or endorsee of the cheque or note who is in possession
or bearer of the cheque.
Parties to a Bill of Exchange
i. Drawer-Person responsible for creating the bill. Usually, this person is the
creditor of the drawer
ii. Drawee-Person to whom the order is addressed.
iii. Payee-Person to whom the drawee is required to pay
iv. Endorser-If the payee desires to transfer the bill he can do so by endorsing it
Bearer-Person who is in possession of the bill
v. Holder-Person in possession of the bill if the bill is payable to the bearer
vi. Holder in due course-Person in possession of the bill who can establish that
they have taken a bill:
a) Complete and regular on the face of it before it is overdue
b) Taken in good faith and for value
c) Without notice at the time of any defect in title of the transferor
d) Without notice of any previous dishonor.

A holder.
Section 1 BEA defines a holder to mean the payee or endorsee of a bill or note who is in
possession of it, or the bearer of a bill or note. The position of a holder is very important
in the law of banking. S. 37 (a) the holder of a bill of exchange can sue on it in his or her
own name. Under s. 33(4) when a bill has been endorsed in blank, any holder may convert
the blank endorsement into a special endorsement by writing above the endorser’s
signature a direction to pay the cheque to or to the order of himself or herself some other
person.
S. 76(2) where a cheque is uncrossed, the holder may cross it generally or specially. S.
76(3) where a cheque is crossed generally, the holder may cross it specially.
S. 76(4) where a cheque is crossed generally or specially, the holder may add the words
“not negotiable”.
S. 68(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 or her another bill of the same tenor, giving security
to the drawer, if required, to indemnify him or her against all persons in case the bill
alleged to have been lost shall be found again and under (2) If the drawer on request as
aforesaid refuses to give such duplicate bill, he or she may be compelled to do so.
With certain exceptions the holder of a cheque may negotiate it to another person. A
holder sometimes has powers to negotiate a cheque even though he or she has no title or
defective title. As Lord Denning said in Arab Bank Ltd v. Ross (1952) 2 Q.B. 216, the
Arab Bank Ltd claimed that they were holders in due course. They failed to make good
that claim because the endorsement was not regular on the face of it. But nevertheless, it
was open to them to claim as holder.
The difference between the rights of a holder in due course and those of a holder is that a
holder in due course may get a better title than the persons from whom he or she took,
whereas the holder gets no better title.
A holder of a cheque can presents it for payment at the drawee bank or present through
his or her bank for collection if the cheque is crossed. Under s. 37(a) the holder may sue
on the cheque in his or her own name. If the holder presents a cheque and it is dishonored,
he or she must give notice of dishonour to maintain liability of the drawer and endorsers.
A Holder in due Course
Section 28 (1) BEA 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 namely; that he or
she became the holder of it before it was overdue, and without notice that it had been
previously dishonored, if that was the fact; that he or she took the bill in good faith and
for value, and that at the time the bill was negotiated to him or her he or she had no notice
of any defect in the title of the person who negotiated it.
The first requirement for one to be a holder in due course is that he must be a holder.
S. 1 defines a holder to mean a payee or endorsee of a bill or note who is in possession of
it or the bearer thereof. Although a payee is a holder, he or she cannot be a holder in due
course. In Re Jones Ltd v. Waring and Gillow (1926) A.C. 670 it was contended
on behalf of the respondents that they were ‘holders in due course’ of the cheque for
pounds 5000, within the meaning of the Act, and entitled on that ground to retain the
proceeds of the cheque. The Court said that the expression ‘holder in due course’
does not include the original payee of a cheque.
It is true that under the definition clause s.1 of the Act the word ‘holder’ includes the payee
of the bill unless the context otherwise requires, but it appears from s. 28(1) that a ‘holder
in due course’ is a person to whom a bill has been ‘negotiated’ and from s. 30 a bill is
negotiated by being transferred from one person to another and if payable to order by
endorsement and delivery. In view of these definitions, it is difficult to see how the
original payee of a cheque can be a holder in due course within the meaning of the Act.
Also s. 23 BEA provides that a forged or unauthorized signature is wholly inoperative, and
no right to retain the bill or give discharge therefore or to enforce payment thereof to a
party thereto can be acquired through or under that signature. It follows from this that if
a prior essential signature was forged or unauthorized no one can thereafter become a
holder
The second requirement for a holder in due course is that he or she must take the bill
complete and regular on the face of it. This means that if any essential element in
