Negotiable Instruments

THE DEVELOPMENT OF COMMERCIAL LAW

Commercial Law as it developed in Europe in the middle ages evolved from the customs and procedures, institutions and rules established by the merchants.  Most European legal systems were very slow in adapting to the demands of commerce at the time. Hence, a separate legal system conceptually different from the rest of the law grew into what became known as “commercial law”

In England, for example, a separate system of commercial courts was created to enforce commercial customs as law in commercial transactions.  Along with this were developed principles of equity in the Chancellor’s courts to supplement and correct common law.

For commercial purposes a person may own something which is not actually in his possession.  In common law this was merely a right to obtain possession of the thing – a “chose in action”, that is, a thing which could be obtained by legal action as distinct from a chose in possession.

Chose in action

The word “chose” used in this context comes direct from the French word which simply means “thing”, an object.  Property, as a thing, can be classified depending upon whether it is in material form or is in the form of a right or an interest in something of value, a right which may be enforced through orders of the courts.

Property that is tangible or capable of physical possession may be referred to as chose in possession.  Any other property which is merely in the form of a right claimable or enforceable through court action but which does not exist in a material form is called a chose in action.

In both cases, such possession or right will be evidenced also in writing.  The written document is itself often called the chose in action.

Common law did not recognize the commercial practice of a merchant reselling something he has bought but has not taken delivery of yet.  The only way common law would recognize this was by the transfer or assignment of the right to obtain delivery, a chose in action.

Thus if A had sold but had not delivered something to B, B could only transfer to C the right to obtain delivery from A.  Even then, C could obtain no more from A than B could have done; so if, for example, B had not yet paid A,C could not get delivery even if he paid B in full and knew nothing of the state of affairs between A and B.

Common law found if difficult accommodating the rights of parties who were not privy to a contract even if they had acquired interests in the subject matter.  But commercial custom proceeded to develop various means of ensuring that  promise to pay money is as good as money itself, even for persons not party to the original promise to pay.

A merchant dealing with items in bulk will find it impossible to carry large amounts of money in coins and to make each purchase on the basis of a physical exchange of cash for goods.  To him the essence of the transaction is the agreement to sell and buy at a particular price among other considerations such as convenience of the business.  The physical control of goods is not important because the merchant does not usually need the goods for personal use.  He invariably needs them for resale or for use in production.  In other words, what is more important to the merchant in commerce is ownership of goods and not possession. His major concerns are with proprietorship of the capital, who takes the profit from the use of the goods for production or their resale and who bears the loss should the goods be lost or destroyed or lose value.  Today the essence of commerce is not the physical exchange of articles or trade; it is primarily an exchange of promises.  Thus, wealth today is largely made of promises, not goats, sheep or herds of cattle as it was at the turn of the 20^th century.

Such a system of commerce must of necessity thrive on confidence. The agreements are made on the presumption that the parties to them will honour them and carry out their obligations under them.  In general, the businessman stands to gain more in his observance of the rules than by their breach.

4. NEGOTIABLE INSTRUMENTS
   • Negotiability

Meaning of negotiability - There are certain classes of documents or choses in action which are freely used in commercial transactions and monetary dealings called negotiable instruments.  They can be transferred (or negotiated) without the formalities necessary in assignments of choses in action under section 3, Law of Contract Act, or the rules of equity.  The word “negotiable” as used here means transferable from one person to another in return for consideration.  An “instrument” means a written document by which a right is created in favour of some person.  Thus a negotiable instrument is a document which entitles a person to a sum of money and which may be transferred from one person to another.  Essentially, it is a method of transferring a debt from one person to another.  The term is not even defined in any of the primary statutes in Kenya.

More technically, a negotiable instrument may be defined as a chose in action, the full and legal title to which is transferable by mere delivery of the instrument (possibly endorsed by the transferor) with the result that complete ownership of the instrument and all the property it represents passes free from equities to the transferee, providing the latter takes the instrument in good faith and for value:  See Guide to Negotiable Instruments and the Bills of Exchange, 7ed. by  Dudley Richardson, p. 15.

Put another way, it is a document evidencing an obligation, which:

• is transferable by mere delivery (or by delivery plus endorsement),
• such delivery operating to transfer all legal rights to the obligation evidenced,
• free of any defects in the transferor’s

A negotiable instrument payable to bearer, such as a bank note, is transferable by delivery alone.  One payable to the order of a specified person, such as most cheques, is transferred by delivery of the instrument endorsed (signed) on the back by the payee or other transferor.

• Characteristics of negotiable instruments

Title passes by delivery (or by delivery + endorsement); whereas a legal assignment of an ordinary chose in action must be in writing under s. 3, Law of Contract Act and any assignment not in writing is merely equitable.  An equitable assignment (such as an oral assignment) is an assignment which though valid fails to comply with requirements that it be in writing: s. 3, Law of Contract Act.

No notice is necessary to the debtor or other obligee; whereas ordinary assignments must be notified under s. 3, Law of Contract Act or the rule in Dearle v. Hall (1823) 3 Russ 1.

The holder can sue in his own name; whereas an equitable assignee of an ordinary chose in action cannot.

A bona fide transferee for value takes free of any defects in the transferor’s title; whereas an assignee of an ordinary chose gets no better title than his assignor had.

A transferee in due course takes free of any defences which could have been raised by the debtor against the transferor; whereas any defence available against an assignor of an ordinary chose in action can be raised against the assignee.

4.3          Examples of negotiable instruments

A chose in action may become negotiable either

• by statute, or
• by mercantile custom judicially recognized. Essentially all cases of statutory recognition of negotiability merely confirms previous judicial acceptance of a mercantile usage which had recognized an instrument as negotiable:  see Text and materials in Commercial Law by L.S Sealy and RJA Hooley at p. 474.  In Kenya bills of exchange, cheques and promissory and bank notes are expressly recognized by the Bills of Exchange Act as negotiable.

With respect to other instruments, it has been observed that “these days [mercantile] usage is established much more quickly than it was in days gone by; more depends on the number of transactions which help to create it than on the time over which the transactions are spread” per Bigham J. in Eldeisten v. Schuler & Co, (1902) 2 KB 144 at 154.  Thus even if the usage is of recent origin the courts will still recognize it.  See Bachuanaland Exploration Co. v. London Trading Bank Ltd (1898) 2 QB 658.

