BANKING 1.8 NEGOTIABLE INSTRUMENTS
Are simply documents capable of discharging debts.
Historically trade was by barter it was later replaced with money. As foreign territories interacted, trade and commerce began to boom. Negotiable instruments were issued for commercial expediency and convenience. Inter-state transportation of gold and silver coins was unattractive therefore, negotiable instruments were utilised especially where the merchant had a debtor in the target country. He could just order his debtor to pay the merchant who resides in the same foreign country.
A Negotiable Instrument:
- Is a written order/promise to pay money.
- Is negotiable: meaning that it is an assignable chose in action. Ordinarily, a chose in action could not be assigned (this was the common law position) however, equity allows assignment of a chose in action provided that prior notice has been given to the debtor. Unlike an assignment, Negotiable instruments do not require a deed of assignment to be executed.
- Is freely transferrable by mere delivery to a bona fide holder for value free from equities.
- Passes full legal title to the transferee who can sue in his own name.
- Value is generally presumed to have been given for the negotiable instrument. By Section 27 of the Bill of Exchange Act, an antecedent debt or liability is valuable consideration.
The following are NOT negotiable instruments:
- Bill of Lading: is a document showing that particular goods have been loaded on the ship. Although it is freely transferrable without need for notice and, transferee can sue in his own name, it is taken subject to equities.
- Share Certificate: a document certifying that the shareholder named therein is the registered holder of the shares. Not freely transferrable. Unlike a share warrant which is a negotiable instrument as it is transferrable by mere delivery. This distinction was noted in Webb Hale V Alexander Water.
- IOU: is a mere written acknowledgment of a debt. Mr A agrees in writing that he owes Mr B. It is not a negotiable instrument.
The Bill of Exchange Act 1917 codifies the following as negotiable instruments:
- Bill of Exchange.
- Promissory notes.
This notwithstanding, the court in Webb hale and co V Alexander Water ltd noted that the existence and evolution of other negotiable instruments has not been inhibited. Other negotiable instruments include: Share Warrants, Treasury Bills, traveller cheques, bearer bonds and debentures, and so on. We take them one by one.
Section 3(1) of the Bill of Exchange Act defines it 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 determinable future time, a sum certain in money or to the order of a specified person or a bearer. Anything else is not a bill of exchange.
By Section 4, an inland bill is drawn and payable within the country or upon a person resident therein.
By Section 3 (1) (2) and (3), for a document/bill to qualify as a bill of exchange:
- The bill must be an order: a mere request, plea or petition may not suffice. In Little V Slackford, a bill couching the request with the phrase, “as you will much oblige your humble servant” was held not to be a bill of exchange. But in Ruff V Webb “will much oblige” was accepted as a request.
- The instrument must be in writing: it does not have to be exclusively in English. For example; In Arab Bank Ltd V Ross, the court accepted a combination of Arabic and English writing.
- The instrument must be signed by the drawer: or his authorised agent. An initial, stamp or signature may suffice- Bennette V Brumfit. In Goodman V Eban, a rubber stamp was accepted.
- The order must be unconditional: not subject to the performance of an act or occurrence of an event or availability of money in a fund- Section 3(2 and 3). Certainty is the watchword.
- The order must be addressed by the drawer to an identified drawee. In Mason V Lack, bill was invalidated as “pay to my order…” did not sufficiently indicate the drawee.
- The payee must be named or indicated with reasonable certainty: where the bill is not payable to the bearer. In NSIC ltd V National Provincial Bank it was held that an instrument made payable to “cash” or “order” could not be considered a specified person, “wages” has also been refused. Where the bill is payable to a non-existing person, the bill would be treated as payable to the bearer- Section 7 BOEXAct.
- The order must be for a sum certain in money: whether payable with interest, by instalment or exchange – Section 9. In Smith V Nightingal, a promise to pay E45 and all other sums which may be due to him was not certain. What happens where (for example) the words say one hundred thousand and the figures say N1,000,000? Section 9(2) provides that the words prevail over figures in the event of inconsistency with figures.
