The Legal Regime of Negotiable Instruments

By Cynthia Mbugua LLB (Hons)

Historical Background

Issues arising from barter trade

Coincidence of want

Transaction cost is high

The essence negotiable instruments is how we pay for goods and services within on economy.

After barter trade we started using articles and items of rare and unique value as tools of exchange eg cowrie shells, gold

The above method also gave rise to certain issues like

1.      How do you determine value of goods vs like shells

2.      Transporting the goods and shells or objects was costly

The next medium of exchange was coins

Modes of Payment available in the current world

1.      Cheques

2.      Cash

3.      Mobile money

4.      Electronic fos….

5.      Credit cards

6.      Negotiable instrument e.g. IOU, Promissory notes

Why do we use the various modes:

1.      Cash

Best for small transactions.

Its certain and fast

Doesn’t have high transaction cost

Where the payment system in the economy is underdeveloped

2.      Mobile Money

Security

For large amounts of money

Convenience

Few regulations

3.      Cheques

They’re a form of negotiable instruments

They’re the most prevalent

It is an equivocal order from bank to pay a third party

When are cheques useful?

1.      It enables one to make payments for large amounts of money

2.      Enable one to keep financial records

3.      Comparably safer

4.      There’s an already existing infrastructure for dealing with cheques

5.      Trade, custom and usage

6.      Can be flexible

7.      Easy to transport

Suggest ways the economy can reduce use of cheques.

1.      Provide alternative infrastructure for other modes like Pesa link

2.       Reduce the cost of transacting for other methods

3.      Prescribing and entering transaction limits for cheques

4.      Provide for an electronic footprint for alternative methods

5.      Deal with cyber security

Mobile Money

1.      Convenience

2.      Technological proliferations i.e. smart phones

3.      Comparatively fast and expedient

4.      Relatively secure

Disadvantage of Mobile Money

1.      Exposed to cyber crime

2.      Exposed to technological failure

3.      Challenge of systemic failure

4.      Transactions Cost

5.      Regulatory risk

Suggestions to enhance mobile money transactions in Kenya

1.      Enhance Security

2.      Deal with transaction cost

3.      Make interoperable platforms

4.      Public education

5.      Regulatory and administrative incentives

Legal and Regulatory Framework in Kenya

1.      Bill of Exchange Act

Provides for the drawing up execution of endorsement of, transfer and payment upon bills of exchange

Provides the rules that govern dealings in the rules of exchange

An instrument drawn up by one person in favour of another for the payment of a sum of money.

2.      Cheques Act

Provides the obligations of the paying and receiving bank.

1.      National Payment Systems Act 2011

Act provides for:

a.       The supervisory and regulatory framework for the National Payment System.

Rules, process, institutions, platforms that facilitate the movement of cash within the economy

2.      National Payment Systems Regulations 2013.

Provides the various categories of national payment systems

Provides the modes of licensing for the said systems

Provides a set of obligations

Provides sanctions and remedies

Banking Act

CBK Act

Micro finance Act

Market Protected Legislations

Consider interactions with shylock:

1.      Customer Protection Act

2.      Competition Act- Regulated conduct other than fact.

Main actors in a national payment system and discuss their effectiveness:

1.      Regulatory agencies eg CBK

Sector regulators

Market regulators

Consumer

Market regulators check on the players to ensure compliance

2.      Financial institutions eg banks, insurance

3.      Market intermediaries

Check interaction between consumer and financial institutions e.g. M-Pesa agent

4.      Public/Government agencies e.g. Ministry of Finance. They make policies

5.      Consumers

6.      Industry assocaitions e.g. Kenya Bankers Associations, Association of Stock Brokers in Kenya. They set up the rules the industry will apply.

Key considerations for the modern payment system e.e underlying factors that have driven the development

1.      Advancement in technology

                            i.            Convenience

                          ii.            Wide range of options

                        iii.            Its changed consumer habits

2.      Demographic changes

3.      Legal and regulatory change

4.      Globalization

Its characterized by:

a)      Global institutions that set the rules

b)      Global standards, rules and guidelines

c)      Interconnectness in terms of transport, communication

5.      Modern national payment system has developed in order to deal with illicit flow of capital, terrorism financing and money laundering.

June 28^th 2017

Objectives

1.      Facilitate convenient and an efficient payment system so that people can be able to transact

2.      Ensures security in the payment system. Enables users of the system to have confidence in it.

3.      Facilitate innovation in the sector.

4.      Ensure protection of the public so that they are not taken advantage of by the providers

5.      Counter illicit flows of funds e.g. funds derived from poaching or corruption and prevent terrorism financing and combat money laundering.

6.      Provide for dealing with systemic risk. Systemic risk is failure in the system when one player has an effect on the whole system which results to low confidence in the system leading to withdrawal, collapse in players in the system such as banks, technology failure for example in the case of Safaricom.

7.      The law seeks to promote national economic and development goals or policies. Payment systems which include banks are first and foremost economic growth agents e.g. through providing jobs. They are a resource of government revenue for example through taxes. They facilitate the provision of government services.