form is lacking the transferee cannot be a holder in due course. Incomplete means that
there are some material details missing e.g. name of the payee, amount payable and
necessary endorsements. It appears that a cheque without a date is not invalid under s. 2
(4) (a) but it is not complete and regular for purposes of s. 28 because regularity is a
different thing form validity. A cheque is regular on the face of it whenever it is such as
not to give rise to any doubt that it is the endorsement of the payee.
The word ‘face’ as used in s.28 (1) means looking at the cheque, front and back without
the aid of outside evidence it must be complete and regular. As to when an endorsement
will give rise to doubt, Lord Denning in the case of Arab Bank Ltd V. Ross (1952) 2
Q.B . 216, says that is a practical question which is as a rule, better answered by a banker
than a lawyer. Bankers must consider regularity of endorsements every week, and every
day of the week and every hour of every day.
The third requirement is that to qualify as a holder in due course the transferee must
have no previous notice of dishonour of a cheque. This can be illustrated by the
facts of N.S. Rawal v. Rathan Singh & Anor (1956) 26 KLR. 98, In this case the
appellant claimed shs. 350 from the respondent on a cheque drawn by the respondent to
one Mohan Singh who gave it to one Hari Chand. Hari Chand presented the cheque to the
Bank, and it was dishonored and returned marked ‘Refer to drawer’ Hari Chand gave the
cheque so marked back to Mohan Sign who referred it to the drawer, the respondent,
Rattan Singh. The respondent said that he had no funds to meet the cheque. Some weeks
later Mohan Singh (who had, at the time, notice of its dishonor) endorsed the cheque to
the appellant allegedly for value. The appellants noticed at the time they took the cheque,
that it had ‘Refer to drawer’ written upon it and that it was a dishonored cheque. One of
the issues was whether the appellants were holders in due course. This was not decided
as counsel for both sides agreed that the appellants were not holders in due course. The
second issue was whether the appellants were holders. The court held that they were
holders.
The Fourth requirement to qualify a holder in due course is that one must become the
holder before the cheque was overdue. Under s. 35(3) BEA, a cheque is payable on
demand and will be deemed overdue when it appears on the face of it to have been in
circulation for unreasonable length of time. And what is unreasonable length of it is a
question of fact. In Uganda and according to the Bank of Uganda clearing rules, a cheque
is valid for a period of 6 months from the date of issue.
The fifth requirement to qualify a holder in due course is that the transferee must
have taken the cheque in good faith and for value. Under s. 89 of the Bills of
Exchange Act, a thing is deemed to be done in good faith where it is in fact done honestly
whether it is done negligently or not.
Value is defined under s. 1 to mean valuable consideration. Under s. 26(1) (a) valuable
consideration sufficient for a cheque may be constituted by any consideration sufficient
to support a simple contract. According to s. 26(2) where value has at any time been given
for a bill, the holder is deemed to be a holder for value as regards the acceptor and all
parties to the bill who became parties prior to that time. It is also provided under s. 26(3)
that where the holder of a bill has a lien on it, arising either from contract or by implication
of law, he or she is deemed to be a holder for value to the extent of the sum for which he
or she has a lien. Moreover under s. 29(1) every party whose signature appears on a bill is
prima facie deemed to have become a party to it for value.
The Supreme court of Nigeria in the case of Metalimpex v. A.G. Leventis and Co.
(Nigeria) Ltd 1976(1) ALR Comm. 20, stated that a bills of exchange and promissory
notes are presumed to be supported by valuable consideration and a party who alleges
want of consideration therefore has the burden of proving it.
Section 26(1) (b) provides that valuable consideration for a bill may be constituted by an
antecedent debt or liability. And under s. 26(3) where the holder of a bill has a lien on it,
arising either from contract or by implication of law, he or she is deemed to be a holder
for value to the extent of the sum for which he or she has a lien. This means that a person
holding by virtue of a lien may qualify as a holder in due course, even though the amount
of the instrument is greater than the sum for which he has alien.
The sixth and final requirement to qualify as a holder in due course is a holder whom at
the time when the bill was negotiated to him or her, he or she had no notice of defect in
title of the person who negotiated it. The phrase defective title is not defined in the Act
but section 29(2) provides that in particular the title of a person who negotiates a bill is
defective within the meaning of the Act, when he or she obtained the bill or acceptance
thereof by fraud, duress or force and fear or other unlawful means or for an illegal
consideration or when he or she negotiates in breach of faith or under such circumstances
as amount to fraud.