The following rules will be applied by the courts to recognize an instrument as negotiable through mercantile usage: -

• the usage must be “reasonable certain and notorious”: see Devonald v. Rosser & Sons (1906) 2KB 728, p. 743, per Farwell L.J.’ CA;
• the usage must be general and not “a custom or habit which prevails only in a particular market of particular section of the commercial world” see Easton v. London Joint Stock Bank, 1886 34 ch. D. 95 at p. 113, per Bower L.J. CA.
• the instrument’s terms must not be incompatible with negotiability (for example not marked “Non-negotiable”) nor stated to be transferable by some other method than delivery; see London and Country Banking Co. Ltd v. London and River Plate Bank Ltd (1887) 20 QBD 232, at 239, per Manisty J.

As seen already, instruments negotiable by statute include bills of exchange including cheques and promissory notes including bank notes.  Instruments negotiable by custom include banker’s drafts, share warrants, bearer debentures, treasury bills, dividend warrants, interest warrants, bearer bonds, floating rate notes, bearer scripts and certificates of deposit issued by commercial banks.

But they must be in a deliverable state, that is, in favour of the bearer.  Bills of exchange, cheques, divided warrants and interest warrants are often drawn in favour of a specified person; and to create the deliverable state they must be endorsed by that person.

• Test of Negotiability

• complete transfer is made by mere delivery i.e. handing over from one person to another; no notice is necessary to the party liable;
• a full and legal title passes;
• title passes free from all equities (including defects in title)

4.5.         Non-negotiable instruments

The following documents of title to money or security for money are not negotiable instruments, though they are freely transferable:  bills of lading, Post Office orders, money orders, registered share certificates, IOUs and receipts, dock warrants, delivery orders, insurance policies and registered debentures.  Documents of title to goods such as bills of lading are not negotiable.

EXAMPLE: A postal order and 100-shilling note are stolen from X. The thief sells both to Z.

• the bank note is a negotiable instrument payable to bearer and Z becomes the legal owner of it: X cannot recover it from Z and can only sue the thief.
• The postal order is transferable, but not negotiable; therefore the seller of it cannot give a better title than he has himself. The thief has no title, therefore Z can get no title; X can recover the postal order or its value from Z (who can only sue the thief for damages).

4.6          Who can sue on a Negotiable instrument?

If a negotiable instrument is dishonoured (i.e. not paid when due), a holder for value can sue any person who signed the bill before it came into his possession.

The persons who may be liable are:

• the drawer, i.e., the person who first issued the instrument;
• the acceptor, i.e. the person (if any) who has accepted liability on the instrument, and
• any endorser, that is, any person who has transferred the instrument to another and endorsed it to effect the transfer (he will also have a right of action against accommodation parties, i.e. persons who have signed an instrument merely to lend the credit of their names to the instrument).

EXCEPTIONS:  A signatory may avoid liability in the following cases: -

• where he signed under a fundamental mistake as to the nature of the document: see s. 15;
• Where his signature was forged (since then he has not signed it himself), unless he is estopped from denying the genuineness of the signature, e.g. where he facilitated the forgery.
• Where he signed sans recours (‘without recourse”), indicating that he accepted no liability on the instrumentThe drawer of a bill and any endorser may insert therein an express stipulation negativing of limiting his own liability to the holder: s.16 BEA.
• Where for some reason the law will not allow him to be sued, e.g. infants, bankrupts, enemy aliens, etc.
• BILLS OF EXCAHNGE

The law relating to negotiable instruments in Kenya is the Bill of Exchange Act    [Chapter 27, Laws of Kenya] supplement by the Cheques Act [Chapter 35,       Laws of Kenya].  The former makes provisions for bills of exchange, cheques      and promissory notes, while the latter specifically deals the payment of cheques            and certain other instruments, more particularly the protection of the   collecting and paying bankers in relation to cheques.

5.1          Bills of Exchange Act, Cap 27. 

This Act codified the law relating cheques and other bills of exchange, the most important kinds of negotiable instruments. Specifically, it deals only with bills, notes and cheques. It does not apply to other negotiable instruments, such as negotiable bonds.

(Most of the rules laid down by the Act as applying to bills of exchange generally apply also to cheques, which are bills of exchange drawn on a banker.                But since cheques are bills payable on demand, the rules relating to        presentation for acceptance do not apply to them.)

• Bills of Exchange Defined

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”:  Bills of Exchange Act, s. 3 (1).  The person issuing the order is called      the drawer, and the person to whom it is addressed is the drawee.  If the bill is               made payable to a named person, or to his order, it is an order bill and he is        the payee.  Otherwise a bill may be payable to bearer, and such a bearer bill is          transferable by mere delivery (without any endorsement). An order bill,             however, requires to be endorsed by the payee to effect transfer.

• “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.”
  • Parties to a bill.

The three necessary parties are the drawer, the drawee, and the payee (or bearer).  One person may fulfil two different capacities, e.g. where he draws a bill payable to himself, or payable to the drawee (such as a cheque on Taifa Bank and payable to the bank in payment of a debt).  In such cases the bill is fully valid and can be negotiated in the normal way.

But where the drawer and drawee are the same legal person (e.g. where a branch of a company draws a bill on its head office), the order is not strictly a bill of exchange, but a promissory note in favour of the payee: B.E.A, s. 5 (2).

A bill is also treated as a promissory note if the payee is a fictitious person or      lacks contractual capacity: B.E.A, s. 5 (2).

5.5.          Addressed to drawee.

The drawee must be identified with reasonable certainty (depending on the circumstances)

A bill can be addressed to joint drawees (e.g. to P, Q and R, but not to   alternate drawees (e.g. P, Q or R).

• Dating a bill.

If a bill I undated the holder may insert what he believes to be the correct date of issue (which may be necessary for calculating time for payment).

If an incorrect date is inserted the bill is nevertheless enforceable by a holder    in due course as though the date were correct: s. 12, B.E.A.

A bill should bear the correct weekday date, but is not invalid merely because it                is post-dated, ante-dated, or Sunday dated.

                Any date appearing on a bill is presumed to be the correct one unless the          contrary is proved: s. 13. BEA.