- The bill must be payable on demand or at a fixed determinable future time: by Section 10, a bill is payable on demand where it expresses to be payable on demand or where no time of payment is prescribed. By Section 11, a bill is payable at a determinable future time where it is expressed to be payable at a fixed period after date or sight or after the occurrence of a specified and inevitable In Williamson V Rider, a note payable “on or before” a given date was invalidated. A bill is not invalidated by the mere fact that it is not dated or that it does not specify place where it is drawn or payable. Section 3(4).
The drawer: the person who draws an instrument and gives the order to pay. Once the bill has been drawn and signed, he is implied to have undertaken to compensate the payee if the bill is dishonoured.
The Drawee: the person legally obliged to honour the order to pay.
The payee: the person in whose favour the bill is drawn. The person who receives payment. It has been noted earlier that the payee must be identified with certainty where the bill is not payable to the bearer. If the payee is fictitious, the bill is treated as payable to the bearer-Section 7(3).
E.g. if by writing, Mr Chinueke properly instructs Chime (who owes him #500,000) to give Tayo #200,000. Chinueke is the drawer, Chime is the Drawee and Tayo is the Payee.
The person who approves a bill is the endorser while the endorsee is the person to whom it is endorsed. Endorsement of bills: Endorsement entails confirming the authority of the issuer. By endorsing it, the endorser is assuring that on due presentation, it shall be paid. Where it is not paid, the payee should be compensated. By endorsing, the endorser is also precluded from denying the genuineness or regularity of the drawer’s signature… he is also precluded from denying or questioning his endorsement-Section 55. Endorsement can be conditional, restrictive or prohibitive. Where an endorsement prohibits transfer, it is valid but not negotiable.
Holder: Section 2 defines a holder as the payee or endorsee in possession of the bill note or the bearer thereof. Meaning that to be a holder, the payee or endorsee must also be in possession of the bill. Where it is a bearer bill, any person in possession of the bearer bill is the holder. A holder for value is one who gives valuable consideration for a bill or has a lien thereon… one whose signature appears on the bill. By Section 29, a holder in due course is one: who takes a bill, complete and regular on the face of it provided:
- He took the bill before it was overdue. (3 days grace is provided after fixed date).
- He took the bill in good faith and for value without notice of the defect in title- Section 29(2).
Section 38 provides that a holder can sue in his own name.
Consideration for a bill.
By Section 30 and 27, consideration is presumed to exist where;
- Value has at anytime been given for the bill.
- The holder has a lien over the bill.
- There is an antecedent debt or liability.
- Where the party in question has his signature on the bill.
Where void/illegal consideration is furnished, no right of action lies except it is transferred to a third party holder for value without notice- Section 30(2).
The bearer: Section 2 of the act: is the holder of a bill payable to the bearer or a holder of a bill which last endorsement is in blank. Such bills can be negotiated by mere delivery. The bearer is not liable under the bill because his signature does not appear on the bill. Except he has transferred the bill for valuable consideration or the bill is found to be a forgery.
Negotiability of bills: The ability to transfer free of equities. By Section 31 and Section 32, a bill is negotiated when it is transferred from one person to another. A bill payable to the bearer is negotiated by mere delivery. Where payable to order, in addition to delivery of the bill, there must be a written and signed endorsement of the whole bill for it to be negotiated.
Inchoate instruments: are incomplete instruments. Lacking any of the following; date of payment, specific value, or place where it is drawn or payable… provided that it does not lack the signature of the drawer. By Section 3(4) this does not invalidate the instrument. The person in possession of the bill can honestly and reasonably fill up such omissions –Section 20. Where a wrong value is inserted fraudulently, the drawer is discharged of liability except the bill comes into the hands of a holder in due course who has no notice of unauthorised filling. Inchoate bills are commonly found in blank cheques.