D. Deriving Title through a Holder in Due Course.

The most favored position of a holder in due course is contained in s.28 (3) BEA. A holder
(whether for value or not) who derives his or her title to a bill through a holder in due
course, and who is not himself or herself a party to any fraud or illegality affecting it, has
all the rights of that holder in due course as regards the acceptor and all parties to the bill
prior to that holder.
Holden in the law and practice of banking comment on this provision is that the rule
applies where a cheque affected by some fraud or illegality, is negotiated to a person who
has no knowledge of such irregularity and who becomes a holder in due course. Under
those circumstances, the rule is that, although this transferee has knowledge of the
irregularity and even though he or she has not given value for the cheque, he or she has
all rights of the original holder in due course as regards all parties prior to that holder.
By way of example A obtains B’s cheque by fraud. A endorses it to C who takes the cheque
as a holder in due course. C endorses it to D who knows of the fraud. D can recover from
B.
Also, if B and D conspire to obtain A’s cheque by fraud, the cheque is drawn in favour of
B. B endorses to C who takes as a holder in due course. C then endorses to D. D cannot
recover from A even if he or she gives value, since he or she was a party to the fraud against
A.

Presumption as to Holding in Due Course.

It is stated in section 29(1) that every party whose signature appears on a bill is prima
facie deemed to have become a party to it for value. In Metalimpex v. A.G. levintis &
Co. (Nig) Ltd 1976(1) ALR Comm. 20, the respondents contended that they had
received no consideration for their purported endorsement of bills of exchange and could
not therefore be liable. The supreme court of Nigeria said that every party whose signature
appears on a bill is prima-facie deemed to have become a party thereto for value. Hence
unlike other forms of simple contracts, bills of exchange (and promissory notes) are
presumed to stand based on a valuable consideration, based on this presumption
therefore the burden is on the party who alleges want of consideration to prove it.

Section 29(2) provides that every holder of a bill is prima facie deemed to be a holder in
due course. But if in an action on a bill it is admitted or proved that the acceptance, issue
or subsequent negotiation of the bill is affected with fraud, duress, or force and fear or
illegality, the burden of proof shifts. Unless and until the holder proves that after the
alleged fraud or illegality, value has in good faith been given for the bill. In Hassanali Issa
& Co. v. Jevaj Produce Shop 1967 (2) ALR Comm. 64, the court observed that ‘under s.
29(2) a holder of a bill is prima facie deemed to be a holder in due course, but that, of
course, is a presumption of fact which may be rebutted. It may, for example, be shown
that no consideration was given, in which event the plaintiff would not be able to succeed
on the cheque.
F. A Summary of provisions protecting a holder in due course.
S. 37(b) holds the bill free from any defect
S.37(c) (i) good and complete title to the bill where holder has a defective title
S.20 (2) Unauthorized delivery will not affect a holder in due course
S. 28(3) holder in due course can pass good title with all rights to a holder
S.11(b) a holder in due course is protected from a wrong date on a bill
S.19(2) an inchoate instrument converted into a bill negotiated to a holder in due course
is valid S.35(5) a holder in due course is not affected with a dishonored overdue bill
S.47(a) a holder in due course’s rights is not prejudiced by omission of notice of dishonour
S.53(b) the acceptor is precluded from denying a holder in due course.
S.54(1) (b) drawer is precluded from denying a holder in due course
S.54(2)(b) endorser is precluded from denying a holder in due course
S. 55 a person who signs a bill incurs liabilities of an endorser to a holder in due course
S.63 a holder in due course is not affected by alteration of a bill etc.