                (NOTE: By s. 45 BEA, the drawer and endorsers are discharged from liability         if the bill is not presented for payment on the due date.  Section 12, BEA                 therefore protects a holder in    due course against s. 45, where the has in good                faith relied on an incorrect date).

• Consideration and capacity
• Bills of exchange require to be supported by consideration like other simple contracts, but note:
• Consideration is presumed in favour of a holder. Thus the normal burden of proof is reserved.  Whereas in other contracts the person seeking to enforce the contract must prove that he has given consideration in, bills of exchange it is for the defendant to show that no consideration has been given.
• Past consideration suffices, i.e. any antecedent debt or other obligation: 27 BEA.

                   An allegation that a bill of exchange has been obtained under duress, it is incumbent upon the holder to prove consideration: see Hassanali Issa & Co. v. Jeraj Produce Store, (1967) H.C.D. 52 (T), per Hamlyn. J.

• Capacity to contract by bill of exchange is generally co-extensive with ordinary contractual capacity: see s. 13. Thus an infant incurs no liability by singing a bill, but adult signatories to the same bill would be fully liable.

5.8.         Sum payable.

A bill must order the payment of a “sum certain in money,” i.e.not in      goods or services, etc. It should be noted that the phrase used is “a sum                 certain” and not “a certain sum” which could mean an unspecified sum.

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 sum may be certain within the meaning of the Act even though it is to be paid:
  • with interest (usually calculated from the date of the bill),
  • by instalments; or
  • 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.
• 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.
• 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.

5.9.         Order and bearer bills.

A bill may be drawn payable to bearer, or to the order of the drawer, payee, or (sometimes) drawee: s. 3 (1) BEA.

                (a)          Order bills are those payable to a named payee or some person               designated by him.

                                A bill is an order bill if: -

                                (i)  the bill itself states, or

                                (ii)  it is payable to a specified person without further  words prohibiting transfer, e.g. “Pay P” or “Pay P or order”: s. 8 (4), BEA.

A bill payable to “P only” is not an order bill and in fact is not really a negotiable instrument at all, but an ordinary chose in action.   Such a bill is enforceable by P, but if P sells it to Q, Q cannot enforce it against the drawer or drawee except through the agency of P.

                (b)          Bearer bill are those transferable by mere delivery.

                                A bill is a bearer bill if:

                                (i)            the bill itself so states;

                                (ii)           the last or only endorsement is in blank i.e. the endorser has merely signed his name without adding the name of the transferee: s. 8 (3) BEA; or

                                (iii)          the bill is payable to a fictitious or non-existent person: s.7(3)                                     BEA.

A non-existent person is one of whose existence the drawer is unaware, or who does not exist at all.  A fictitious person is one of whose existence the drawer is aware but who was not intended by the drawer to receive payment: see Bank of England v. Vagliano Bros. (1891) A.C. 107.  Put another way, he is a real person who never had nor was intended to have any right to the bill.

For practical purposes, there is no difference between a fictitious or non-existent person and s. 7 (3), BEA, makes no distinction between them, either. Section 7(3), BEA circumvents the effects of section 24, relating to a forged or unauthorized signature on a bill which is treated as wholly inoperative. If a bill is treated as payable to bearer, any forged endorsement is irrelevant because the possessor of the bill will be, in any event, a holder within the statutory definition:  See L. S Sealey & R.J.A                 Holley, Text and Materials in Commercial Law, p.496.

• Inland and foreign bills

                (a)  An inland bill is one which is or purports to be

                                (i)            both drawn and payable within East Africa, or

                                (ii)           drawn within East Africa upon some person resident therein: s.4, BEA.

(b) Foreign bills are all other bills. But unless the contrary appears on the face of the bill the holder may treat it as an inland bill.

(This distinction is only important regarding (i) procedure on dishonour                 (discussed below), and (ii) stamp duty),

• Bills in a set

A set of bills means a bill executed in duplicate, triplicate, etc.  This practice is common in the case of foreign bills.  The object is to avoid delays and inconveniences which might otherwise arise from the loss or mislaying or miscarriage of the bill and also to enable the holder to transmit the bill by different conveyances to the drawee, so as to ensure the most prompt and speedy presentment for acceptance and payment (Halsbury’s Laws of England 4ed. Vol. 4 p. 215).  The payment of one part of the bill in set discharges the other parts also: s.71.BEA.  But if the drawer mistakenly accepts two or more parts of the same bill he will be liable on each part accepted as if it were a separate bill.  Similarly a holder who endorses several parts is liable on each.

• Inchoate or incomplete instruments.

Where a person places a simple signature on a blank stamped paper and;

• delivers it to another,
• intending it to be converted into a bill, it operates as prima facie authority to fill it up as a complete bill for any amount which the stamp will cover, using the signature already upon it as that of drawer, acceptor, or endorser: s.20 (1), BEA. In the same way when a bill is wanting in any material particular, the possessor has a prima facie authority to fill up the omission in any he thinks fit:

                Such a bill can only be enforced against the original signer if it is: -

• filled up within a reasonable time of delivery; and
• completed strictly within the limits of the authority given: s. 20 (2).

But after completion the bill is fully enforceable in the usual way.  Thus where   S signs an inchoate instrument and delivers it to P with authority to complete it for not more than              Kshs. 2,000/=, if P fills it up for Kshs. 20,000/= he cannot force S to accept liability for that amount.  But if P sells (negotiates) the bill to H, who takes it in good faith and without   notice of the Kshs. 2,000/= limit, H as “a holder in due course” (see s. 29, BEA) could enforce the bill for the full Kshs. 20,000/= against S.

                Materials alterations

Any alteration to a bill will be deemed to be material if it in way changes the operation and effect of the bill and the liabilities of the parties, whether thechanges is prejudicial or beneficial.

A bill or acceptance which is materially altered without the assent of all parties liable on it is avoided except as against the person who has himself made, authorized or accented to the alteration as well as subsequent endorsers: s. 64 (1) BEA. Such material alteration must be apparent, otherwise a holder in due course may enforce payment of it: see Apparent and non-apparent alterations, below.

A cheque is discharged by material alteration not authorized by the holder. Any amendment on a cheque should therefore be initialled by the holder as proof of alteration.