What is a Negotiable Instrument? Section 3 Bills of Exchange Act

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.

Therefore, a bill of exchange has the following conditions:

1.      Must be an unconditional order

It must be a positive order to pay, not a mere request or authorization.  The usual wording is “Pay X…”, though “Please pay X…” is also regarded as unconditional.

An order is not unconditional if:

·         It gives the drawee a discretion whether to pay or not, e.g. “Pay P, if satisfied with goods consigned”.

·         It orders payment from a particular fund, e.g. “Pay P out of my current account”,  (But where an unconditional order to pay is merely coupled with mention of a particular fund, for the guidance of the drawee, this is sufficiently unconditional) ; or

·         It requires the drawee to do something more than to pay money, e.g. “Pay P and notify me in writing.”

2.      Must be in writing

3.      Must be addressed by one person to another to pay a sum of money strictly

4.      The sum of money must be determinate or certain. Has to be a specific figure.

The sum must be expressly stated. The currency should also be stated. The sum must be capable of being determined without any difficulty when it hasn’t been stated

The phrase “a determinate sum of money” is used under the Geneva Uniform law on Bills of Exchange and Promissory Notes, 1930, concluded in Geneva as a result of pressure for international unification of private law – under the auspices of the League of Nations.

In Plateau Hotel Ltd. V.  Mitchell (1924) 10 K.L.R. 76, a promissory note for “Kshs. 4,449/50 plus bank charges and stamp duty for value received” was held not to be a bill of exchange on the ground that it was not for a sum certain.

(a)    A sum may be certain within the meaning of the Act even though it is to be paid:

(i)                 with interest (usually calculated from the date of the bill),

(ii)               by instalments; or

(iii)             according to some indicated rate of exchange, e.g. where a bill drawn in Shilling in Kenya is payable in dollars in the USA: s.9 (2) BEA.

(b)   Where the sum payable is stated in both words and figures and these do not agree, the sum denoted by the words shall prevail and is the amount payable: s. 9 (2) BEA. It should be noted that there is no legal obligation to write out the sum payable both in words and figures, even though this is the practice.

(c)    A miscalculation does not render uncertain an otherwise agreed sum certain and if the defendant knows his exact liability as to the amount then there is no uncertainty: per Madan J. in Lombard Banking Ltd.v. J.L. Gandhi and Another (1965) EA 12, at p.14.

5.      Payment must be made either to the bearer of the instrument or a person specified in it.

Validity of a Bill of Exchange.

a.       Dating the bill

It is not a requirement that the bill should be dated

b.      The name of the person being paid. The payee doesn’t have to be specified. Bearer cheques.

c.       You don’t have to explain the consideration for the instrument

d.      You don’t have to specify the place it was drawn.

Types of Cheques

Bankers

Personal

Closed

Open

Travellers Cheque

Types of Negotiable Instruments…

Problems facing Negotiable Instruments

Fraud and forgery

Determining the validity of the instrument i.e. does it express the wishes of the drawer.

As means of payment, they need to be widely accepted so that they can be used.

Presumptions on Negotiable Instruments.

Presumptions set the basic rules that set the drawing up and transfer of instruments.

1.      It is a rebuttable presumption that all instruments have been made, drawn or made, endorsed, accepted and or transferred for a consideration. Section 30 BEA

2.      Every instrument is presumed to have been made if it bears a date on that date.

3.      Every instrument is presumed to have been accepted within a reasonable time of its date and before maturity. In the case where a cheque is past its maturity date and one presents it after and it is dishonoured, it is presumed that before the maturity date, the law presumes that you have accepted it because you have nt objected it or notify the owner.

4.      Every instrument is presumed to have been transferred before its maturity

5.       Every instrument is presumed to have been endorsed in the order which the instrument appears. A negotiable instrument can be transferred to another party and the benefit of transferring it to another party is known as endorsement and conditions can be attached to the endorsing. The most effective endorsement is the last in time which takes precedence over all other endorsements

6.      It is a presumption of law that all instruments have been duly stamped. That is stamp duty as well has been paid

7.      It is a presumption that all instruments are held by the holder in due course thereof.

Section 29 BEA. A holder in due course is a holder who has taken a bill:-

(i) complete, proper and regular on the face of it; (A complete bill is one that has met the requirements of section 3,)

(ii) before it was overdue and without notice that it had been dishonoured or has a defect (if such was the case);

(iii) in good faith and for value and;

(iv) without notice of any defect in the transferor’s title

Drawing and execution of Negotiable Instruments

·         Capacity

Similar to capacity in contract

Minor, Unsound Mind, undischarged bankrupt cant draw a cheque

Q. Mato has drawn a cheque to the nephew Jivinjari. The instructions are on your 16^th birthday spoil yourself. Jivinjari goes to shop and he presents the cheque intending to buy a player. The owner of the shop, Mawendo, takes the cheque and writes the cheque on behalf of his shop’s name and later in the bank it gets dishonoured. Advice Problems…Holder in due course, Minor