G. Liabilities of Parties to a cheque

(i) Drawer
Under s. 54(1)(a) the drawer of a cheque by drawing it engages that on due presentment
it shall be paid according to its character and that if it is dishonored he or she will
compensate the holder or any endorser who is compelled to pay it so long as the requisite
proceedings on dishonour are duly taken. Rules relating to notice of dishonour are
contained in s.48 and s.49 of the BEA. Consequently, the drawer is under no liability until
the cheque has been presented for payment and dishonored. A cheque is to be treated as
cash, and it is to be honored unless there is some good reason to the contrary. The rule
has always been that as between the drawer and holder of a cheque, the drawer is not
discharged by any delay in presentation unless some loss or injury is occasioned to him
or her by delay. Under s. 15(a) the drawer of a bill may insert therein an express
stipulation negativating or limiting his or her own liability to the holder. The words
usually used are ‘without recourse to me’ or ‘sans recours.’
(ii) Endorser’s liability
Under s. 54(2)(a) the endorser of a bill by endorsing it engages that on due presentment
it shall be accepted and paid according to its tenor, and that if it is dishonored he or she
will compensate the holder or a subsequent endorser who is compelled to pay it, provided
that the requisite proceedings on dishonour are duly taken and under subsection 2 (c) is
precluded from denying to his or her immediate or a subsequent endorsee that the bill
was at the time of his or her endorsement a valid and subsisting bill and that he or she
had then a good title to it. But under s.30(5) where any person is under obligation to
endorse a bill in a representative capacity, he or she may endorse the bill in such terms as
to negative personal liability and under s.15(a) an endorser may add an express
stipulation negating or limiting his or her own liability to the holder.
(iii) Transferor by Delivery
Under S.57 (1) where the holder of a bill payable to bearer negotiates it by delivery without
endorsing it, he is called a ‘transferor by delivery’ and according to subsection 2 such
transferor by delivery is not liable on the cheque. However according to subsection 3 a
transferor by delivery who negotiates a bill thereby warrants to his or her immediate
transferee, being a holder for value, (a) that the bill is what it purports to be, (b) that he
or she has a right to transfer it and (c) that at the time of transfer he or she is not aware
of any fact which renders it valueless.

DEFENCES TO A CLAIM ON A CHEQUE

The main defenses to claim on a cheque are largely to a defense on a suit in contract. Thus
S. 20(1) talks of every contract on a bill which means that the relationship of the parties
is contractual.
i) failure or absence of consideration
Section 26 BEA codifies the common law rules relating to valuable consideration. In a
contract the plaintiff must prove that he or she gave consideration. However contrary
to the general rule that in a contract the plaintiff must prove consideration, a party to
a bill of exchange does not have to prove consideration. This is because it is provided
under s. 29(1) that every party whose signature appears on a bill is prima facie deemed
to have become a party thereto for value. This is a rebuttable presumption of fact and
a party resisting payment of a bill must rebut it by proving either that there was
absence or failure of consideration or that the consideration was illegal. In Sterling
Products (Nigeria) Ltd v. Dinkpa 1975(2) ALR Comm. 75, the plaintiff brought
an action against the defendant to recover the amount of a cheque returned un paid
drawn by the defendant for the price. The court said that as regards the claim on a
cheque, this had to fail because the evidence showed that there was total failure of
consideration. The goods for which the cheque was issued were returned to the
plaintiff in the same condition as they were delivered to the defendant. There was
therefore an entire failure of consideration, and this is a valid defense to an action on
a bill of exchange.
 ii) Failure to present a Cheque in proper time.
S.44(3)(b) BEA provides that where the bill is payable on demand, presentment must be
made within a reasonable time after its issue to render the drawer liable, and within a
reasonable time after its endorsement, to render the endorser liable. In determining what
is a reasonable time, regard shall be had to the nature of the bill, the usage of trade
regarding similar bills and the facts of the particular case. However, under s. 73(a) where
a cheque is not presented for payment within a reasonable time of its issue the drawer will
only be discharged to the extent of any actual damage which he or she suffers because of
such failure. The rules as to presentment are of particular importance to the collecting
bank because a banker to whom a cheque is delivered for collection is under a duty to his
customer to use reasonable diligence in presenting it for payment. Sections 44, 45 and 73
which govern presentment were exhaustively discussed by the Supreme Court of Uganda
in Esso Petroleum (Uganda) Ltd v. UCB Civil Appeal No.14/1992 S.C. After quoting the
sections Order J.S.C stated that the duty appears to be that such a banker as agent for
collection is bound to exercise diligence in the presentation of the cheque for payment. If
a banker fails to present a cheque within a reasonable time after it reaches it, it is liable to
the customer for loss arising from the delay, the drawer or endorsee, if any, is discharged
to the extent of damage he or she may have suffered by the failure to pay the cheque by
the bank on which the cheque was drawn.