                The Bills of Exchange Act declares the following alterations to be material:

• The date;
• The sum payable: where , e.g. sum payable  has been altered  without authority, a cheque is discharged and no one can make any claim to have the cheque paid;
• The time of payment;
• Place of payment;
• The addition of a place of payment without the acceptor’s consent where a bill has been accepted generally, section 64; and,
• The obliteration of a crossing authorized by the Act on a cheque or other unauthorized addition or alteration thereof: s. 78, BEA.

“Alteration” must be distinguished from “addition”.  In National Bank of Commerce v. Yusuf Hussein Allidina (1968) High Court Digest 485 (T), the plaintiff, as a holder in due course, sued on a promissory note made by the defendant.  The note was endorsed to the plaintiff and was dishonoured when presented for payment.  The plaintiff admitted that at the time of endorsement the place of payment was blank but was only filled in later without the consent of the defendant.  Georges C.J. held that the case did not fall within material alterations specified in section 64 (2) of the Bills of Exchange Act because it was not an “alteration of the place of payment” but an addition. Secondly, the second part of section 64(2) referring to additions of places of payment, applies only to bills accepted generally; and section 90(3)(b) provides that the provisions of the Act relating to acceptance do not apply to promissory notes.

Pursuant to various judicial decisions some of which preceded even the English Act of 1882 and certainly our own Act of 1927 the following other alterations have been held as material:

• addition or alteration of a rate of interest (Warrington v. Early (1853) and Sutton v. Toomer (1822)).
• the insertion of a particular rate of exchange (Hirchfeld v. Smith (1866);
• alteration of the name of the payee (Lumsden & Co. v. London Trustee Savings Bank (1971) 1 Lloyd’s Rep. 114)
• the alteration of the description of the payee (Slingsby v. District Bank Ltd. (1932) 1 K.B. 544, CA).
• alteration of the word “order” and “bearer” (but not vice versa): see Richardons Guide to negotiable Instruments, 8 ed, p. 144;
• the alteration of the place of drawing a complete bill, which changes the bill from an inland to a foreign bill (Koch v. Dicks (1933) 1 K.B. 307);
• the addition of the name of a new maker to a joint and several note (Gardner Walsh (1855); Flanagam v. National Bank Ltd. (1939) I.R. 352);
• the elimination of the name of an existing maker (Mason v. Bradely 1843); and
• the conversation of a joint note into a joint and several note (Perring v. Hone (1826)

(a) Effect of material alteration

An unauthorized alteration discharges from liability all persons liable on the bill; and the bill is avoided except as against a party who has himself made, authorized or assented to the alteration and subsequent endorsers: s. 64 BEA. In other words, where alteration to a bill is material, it becomes void except as against the party who was privy to the alteration and except in the case of an alteration that is not apparent: See Fakri Stores Ltd v. London Confirmers Ltd, (1965) E. A. 159.

(b) Apparent and non-apparent alterations –

The effect of s. 64 differs slightly where the alteration is not apparent.  In this case a holder in due course can enforce as if it has not been altered, i.e. with the alteration deleted: s. 64.

Where the alteration is apparent, all parties prior to the alteration are discharged from liability (even against a subsequent holder in due course).  But the bill will be valid and enforceable as between persons who became parties subsequent to the alteration.

EXAMPLE:           S draws a cheque for Kshs. 2000/= in favour of P, who fraudulently alters the amount to Kshs. 20,000/= and sells (negotiates) it to Q who negotiates it to R.  Here R can enforce it against Q and P, even if the alteration is apparent, but he has no remedy against S unless he is a holder in due course and the alteration was not apparent (when he can make S liable for the unaltered amount)

(c) Cheques:

Although the provisions of s. 64 apply to cheques (see s. 73 (2), BEA) it should be noted that if a cheque is altered and the drawer later authorizes the alteration (usually by initialling it) the effect is that the drawer is bound by the cheque as altered, and other parties are protected by s. 64 unless they, too, have assented to the alteration.  Section 78 specifically applies only to authorized crossings on cheques.

Burden of Proof

The onus is on the plaintiff suing on a bill of exchange which has been patently altered in a material respect to prove that the defendant was privy to the alteration: See Fakri Stores Ltd v. London Confirmers Ltd (1965) E.A. 159.

• Overdue bill

                A time bill, that is a bill due and payable on a specified future date, becomes overdue on or after that date.  Anyone who takes the bill thereafter cannot be a holder in due course, though he may be a holder for value.

                (a)          A bill payable on demand is overdue when it appears on the face of it to have been in circulation of an unreasonable length of time.  What amounts to an unreasonable length of time is a question of fact in each case: BEA. S. 36 (3).

                (b)          Other bills are overdue when the date fixed for payment has passed without the bill being presented: s. 36, BEA.

                Effect of a bill being overdue is:

                (i)            that it can still be negotiated, but

                (ii)           a transferee can get no better title to it than his transferor had, i.e. he cannot be a holder in due course.   But if “the person form whom the                holder took it had at the time when the instrument        matured a good title, the holder is not affected by a defect in the title  of a previous                                    holder” Halsbury’s laws of England 4ed. p. 176.

• Lost bills.

If a bill is lost before it is overdue, the holder can compel the drawer to issue a replacement (though he cannot compel any other parties to sign the copy); s. 69.

                Where this happens the drawer can demand security from the holder, to guard                against the possibility of having to pay twice over, i.e. on the original bill         and on the replacement.

• Bills as conditional payment.

A creditor who receives a cheque or other bill in settlement of his debt is not regarded as finally paid, since he has not received cash but merely a contractual right to obtain cash under the terms of the bill.  Payment by bill of exchange therefore is conditional, i.e. subject to a condition that if the bill is dishonoured the creditor shall have a right of action for the debt against the debtor.

• Stamp duty.

A bill of exchange must be stamped under the Stamp Duty Act, Cap 480.  For the purposes of the Stamp Duty Act, a bill of exchange includes “draft, order cheque and letter of credit, and any other document or writing entitling or purporting to entitle any person, whether named therein or not, to payment by any other person of, or to draw upon any other person for any sum of money”: s. 32, ibid.

6. SIGNATURE, DELIVERY AND ENDORSEMENT
7. Meaning of negotiation - A bill negotiated when it is transferred in such a way as to constitute the transferee the holder of the bill, i.e. by delivery of a bearer bill, or by delivery plus endorsement of an order bill: s.31, BEA.  Negotiation may be prohibited by clear words written on the face of the bill, e.g. by marking the bill, “Not Negotiable”

                NOTE: The addition of the words “Not negotiable” has differing effects in cheques and other bills.