Acceptance: by Section 17, is a written assent on the bill signed by the drawee, agreeing to pay the specified money. Acceptance may be general, conditional, partial or local. Acceptance compels the drawee to pay without challenging the existence, capacity or authority of the drawer or the genuineness of his signature-Section 54.
Dishonour occurs where the bill is not accepted on presentation. The holder can then sue the drawer or endorser.
DISCHARGE OF A BILL.
A bill may be discharged in the following circumstances:
- Payment in due course/ on presentation: by the drawee in good faith and without notice of any defect in the bill. Where payment is by drawer, the bill is not discharged.
- Where the bill is negotiated to the acceptor. I.e. where the acceptor becomes the holder of the bill in his own right rather than on trust.
- Where the holder waives the bill in writing.
- Where there is material alteration of the bill without the consent of the parties liable to it. Although the bill would still be valid against any of the parties that assented the alteration.
- Where the bill is cancelled.
By Section 73 of the BOEXA, a cheque is a bill of exchange drawn on a banker and payable on demand.
Unlike a bill of exchange, a cheque must be payable on demand, and drawn on the banker. Since the cheque is payable on demand, it does not need acceptance. The drawer of a cheque is meant to exercise reasonable care in drawing it unlike in a bill. The bank, unlike the drawee of an ordinary bill is protected against forged or unauthorised endorsement.
A cheque is an unconditional order in writing, signed by the drawer requiring a bank to pay a certain sum in money to the person to whom it is drawn or the order…
Flowing from the implications of the banker-customer relationship, a bank is to honour cheques drawn on it and the customer is to execute his order with due care-Joachinson V Swiss Bank Corporation. A wrongful dishonour of cheque can give rise to an action for breach. Damages presumed where the customer is a trader in other cases; nominal damages.
Types of cheques.
- Open cheque: payable over the counter of the drawee bank after ascertaining the identity of the payee.
- Crossed cheque: two transverse lines run across the face of the cheque. Crossed cheques are payable only into the account of the payee. A crossed cheque is advantageous in the sense that it forestall fraud as it is paid into account of intended payee. Also, fraudulent proceeds can be traced to the recipient’s account (This facilitates the Know Your Customer directive of the CBN). Also since it takes a longer time to clear, the bank has ample time to detect fraud and stop payment. The disadvantage of a crossed cheque is that it takes a longer time to clear and the payee is required to have an account.
Types of Crossing:
- General crossing: by Section 78(1) in addition to the two transverse lines, the words; “and company” may be included.
- Special crossing: by Section 78(2) an addition of the name of the banker with or without the words “not negotiable”. It is a cheque payable only to the banker specified in the crossing.
- Not negotiable crossing: Section 83, meaning the holder gets it subject to equities-Great Western Railway V London and County Banking Co. Protects the true owner from any subsequent transfer occasioned by loss or theft. Meaning he can recover the money even from a holder for value without notice.
- Account payee: that the money must be paid only into the account of the named payee (identified in the cheque). Payment into another account could make the bank liable in negligence and conversion-Abimbola V Bank of America as “account payee” puts the banker on inquiry and caution.
Duties of the paying bank same as the banker-customer relationship duties noted above.
Forgery entails making a false document or writing with the intent that it may be acted upon as genuine…Forgery is a criminal offence punishable under Section 465 of the Criminal Code. The court noted in ACB V Victor Ndoma that a cheque is forged where there is an unauthorised alteration of the amount, date, a fabrication of the signature(s) and other features of the cheque. Section 24 BOEXACT provides that such forged instruments are inoperative except the customer (drawer) is precluded from alleging forgery. For example in the case of Greenwood V Martins Bank, the customer became aware of the forgeries by his wife but kept quiet for 8 months. The court held that his silence gave rise to estoppel. At common-law, a banker who pays on a forged cheque can be liable to the true owner for conversion. However, Section 60 and 77 of the Bill of Exchange Act protects an innocent banker who pays on demand in good faith and in the ordinary course of business.
THE COLLECTING BANKER.