iii) Failure to give notice of dishonor

The BEA contains detailed rules relating to notice of dishonor. Under s.47, when a bill
has been dishonored by non-acceptance or by nonpayment, notice of dishonor must
be given to the drawer and each endorser, and any drawer or endorser to whom the
notice is not given is discharged. S.48 (i) the notice may be given as soon as the bill is
dishonored and must be given within a reasonable time thereafter. In Nanji
Khodabhai v. Sohan Singh (1957 EA 291, a cheque was dishonored on the 25th
of April 1955 and notice of dishonour was not given until 29th April 1995. The court
held that the defendant was discharged because there were no special circumstances
to justify any delay, and notice should have been given on 26th April 1955.
iv) Material Alteration of a Cheque
It is provided under S.63(1) that where a bill or acceptance is materially altered
without the assent of all parties liable on the bill, the bill is avoided, except as against
a party who has himself or herself made, authorized or assented to the alteration, and
subsequent endorsers; except that where a bill has been materially altered, but the
alteration is not apparent, and the bill is in the hands of a holder in due course, the
holder may avail himself or herself of the bill as if it had not been altered and may
enforce payment of it according to its original tenor.
 S.63(2) provides that in particular, the following alterations are material, namely, any
alteration of the date, the sum payable, the time of payment, the place of payment and,
where a bill has been accepted generally, the addition of a place of payment without
the acceptor’s consent. But in Overman & Co. v. Rahemtulla (1930) 12
K.L.R.131 the supreme court of Kenya said that those particulars are not intended to
be conclusive but are given as examples of alterations which would be considered
material. Thus, it was held in Koch v. Dicks (1933) 1 K.B. 307, that an alteration
in the place of drawing of a bill which changed it from an inland bill to a foreign bill
was material alteration. And yet alteration of place of drawing is not enumerated in
the equivalent of s.63 (2).
v) Forged Signatures
According to S.23 BEA it is provided that a person cannot be liable where his signature
has been forged or placed on the cheque without his authority. A person in possession
of a cheque on which the drawers or endorser’s signature has been forged or placed
thereon without authority has no title and therefore no right to retain the cheque or
discharge the cheque. In Kepitingalla Rubber Estates Ltd v. National Bank of
India Ltd (1909) 2 K.B. 1010, the court held that the bank could not charge the
company with the amounts paid out on forged cheques and the plaintiffs were under
no duty to organize their business in such a way that forgeries of cheques could not
take place.