• A cheque crossed “not negotiable” remains transferable, but the transferee gets no better title than his transferor possessed, i.e. the instrument descends to the status of an ordinary assignable chose in action: see below.
• Any other bill marked not negotiable ceases to be transferable altogether: Hilbernian Bank v. Gysin & Hanson (1938) 2 KB, 383; 2 All E.R. 575.

                (iii)          A cheque or other bill marked “Not transferable” ceases to be transferable altogether (and therefore is not really a bill of exchange).

2. 2. No liability without signature. Liability on a bill is incurred only by a person who has signed it, either as drawer, acceptor or endorser s.

• Signature in an assumed name, or on behalf of a firm confers full liability: s. 23.
• Agent’s signature. An agent may simply sign in the name of his principal but it must be clear that he does so in the capacity of an agent. It is the signature and the authority to place it on the instrument that are important. Under section 35 of the Companies Act, Cap 486, any person acting under the express or implied authority of a company may make, accept or endorse a bill of exchange or promissory note, provided that he does so in the name of or on behalf of or on account of the company.

Under section 35 of the Companies Act, Cap 486, any person acting under the express or, implied authority of a company may make, accept or endorse a bill of exchange or promissory note, provided that he does so in the name of or on behalf of or on account of the company.

Any agent signing a bill incurs full personal liability unless he makes it      clear that he signs merely on behalf of someone else, e.g. by signing                                         “per pro” acronym for per procurationem i.e. by procuration) or “for and on behalf of” his principal: s. 26 BEA e.g. a company director should sign        thus: “J. Legi, Director, per pro Mbata Holdings Ltd” and not merely as   “director” or “manager”.  In the latter case he will be held personally liable on the cheque.

Similarly an agent will be personally liable on a cheque if he merely signed against a rubber stamp showing the company’s name.  In Hamisi Mlezi v. Umoja Printers 1968 H.C.D. 350, the plaintiff sued the defendant on a dishonoured cheque issued and signed by the defendant.  The cheque was rubber stamped “Bashir & Company” and the defendant was the person authorized to operate its bank account.  The defendant argued that he had signed the cheque merely in a representative capacity and was not personally liable on it.  He relied on section 26 (1), BEA.  It was held by Duff J. that the defendant was personally liable on the cheque and the mere stamping of the company’s name without more did not automatically exclude his liability.

The form of the signature operates as notice to third parties of the limitation of             authority.  The agent acting within the actual limits of his authority will bind the principal.  The fact that he may have abused his authority does not affect the rights of the holder.  An instrument drawn per pro outside the scope of the agent’s authority will however not bind to the principal: Reid v. Rigby & Co. (1894) 2 QB 40,DC.

• Transferor by delivery – A person who transfers a bill by delivery without endorsement (i.e. bearer bill), is not liable upon it (except to his immediate transferee): s. 58, BEA.
• Endorsement by a stranger – A person who is not a party to a bill but who signs it for any reason is fully liable on the bill by reason of his signature, to a holder in due course: s. 56.

3. Signature sans recours - The drawer or any endorser can negative or limit his liability by clear words accompanying his signature on the bill: s. 16.
   • Signature sans recours (“without recourse”) negatives all liability of the signer on the bill.
   • Signature sans frais (“without expenses”) limits the signer’s liability to the actual value of the bill, i.e. excludes liability for any expenses arising through dishonour and subsequent action for enforcement.

4. Forged and Unauthorized signatures

                Effect of forged signature – where a signature on a bill or note is forged or          placed thereon without the authority of the person whose signature it purports        to be, the forged or unauthorized signature is wholly inoperative and no rights can be acquired by reason of                 such signature unless the party against whom    enforcement is sought is for some reason estopped from denying the   genuineness of the signature: s. 24, BEA.

Section 92 BEA, states that  where, by this Act, any instrument or writing is required to be            signed by any person, it is not necessary that he should sign it with his own hand, but it is sufficient if this signature is written thereon by some other person by or under his authority.

• Forged Signature

                Forgery is defined as the “making of a false document with intent to defraud or                to deceive” s. 345, Penal Code.  A document is false when: -

• it purports to be what in fact it is not; or
• it is altered without authority in such a manner as to alter its effect; or
• some matter is introduced into it without authority, whilst it is being drawn, which alters its effect; or
• it is signed in the name of any person without his authority; or
• it is signed in the name of a fictitious person alleged to exist;
• it is signed in the name represented as being the name of a different person from that of the person signing it but meant to be mistaken for the name of the person signing it; or
• it is signed in the name of the person impersonated by the person signing it; S. 347, Penal Code.

A forged signature is one which is false or altered.

Examples: -

• X signs S’s name to a cheque, or alters a signature to that of another person.
• A person of the same name as the payee named in a bill of exchange endorses the bill, knowing he is not the person in whose favour it is drawn: Mead v. Young (1970); see also s. 347 (d) (1) Penal Code.
• An unathorised signature is where a person signs his own name, but without authority to do so, e.g. where an agent without authority to do so signs a cheque on behalf of his principal.
• Ratification of signature – An unauthorised signature can be ratified by the person by whose authority it purports to be made, thus validating

A forgery cannot be ratified in any circumstances since falsely making or altering any documents is a criminal offence, and as such can never be validated: s. 347, Penal Code.

“Where the signature of a party to an instrument has been forged, the fact that the holder has subsequently obtained the genuine signature of that party does not restore validity to the instrument” – Halsbury’s ibid p. 178.  A holder paid on an instrument in good faith may be compelled to return the money paid if his title was derived through a forged endorsement:  Imperial Bank of Canada v. Bank of Hamilton (1903) AC 49 PC.

(d)  Estoppel. If a person knows that his signature to a bill has been forged, but leads others to believe that the signature is genuine he will be estopped from denying the genuineness of the signature and will be fully liable on the bill, e.g. where S habitually lets his wife forge his signature to cheques and obtain cash thereon, he may be estopped from denying the genuineness of such signature if a dispute later arises.

• Effect of forged signatures

                (a) Forgery of drawer’s signature. The bill is void since it fails to satisfy the definition in s. 3 (1) BEA, of an order “addressed by one person to another,          signed by the person giving it.”  The forged signature is wholly inoperative.