A collecting bank is a bank which receives a cheque on behalf of its customer for clearing and collection before placing the value on customer’s account. In Gordon V Capital and Counties Bank Ltd the court likened such function to a situation where a customer gives his clerk a cheque to cash on his behalf.
For example, a Mr A Draws a First Bank Cheque payable to Mr B who has a UBA account. Mr B presents the cheque to UBA (his bank). UBA takes the cheque to First Bank and receives the money on behalf of Mr B. This money is then credited (by UBA) into Mr B’s UBA account.
Section 77(2) protects a collecting banker from liability (in the event of fraud or defective title) provided the collecting banker acted in good faith and without negligence. “Good faith” by Section 92 is where the act was done honestly. The whole transaction must have been done in good faith-Gordon V Capital and Counties Bank Ltd.
The duty of care required in handling cheques: owed to the customer. In Taxation Commissioners V English Scottish and Australian Bank, the court held that we must equate to the cashiers and clerks handling the cheque the intelligence of ordinary persons in their position. The bankers have to prove that they were not careless. The banker must ensure that it:
- Obtains reference: like driver’s licence, passport, I.D card and so on.
- Verifies endorsements.
- Acts wisely: for example, the bank should ensure that it pays money for a corporate establishment into the corporation’s account rather than into a private account. It is negligent to collect for a man’s private account, cheques made payable to him in his official capacity. In Midland Bank V Reckitt, notwithstanding that the attorney was authorised to draw without restriction, the court held a bank liable in negligence for collecting a cheque drawn by an attorney from his principal’s account.
By Section 85 of the Act: A promissory note is:
- A written and unconditional promise to pay.
- Signed by the person making the promise.
- To pay a sum certain in money.
- On Demand or at a fixed determinable future date.
- To a specified person or to the bearer.
Unlike a bill of exchange that has 3 parties, here there are only two parties. The Promisee and promissor. Also, unlike the Bill of exchange which must be an order, the promissory note is a promise.
An IOU is not a promissory note because it does not specify date of payment nor does it specify the person to be paid. It is a mere acknowledgement of indebtedness in writing.
A promissory note is inchoate until delivered to the payee or bearer- Section 86.
JOINT AND SEVERAL NOTES.
By Section 87 of the act a promissory note can be made by two or more persons jointly and severally. It is made jointly where the note begins with; “we promise to pay” while it is made severally where it begins with “I promise to pay”. It is joint and several where it begins with: “the makers jointly and severally promise” here either of them can be sued and a contribution can be recovered from the other party.
There should be some consideration passing from the promissee to the promissor for him to succeed in a suit-Gbebamose V Mbadire.
Goldface-Irokalibe, I. J. Law of Banking in Nigeria. (Malthouse Press Limited, Lagos). 2007.
Layi Afolabi – Law and Practice of Banking.
Commercial Law in Nigeria. Akanki.
National Open University: Law of Banking and Insurance.
 Assignment involves a transfer of right from one person to another.
 A chose in action is a right that is enforceable by legal action rather than by taking possession. E.g. recovery of debts, shares, and so on.
 a person who takes the instrument for value in good faith without notice of defect in title.
 Notwithstanding that the transferor has a defective title.
 Anything of value like; money, goods or services.
 I.e. where the transferor owes the transferee some money.
 Where the transferor has a defective title, the right of the holder is vitiated.
 Which states that the bearer is entitled to the shares stated therein
 Issued by a company acknowledging its indebtedness to the holder or bearer
 Although Lord Denning dissented in this case stating that a rubber stamp lacks the uniqueness of a hand written signature
 The person making the bill…. The person giving the order.
 The debtor… the person that is to pay the bill.
 The person in whose favour the bill is drawn… The person to receive the money.
 Like “ this bill is drawn on the 25th December, 2015”.
 Subject to the performance of act or qualified as to time.
 Accept to pay only a part of the amount.
 To pay at a particular place and nowhere else.
 Not subject to conditions or contingencies which may or may not occur.