vi) Other Defenses

Non fulfillment of a condition is a defense. The case of Baxendale v. Bennett (1878)
3 QBD 52 is authority for the proposition that if a person signs a blank cheque in space
provided for the drawer’s signature but never delivers it for the purpose of completion, he
will not be liable on it even to a holder in due course.
Section 35(2) provides that where an overdue bill is negotiated, it can only be negotiated
subject to any defect of title affecting it at its maturity, and then forward no person who
takes it can acquire or give a better title than that which the person from whom he or she
took it had.
Similarly, under Section 35(5) where a bill which is not overdue has been dishonored, any
person who takes it with notice of the dishonour takes it subject to any defect of title
attaching thereto at the time of dishonour, but nothing in this subsection affects the rights
of a holder in due course
Other defenses such as lack of capacity, mental incapacity, fraud, duress and undue
influence are defenses coextensive with the defenses in the law of contract.
I). Fictitious or non-existing person
Section 6(3) of the Act provides that where the payee is a fictitious or nonexisting person,
the bill may be treated as payable to bearer. The HOL considered this provision in the
case of Bank of England v. Vagliano Brothers (1891) AC 107 and held by a majority
of five to two that the effect of the section is that a bill may be treated as payable to the
bearer where the person named as payee and to whose order the bill is made payable on
the face of it is a real person but has not and was never intended by the drawer to have
any right upon it or arising out of it, and this is so though the bill (so called) is not in
reality a bill but is in fact a document in the form of a bill manufactured by a person who
forges the signature of the named drawer, obtained by fraud the signature of the accepter,
forges the signature of the named payee, and presents the document for payment, both
the named drawer and named payee being entirely ignorant of the circumstances.
Lord Watson was of the view that ‘the language of the sub-section, taken in its ordinary
significance, imports that the bill may be treated as payable in all cases where the person
designated as payee on the account of it is either non existing or being in existence, has
not and never was intended to have any right to its contents. Bearer is defined in s.1 of the
Act to mean the person in possession of a bill or note which is payable to bearer.
In Boma Manufacturing Ltd v. Canadian Imperial Bank of Commerce (1997)
23 CLB 740, the Supreme Court of Canada stated the law in similar terms that the
concept of a nonexistent person within the meaning of the equivalent s.6 (3) was that if
the payee on a cheque was a matter of pure invention and not a real person then such
payee was nonexistent.
The rationale of the rule was stated by the court to be that the fictitious payee rule set out
in the equivalent of s. 6(3) of the BEA by which a cheque made out to a fictious or non-
existing person was to be treated as a payable to bearer and could be negotiated by simple
delivery, was an exception to the normal rule of nemo dat quad non habet (no one gives
who possesses not) and threw the loss to the drawer. The policy behind the fictious payee
rule is that if a drawer drew a cheque payable to order, not intending that the payee receive
payment, the drawer lost, by his or her conduct, the right of protection afforded to a bill
payable to order and there was no reason why the defence of fictitious payee was not
available to the collecting banker.
In Clutton v. Attenborough & Sons (1897) A.C. 90 an employer was fraudulently
induced by the clerk to draw cheque in favour of nonexistent payees whose endorsement
was forged by the clerk in favour of a bonafide transferee for value. The third party, the
transferee, who acted in good faith obtained payment of the cheques. Clutton, after
discovering the fraud sued the third party for money they had received. The HOL held
that the equivalent of 6.6(3) applied and the money could not be recovered.
Impersonal Payees
Impersonal payee is a payee of a bill or note designated as cash, bills payable or order.
Impersonal payee may be designated otherwise than in the name of a person, association,
partnership, or corporation. Effect of drawing bill or note in the name of an impersonal
payee is that the instrument will be payable to bearer. Instruments payable to any
impersonal payee are negotiable and payable to bearer and need not have other words of
negotiability. Under s. 6(3) a cheque is treated as being payable to the bearer only when
the payee is a fictitious or non-existing person. The word person is defined in s. 3 as
including a body of persons whether incorporated or not. Obviously, this definition does
not cover impersonal payees such as instruments drawn in a cheque form to order or
bearer in favour of ‘cash’.
This issue came up for decision in Khan Stores v. Delawer [1959] E.A. 714, the
document in question was a cheque drawn on the National Bank of India signed by the
applicant, directing the bank to pay ‘cash or bearer’ the sum of Shs. 2,000/-. The word
‘cash’ was in manuscript, the word ‘bearer’ was printed. Law J. as he was, held that a
person who uses cheque forms made out to blank ‘or bearer’ and who fills in the blank
either the word ‘cash’ or with the name of specified person without deleting the word
‘bearer’ must be presumed to intend that the words ‘or bearer’ should remain. Such a
document is a bill of exchange, being payable to bearer and complying with other
requirements of the Act and the Plaintiff / respondent, as the person in possession of the
Cheque, was the holder thereof within the meaning of the terms bearer and holder.