                But the bill will remain valid as between subsequent parties to it, For example   if Mtapeli draws a cheque in favour of himself on Akia’s bank and forges               Akia’s signature as drawer. He then negotiates the cheque for value to                 Jauso. Here Akia incurs no liability on the bill (unless estoppel applies),     but Jauso has fully rights of action against Mtapeli.

                (b)  Forgery of the acceptor’s signature – The bill acceptor incurs no liability,       but a holder has full rights against other persons whose signatures are   genuine, i.e. the drawer and endorsers.  The acceptor of the bill is precluded     from denying to a holder in due course the genuineness of the drawer’s      signature or his authority to draw: s. 54 (2) BEA; see also Bank of England v.        Vagliano Bros (1891) AC 107, HL.

                (c)  Forgery of endorsement - If a bill is an order bill endorsement is vitally           necessary to effect legal transfer; therefore any forgery of such endorsement    nullifies transfer.  Thus the transferee gets not title to the bill, and has no            claims against persons who became parties to             it before the forgery.  The Bill     will however be valid and enforceable as between parties subsequent to the    forgery: s. 55BEA.

                Example:  S draws a cheque in favour of A, who negotiates it to B.  X steals the cheque from B whose signature he forges to negotiate it to Y.  Y in turn    negotiates the cheque to Z. Z can enforce the bill against Y (and X), and Y             can claim compensation from X.  However Y and Z have no claims against S,           A or B.  As a lot bill, B may compel S to issue another cheque if he gives adequate under s. 69 BEA.

                NOTE:  In cases (a) and (c) above no person who takes the bill subsequent to     the forgery can be a holder in due course (though by ss. 54, 55 he may have         the legal rights of such a holder against persons who became parties      subsequent to the forgery).

6. Delivery of bills - Delivery is defined as the transfer of possession, actual or constructive from one person to another: s. 54 BEA. No person is liable upon      a bill unless he has: -

                (i)  signed it, and

                (ii)  delivered it.

                An order bill must have the signature of the transferor on it in order to effect a                 valid transfer; but a bearer bill is transferable by delivery without               endorsement.

Delivery means deliberately and unconditionally transferring possession to another: BEA, s. 21, (1). No person is liable on a bill, even if he has signed it, if he can prove positively that he did not deliver it, either actually or constructively.  This means that if a bill is stolen from a person (whether as drawer or endorser), he has not delivered it and he (and prior parties) incurs no liability except where delivery is reputably presumed: See below.

• Delivery presumed

                (i)  Delivery is conclusively presumed in favour of a holder in       due course, who can thus enforce a bill even against a person    who can show that he did not deliver it: s. 21 (2);

                (ii)  Delivery is also reputably presumed in favour of any holder                 (though here it can be disproved so as to avoid liability): s. 21                 (3).

• When delivery is reputably presumed – Delivery is not presumed conclusively where :

(i) the bill was not complete or was irregular when it left the possession of the party to be charged, e.g. an inchoate instrument, or

                (ii) where the person seeking to enforce it is not a holder in due               course.

• Conditional delivery - Where a bill is delivered subject to the fulfillment of some condition, delivery is incomplete until the condition is satisfied, and the bill is not enforceable between the parties to the conditional delivery.

        (But such bill is fully enforceable by a holder in due course: see  (b)   above)

• When deliverer liable – Although a person who delivers a bill without signing it is not generally liable on the bill, he impliedly warrants: -

                (i)            that he will indemnify his immediate transferee (but no                one else);

                (ii)           that the bill is genuine, and

                (iii)          that he is entitled to transfer it.  (This warranty does not apply if the transferee has not given value for the bill.)

7. ENDORSEMENTS

                To endorse is:

• to give approval or sanction, or
• to sign (one’s name) on the back of (a cheque etc) to specify oneself as payee: see Collins English Dictionary and Thesaurus p. 369.

                An endorsement is a writing on the back of an instrument.  It is a mode of transference of bills of exchange, bills of lading etc consisting of the signature of the person to whom the instrument is payable on the back of the instrument and delivery to the transferee (called an endorsement in blank) name of the transferee: see Osborn, A Concise Law Dictionary 5 ed. p. 166.

An order bill requires the endorsement (signature) of the transferor in orde for the transfer to be effective:  Under s. 2, BEA – “endorsement completed by delivery.

Valid endorsements

Requirements of valid endorsements: -

(a)          It must be written on the bill itself (usually on the back of the bill).  The signature of the endorser is sufficient, without further words indicating transfer: s. 32 (1).

                Endorsement may be in ink, print, pencil etc. (But banks discourage endorsements in pencil since they are easily obliterated; and endorsement by rubber stamp on a cheque will not usually be accepted by a bank).

(b)          It must be in respect of the entire bill.  Partial endorsement that is, an endorsement which purports to transfer to the endorsee a part only of the amount payable, or which purports to transfer the bill to two or more endorsee severally ineffective.  The endorsement must relate to the full value of the bill: s. 32 (2).

(c)           Where there are several payees, all should endorse (unless one has authority to endorse on behalf of the others, e.g. in partnership): s. 32 (3).

(d)          Manner of endorsement should correspond exactly with the drawing, e.g. if the payee’s name is misspelt he should endorse in the misspelt version (adding the correct spelling if he wishes); s. 32 (4).

(e)          Allonge – Where there is insufficient space on the bill for further endorsement, an additional piece of paper (called an allonge) may be glued to the bill to receive further endorsements.

(f)           Endorsement by agent - An agent is personally liable as endorser unless he makes it clear that he endorses only on behalf of another, e.g. by endorsing “per pro” his principal: see s. 32, 4.

(g)          Blank and Special endorsements - If the endorser merely signs his own name (without adding that of the transferee), the endorsement is said to be in blank and the bill becomes payable to bearer (so that it can be further negotiated by mere delivery).

                If the endorser adds the name of the transferee the bill is specially endorsed, and is payable to order, i.e. if the transferor wishes to negotiate it further he must himself endorse the bill.  (Thus by means of its endorsements, an order bill may be converted into a bearer bill at any time, and vice versa).

