NEGOTIABLE INSTRUMENTS

Introduction

Back in time?

The tangible nature of NI (a piece of paper) dominates the intangible right to payment embodied
in the instrument.

Transfer of the right to payment requires physical delivery of the instrument itself.

NI merit attention for two important reasons

1. They are still used to a significant degree as a method of making payment in the commercial
world, especially in the area of international trade.
a. Bills of exchange, one type of negotiable instrument, are frequently used where a
seller of goods allows his overseas buyer a period of credit but needs access to funds
in the interim. The seller draws a bill of exchange in his own favour on the buyer
or, more usually, on a bank that has undertaken to pay under the terms of a
documentary credit. As a credit period has been agreed, the bill will be payable at
a future date, eg 90 or 180 days after sight. The seller then presents the bill for
acceptance by the buyer or, in the case of a documentary credit transaction, by the
bank. Once the bill has been accepted, the seller does not have to wait until it
matures to receive funds. He can take advantage of the negotiable character of the
bill and discount (sell) it to his own bank for an immediate (but reduced) cash
payment. The seller’s own bank is left to collect payment from the buyer, or other
party that has accepted liability, on maturity of the instrument. In certain cases, the
seller will obtain an advance on the bill from his own bank before acceptance and
leave it to the bank to present the bill for acceptance and for payment.

2. It encapsulates many of the fundamental principles and concepts of commercial law in

general.

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 Mercantile custom and usage has been, and remains, an important influence in this area. It
was, after all, the fact that the common law refused to recognise the transferability of a debt
that led commercial men to embody the debt in a chattel (a piece of paper) and render the
debt transferable through transfer of the chattel.

Nowhere is certainty more prized than in the law relating to negotiable instruments.

Carlos v Fancourt – per Ashhurst – “certainty is a great object in commercial instruments;

and unless they carry their own validity on the face of them, they are not negotiable”.

This requirement ensures that negotiable instruments are freely negotiable and saleable and
it lies at the heart of the definition of a bill of exchange contained in s 1(1) of the Bills of
Exchange Act.

Protection of the bona fide purchaser for value is paramount.

It is a fundamental principle of the law relating to negotiable instruments that the bona fide
holder for value of a negotiable instrument is able to acquire a better title than that of his
transferor.

Negotiable instruments represent a major exception to the nemo dat rule.

The marketability of the instrument is enhanced through the protection afforded to the good
faith purchaser.

Definition

Instrument

An instrument is a document which physically embodies a payment obligation so that the possessor
of the instrument (following any necessary indorsement in his favour) is presumed to be entitled
to claim payment of the money it represents.

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It has been described by Professor Goode as “a document of title to money” (RM Goode
Commercial Law 3rd edn, 2004, p 476)

• It must be distinguished from a document of title to goods, such as a bill of lading.

• To be a document of title to money an instrument must contain an undertaking to pay a

sum of money (eg as in a promissory note) or an order to another to pay a sum of money
to the person giving the order or a third person (eg as in a bill of exchange).

If an instrument is made payable to bearer, or if it is made payable to a specified person or her

order and it has been indorsed (ie signed on the back) by or with the authority of that person, it is
described as being “in a deliverable state”.

The possessor, otherwise known as the “holder”, of an instrument in a deliverable state is

presumed to be entitled to payment of the money due under it.

This is because the instrument embodies the contractual right to payment and that right is
transferable by mere delivery.

Negotiability

The holder may not be the true owner of the instrument. The true owner is the person entitled to
the property in and possession of the instrument against all others.

But the true owner may have lost the instrument, or it may have been stolen from him. The “holder”
of the instrument would be the finder or the thief who is in possession of it (assuming the
instrument is in a deliverable state – it is made payable to bearer).

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Can the true owner sue for conversion?

What happens should the instrument reach the hands of a holder who gave value for the instrument,
in good faith and without notice of the defect in the title of his transferor?

Indefeasible title to the instrument?

The true owner has no claim against him. But the instrument must be a negotiable instrument for
the bona fide purchaser to take an indefeasible title to it – See, s 27 of the Bills of Exchange Act

NOTE: It is its capacity to be acquired free from defects in the title of prior parties which
characterises an instrument as “negotiable” in the strict sense of the word.

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A composite definition

A “negotiable instrument” is a document of title embodying rights to the payment of money or a

security for money, which, by custom or legislation, is:

a. transferable by delivery (or by indorsement and delivery) in such a way that the holder pro
tempore may sue on it in his own name and in his own right, and

b. a bona fide transferee for value may acquire a good and complete title to the document and
the rights embodied therein, notwithstanding that his predecessor had a defective title or
no title at all.

How Instruments Come to be Negotiable

There are two ways in which documents may come to be recognised as negotiable instruments:

a. statute; and
b. mercantile usage.

(a) Statute

In most, perhaps all, cases statutory recognition of negotiability merely confirms previous judicial
acceptance of a mercantile usage which recognised an instrument as negotiable.