Restrictive and conditional endorsements

                (a)  A restrictive endorsement is one which prohibits further transfer    or limits transferability, e.g. “pay X only, signed J. Smith”, or an                 endorsement indicating that      the endorsee is to receive payment only              as agent for the endorser: s. 35 (1)

                By this means an endorser can deprive the bill of its negotiability.  This   will not affect the rights of the transferee as against the indorser,              but will prevent him passing a full title to any further transferee: s. 35 (2).

(b)  Conditional endorsement is one which makes payment of transfer subject to some condition, e.g. “Pay X, after his marriage to Z.”

 Such a condition can be ignored by the payer: s. 33.

(c) Endorsement sans recours - If the endorser seeks to restrict his liability to the transferee by endorsing sans recours, or san frais 9see 3 above), the transferee can refuse to accept the bill with this endorsement.  If he does take the bill so endorsed, he is bound by the restriction,

• Facultative endorsement is one in which the endorser waives some of his legal rights in favour of the transferee, e.g. endorsement with “notice of dishonor waived”. S. 16(2). In such a case the transferee and subsequent transferees can enforce the bill against the endorser without giving notice of dishonour, etc.

8. LIABILITY OF PARTIES
9. Parties to a bill -  A party means a person who is liable on the bill, i.e.     the drawer, acceptor, and endorser.

                However, the payee (before he endorses the bill) has rights under it,    and can also be described as a party.

2. 2. Order of Liability

• Before acceptance the drawer is the principal debtor and primarily liable.
• After acceptance, the drawee takes over primary liability (and the drawer and endorsers are merely sureties for him)
• After endorsement, the endorser becomes liable as a surety for the value of the bill. The holder can thus enforce the bill against the drawer, the acceptor (primarily) and any endorsers.  He can sue any one or he can sue any combination of them, and each is liable for the full value of the bill.

                 (As between themselves the parties have no right of    contribution:      contrast guarantors. But any party who has been made to pay                 the full amount on the bill has a right of action for that amount against his immediate transferor).

3. The drawer
   • Liability under s. 55, BEA, the drawer of a bill engages that on due presentment it will be paid according to its tenor and if dishonoured, he will compensate the holder or any endorser who has suffered loss thereby (provided necessary proceedings on dishonor are taken).
   • Estoppel - The drawer is precluded from denying to a holder in due course the existence and capacity of the payee.
4. The drawee/acceptor – The drawee is the person to whom the order is addressed. He is under no liability on the bill unless and until he accepts it, after which he assumes primary liability (and is called the acceptor).

                Where a bill is not payable on demand it must be presented to the          drawee for him to signify his acceptance of liability (or to reject it),          and later presented to him again for payment.  A bill payable on               demand, such as a cheque is merely presented for payment without                any prior presentation for acceptance.

• Acceptor’s liability - The acceptor engages that he will pay the bill on due presentment for payment according to its tenor.
• Estoppel – The acceptor is precluded from denying: -

(i)  the existence, capacity and signature of the drawer,

(ii) the existence and capacity of the payee of an order bill (though he may deny the validity or genuineness of the payee’s endorsement) s. 54.

5. Endorsers – Endorsers are people (including the payee) who endorse or order bill in order to transfer it.
   • Liability - They engage:

(i)            that on due presentment the bill will be accepted and   paid according to its tenor, and

(ii)           that if it is dishonoured they will compensate the holder               (or any endorser who is compelled to pay it)  providing necessary proceedings for dishonour are taken: s. 66.

• Estoppel - An endorser is precluded from denying:

                (i)            to a holder in due course – the genuineness of the drawer’s signature and of all endorsements prior to his own;

                (ii)           to a later endorser –the validity of the bill or his own title when he endorsed it.

                (Remember that any person signing a bill otherwise than as drawer or acceptor incurs the full liability of an endorser).

6. Accommodation party – This means a person who has signed a bill as drawer, acceptor or endorser without receiving value therefore,

                An accommodation party is liable on the bill to any holder for value,        but not to the    person whom he has accommodated, i.e. the person whom he lent the credit of his name.

                An accommodation bill is one which the acceptor is an   accommodation party: s. 59(3), i.e. a person who accepts for the              honour of the drawer or some other party.

                When a bill is not accepted by the original drawee, some other person may step in to accept the bill to save the drawer or any endorser                 from being sued for dishonour.  This is called acceptance for honour.

7. Referee in case of need

                The drawer or any endorser who fears that a bill may not be accepted   by the   drawee, may designate some other person in addition to the    drawee as “referee in case of need,” to whom the holder may apply for               payment (if he wishes) in the     event of dishonour by the drawee: s. 15.

                If the referee accepts liability, the bill becomes an accommodation bill   and he is said to be accepting for honour of the drawer or any endorser             on whose behalf he intervenes: ss 65-68.

8. Fictitious and non-existing payees

                Where the payee of a bill is a fictitious or non-existing person, the bill    may be treated as payable to bearer (and can be negotiated without the        endorsement of such payee); s.7 (3).

• Fictitious payee means someone whom the drawer did not intend to receive payment, though he may be an existing person and may be named by the drawer as payee.

                EXAMPLES:

V’s clerk, G, obtained V’s acceptance of spurious bills G had forged, and apparently drawn by a customer of V in favour of P, a person known to V. G then forged P’s endorsement to the bills and obtained their value.

HELD: The clerk was the real drawer of the bills, and he knew of P’s existence but did not intend him to obtained payment, therefore P was a fictitious payee and the bills were payable to bearer: *Bank of England v. Valgaliano Bros (1908) A.C. 107.

A clerk induced his employer to draw cheques payable to X, to whom the employer owed money.  The employer intended X to be the payee, but the amounts of the                 cheques were forged by the clerk, who later forged X’s endorsements and obtained     payment.

HELD: The cheques were not payable to a fictitious payee since the drawer intended X to receive payment, though        not of    the amounts stated.  Thus the cheques were order bills, needing a valid endorsement by X to effect transfer,              therefore the forged endorsements by the clerk were ineffective and the transferee obtained no title: Vinden v. Hughes (1905) 1 KB 795.

                (b)          Non-existing payee means someone (living or not) of whose existence                                the drawer is unaware, even though he may have intended him to receive payment.