For example, bills of exchange and cheques were accepted as negotiable by the courts
before they were recognised as such by the Bills of Exchange Act of Ghana.

(b) Mercantile usage

Instruments may be regarded as negotiable through judicially recognised mercantile usage.

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Before a court will recognise an instrument as negotiable through mercantile usage the following
conditions must be satisfied:

1. the usage must be “reasonable, certain and notorious”: Devonald v Rosser & Sons [1906]

2. the usage must be general and not “a custom or habit which prevails only in a particular
market or particular section of the commercial world”: Easton v London Joint Stock Bank
(1886)

3. the instrument’s terms must not be incompatible with negotiability (eg not marked “non-
negotiable) nor stated to be transferable by some method other than delivery: London and
County Banking Co Ltd v London and River Plate Bank Ltd (1887)

Types of Negotiable Instrument

Negotiable instruments include the following documents:

1. bills of exchange;
2. cheques;
3. promissory notes;
4. bank notes;
5. treasury bills;
6. banker’s drafts;
7. dividend warrants;
8. share warrants;
9. bearer scrip;
10. bearer debentures;
11. bearer bonds;
12. floating rate notes;
13. certificates of deposit.

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The following documents are not negotiable instruments:

1. bills of lading;
2. dock warrants;
3. delivery orders;
4. postal or money orders;
5. registered share certificates;
6. registered debentures;
7. insurance policies;
8. IOUs.

Advantages of a Negotiable Instrument

1. the transferee of a negotiable instrument can sue in his own name, even though there has
been no assignment in writing, or notice to the obligor or even if the transfer is not absolute,
as required for assignments; and
2. the transferee of a negotiable instrument who takes it for value and in good faith acquires
a good title free from equities, whereas an assignee under always takes subject to equities.

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THE BILLS OF EXCHANGE ACT OF GHANAN OF 1961

The primary source of the law of bills of exchange is the Bills of Exchange Act 1961 (the BEA).

Definition of a Bill of Exchange

Section 1 of the BEA defines a bill of exchange as follows:

(1) A bill of exchange is 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 bearer.

(2) An instrument which does not comply with these conditions, or which orders any act to be done
in addition to the payment of money, is not a bill of exchange.

§ The person who draws the bill and gives the order to pay is called the “drawer”.

§ The person upon whom the bill is drawn, and who is thereby ordered to pay, is called the
“drawee”.

§ When the drawee indicates his willingness to pay, he is then called the “acceptor”.

§ The person identified in the bill as the person to or to whose order the money is to be paid is
called the “payee”, or, if the bill is drawn payable to bearer, and he is in possession of the bill,
the “bearer”.

§ A bill payable to order is negotiated by the indorsement of the payee (or of a subsequent
transferee) completed by delivery.

§ The person indorsing the bill is called the “Endorser” and the person to whom it is indorsed,
the indorsee.

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§ A bill payable to bearer is negotiated by mere delivery.

§ The payee or an indorsee of a bill who is in possession of it, or the bearer, is called the “holder”.

Below are examples of instruments that fall within the statutory definition of a bill of exchange.
The accompanying notes should help you identify the relevant parties to the instruments.

Bill of exchange payable on demand

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Bill of exchange payable at a future date

§ An instrument must comply with all the requirements set out in s 1(1) of the BEA if it is to be
a bill of exchange.

• Unconditional – The order given by the drawer to the drawee must be unconditional.
An order to pay “provided funds are available”?
An order to pay out of a particular fund?

• Writing – The order to pay must be in writing, which includes print (BEA, s 1).
A bill does not have to be drawn on any particular material, and there is one famous
example of a cheque being drawn on the side of a cow! (Board of Inland Revenue v
Haddock – Fictitious legal case).

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 There is some uncertainty as to whether an electronic communication, such as an e-mail or
an electronic data interchange (EDI) message, can satisfy a statutory requirement for
writing.
See section 5 of the Electronic Transactions Act of Ghana of 2008 on electronic
writings; and
Section 10 on effectiveness of electronic signatures

However, these alone do not facilitate the introduction of an electronic bill of exchange.

The definition of a bill of exchange includes a number of paper-based concepts, the cumulative
effect of which means that the definition cannot be satisfied by electronic communications (this is
also the conclusion of the Law Commission of the UK in its Advice to Government, Electronic
Commerce: Formal Requirements in Commercial Transactions, December 2001, para 9.5).

For example, there would be the problem of ensuring that the holder could not transfer the
same electronic bill of exchange to more than one party (Law Com, above, para 9.7).

Addressed by one person to another – If the drawer draws the instrument on himself, it is not a
bill of exchange but the holder of such an instrument has the option of treating it either as a bill of
exchange or as a promissory note (BEA, s 5(2)).

Note: The instrument is a bill of exchange where the drawer names himself as the payee.

Signed by the person giving it – The drawer must sign the bill personally or through an agent.

A stamped facsimile of a signature is probably sufficient, but a digital signature (on an electronic
bill of exchange) may.

If the signature of the drawer is forged or placed on the bill without his authority, the signature is
wholly “inoperative”, although certain estoppels may arise as against the drawer (BEA, s 22).

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On demand or at a fixed or determinable future time – By s8(1) of the BEA, 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.

By s9 of the BEA, a bill is payable at a fixed or determinable future time:

a. if it is expressed to be payable at a fixed period after date or sight; or

b. on or at a fixed period after the occurrence of a specified event which is certain to happen,
though the time of happening may be uncertain.

It is vital that the time of payment is certain according to the terms of the bill. This renders the bill
“saleable”.

An instrument drawn payable by a specified date? (Claydon v Bradley [1987] 1 All ER 522, CA,
following Williamson v Rider [1963] 1 QB 89, CA)

Note: Where time of payment is not certain from the face of the instrument it will not be treated
as a bill of exchange.

Is an instrument expressed to be payable on a contingency a bill?

What if the event happens (BEA, s 9).

A sum certain in money – “Money” includes legal tender and foreign currency.

Note: A sum payable is a sum certain even though required to be paid with interest, or by stated
instalments, or according to an indicated rate of exchange or a rate of exchange to be ascertained
as directed on the bill (BEA, s 7(1)).

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To or to the order of a specified person or to bearer – Where a bill is not payable to bearer, the
payee must be named or otherwise indicated therein with reasonable certainty (BEA, s 5(1)).

Payment to the holder of an office for the time being (eg “Accountant of the University of Ghana
School of Law) is permissible (BEA, s 5(2)).

Inchoate instruments

An unsigned document cannot be a bill of exchange but a signed document, though failing to
comply with all the requirements of s 1(1) of the BEA, may be converted into a bill of exchange
where the signatory (the drawer, the acceptor or an indorser) delivers it to another person in order
that the missing details may be completed by him.

The person who takes delivery of an inchoate instrument has prima facie authority to fill it up as
a complete bill and to rectify any omission of any material particular, for example the amount or
the name of the payee (BEA, s 18(1)).

Transfer of a Bill of Exchange

Discounting a bill of exchange payable in future – The payee must “negotiate” the bill to the
purchaser and give him legal title to the sum payable under it.

The same bill could, in theory, be negotiated many times down a chain of different people, for
example, from A to B, from B to C, from C to D etc (see, s 33(1) of BEA)

By s29(1) of the BEA, “a bill is negotiated when it is transferred from one person to another in
such a manner as to constitute the transferee the holder of the bill”.

In this section the word “negotiated” is used to mean “transferred”, whether or not such
transfer is free from equities of prior parties. The actual mode of transfer depends on
whether the bill is a bearer bill or payable to order.

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(a) Bearer bills

Bearer bills are transferred by delivery, i.e. through the transfer of possession, whether actual or
constructive, from one person to another (BEA, s 29 (2)).

A bill of exchange is payable to bearer in any of the following circumstances:

1. When it is expressed to be so payable, ie “Pay bearer” (BEA, s 6(3)).

2. When the only or last indorsement is an indorsement in blank (BEA, s 6(3)).

An indorsement in blank occurs when the indorser simply signs the bill without specifying
an indorsee (BEA, s 32(1)) and is to be contrasted with a special indorsement which occurs
when the indorser specifies the person to whom, or to whose order, the bill is to be payable
(BEA, s 32(2)).

3. Where the payee is a fictitious or non-existing person the bill may be treated as payable
to bearer (BEA, s 5(3)).
By virtue of s 32(3) of the BEA, this provision is extended to the case where an indorsee
under a special indorsement is a fictitious or non-existent person so that the bill can then
be treated as having been indorsed in blank. (Leading authority on whether the payee is
fictitious Bank of England v Vagliano Bros [1891] AC 107, House of Lords)

(b) Order bills

A bill payable to the order of a specified payee is transferred by indorsement of the payee, or the
holder to whom the bill has been specially indorsed, and delivery of it (BEA, s 29(3).

A bill is payable to order in any of the following circumstances:

a. When it is expressed to be so payable (For example, “Pay Delilah Brown or order”),

Or

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 when it is payable to a particular person, so long as the bill does not contain words
prohibiting transfer or indicating an intention that it should not be transferable (BE.A, s
6(4)). (for example, Pay Delilah Brown)

b. When the only or last indorsement on the bill is in blank (and, therefore, the bill is payable
to bearer) and the holder inserts above the indorsement in blank a direction to pay the bill
to or to the order of himself or some other person, ie he converts the indorsement in blank
into a special indorsement (BEA, s 32(4)).

(c) Destruction of transferability

§ Under s 6(1) of the BEA, a bill is “negotiable” when drawn, unless it contains words
prohibiting transfer, or indicating an intention that it should not be transferable.

§ If the bill is drawn so that it is not transferable then only the original payee can enforce it.

§ However, a non-transferable instrument still appears to fall within the definition of a bill of
exchange set out in s 1(1) of the BEA.

§ It is obvious that if the bill is not transferable then it is not “negotiable” in the technical sense
of the word (i.e. it cannot be acquired free from defects of title of prior parties).

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