EXAMPLE:  A clerk induced his employer to draw cheques in favour of X (an actual person) by pretending that the money was owing to X.  The clerk then forged X’s endorsements and obtained the value of the cheques.  HELD : X was a non-existing payee, and these cheques were therefore bearer bills.  Consequently transfer would have been effective without endorsement at all: Clutton v. Attenborough K. Son (1897) A.C. 90; 13 TLR 114.

9. Holder of a Bill of Exchange

 (a)         Meaning of holder - A holder of a bill of exchange is a person who is in possession of it.  He is the payee of endorsee of a bill, who is in possession of it, or the bearer   bill. S. 2.

Thus a person who takes an order bill by means of a forged endorsement is not a holder, since he is neither the endorsee of it, nor the bearer of a bearer bill.

                There are three kinds of holder:

                (i)            a simple holder of a bill;

                (ii)            a holder for value; and

                (iii)           A holder in due course.

1. Position of holder - He can enforce the bill

(i)            against any person who has signed it, and;

(ii)           against the transferor from whom he obtained it, whether that                person signed it or not.

To have full rights of enforcement he should:

(i)            have given value himself (in which case he is probably a holder in due   course: see paragraph 10 below) or.

(ii)            have obtained it from a person who has given value for it (in     which case he    is a holder for value: see paragraph 11 below).

But in any case the law presumes in favour of any holder that his possession is supported by valuable consideration, and in any action brought by the holder it will be for the defendant to disprove this presumption (not for the holder to prove the existence of consideration), see Consideration and Capacity, above.

10. Holder in due course
    • Meaning - A holder in due course is a holder who has taken a bill:-

                (i)             complete and regular on the face of it;

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

                (iii)          in good faith and for value and;

                (iv)         without notice of any defect in the transferor’s title: s.                  29 (1).

NOTE:

(i)            That the payee cannot be a holder in due course, since he did    not take the bill by the process of negotiation, i.e. he was one   of the original parties to the issue of the bill:  R.E. Jones              Ltd v. Waring & Gillow, Ltd (1926) A.C. 670;          All E.R. Rep, 36.

(ii)           A person who derives his title through a forged endorsement    cannot be a holder in due course, since a holder is a person         who derives his title through a valid endorsement (s. 2) and a              forgery is an invalid and inoperative endorsement (s. 24).

• Rights -  A holder in due course can: -

                                (i)            sue on the bill in his own name, and;

                                (ii)           defeat any defences arising from defects of title or arising from the relations of the parties before he took the bill.

                                Thus the only defences that can be raised against his claims       are:-

                                (i)            that he does not satisfy the definition given in s. 29 (1),                                 e.g. that the bill was overdue when he took it, or had some patent defect (such as disagreement of words and figures of the amount)

                                (ii)           that a forged endorsement vitiates his title,

                                (iii)          that issue, acceptance or negotiation of the bill were produced by fraud, coercion or illegality (in which case the holder in due course can still enforce the bill but only if he can prove positively that subsequent to the alleged fraud, coercion or illegality, value has in good faith for the bill been given for the bill, i.e. the burden of proof shifts to the holder): s. 30 (2).

• Presumption in favour of holder - Every holder of a bill is presumed to be a holder in due course until contrary is approved: See V. Sirley & Co. v. Tanganyika Tegry Plastics Ltd  (1969) EA 529.
• Good faith - Negligence of the holder (e.g. failure to make reasonable enquiries) does not preclude him from being a holder in due course, i.e. does not necessary amount to bad faith.

11. Holder for Value

                (a)          A holder for value is a holder of a bill for which value has at some time been given; he need not have given value himself.

                (b)          Rights - He can enforce the bill against all person who became parties prior to the giving of such value; s. 27.  If a holder of a bill has not given value for it, he cannot sue any party subsequent to the last endorsement when value was given.                 Remember also the presumption in favour of all holders that value has been given for the bill:  see section 30 (2).  He can sue on the bill in his own name, but he obtains no better title than his transferor possessed. Thus if a holder in due course gives the bill as a present to V, V is a holder for value (since value has been given by the holder in due course) and has as good a title as his transferor, i.e. in this case, a perfect title.

EXAMPLE:  S draws a cheque in favour of A, who endorses it for value to B, who gives it gratuitously to C who gives it a holder for value (even though he did not himself give value) and can enforce the cheque against all person who became parties prior to value being given, i.e. against S and A, but not against B or C.

ACCEPTANCE, PAYMENT AND DISHONOUR

1. Acceptance of bills of exchange - Bills not payable on demand must be accepted by the drawee as a pre-quisite to payment.  (Bills payable on demand, including cheques, by-pass this intervening stage and proceed straight to payment).

• Drawee’s liability - The drawee is under no liability to holders of the bill until he accepts liability, by signing across the face of the bill, (though he may be liable to damages for breach of contract to the drawer if he was contractually bound to accept).

Acceptance is signified by the drawee signing across the face of the bill, with or without addition of the date or such words as ‘accepted”: s.17.

• When made – Acceptance may be made at any time, even before the drawer’s signature of the bill (though usually after). A bill may also be accepted when overdue or when previously dishonoured: s. 18.

If a bill payable after sight is dishonoured by non-acceptance but the drawee later changes his mind and accepts it, the holder is entitled to have the acceptance back-dated to the date when it was first presented for acceptance: s. 18 (3).  This may be important, e.g. where a bill is payable 3 months after sight by the drawee.

• Kinds of acceptance - Acceptance may be either general (unqualified acceptance of the bill as drawn) or qualified. The holder is entitled to general acceptance, and may treat the bill as dishonoured if only a qualified acceptance is offered: s. 44(1). If he takes a qualified acceptance he loses his right or recourse against prior parties to the bill (except such of them as authorized him to do so): s. 44 (2).
• Kinds of qualified acceptance

                (i)            Conditional, e.g. “Acceptance subject to deduction for                 expenses.”

                (ii)           Partial, e.g. for part only of the sum specified.

                (iii)          Local, i.e. payable only at a particular place. (Merely naming a place for payment is general acceptance, unless it is to be made only at the place named).

                (iv)         Qualified as to time, e.g. “Acceptance payable in 6 months” where the bill specified 3 month.

                (v)          Acceptance by some only of several joint drawees.

2. Presentment for acceptance - A bill payable after sight must be presented for    acceptance within a reasonable time, and if not so           presented the drawer and all endorsers prior to presentation are            discharged form liability. Presentment is only necessary where: -

                (i)            The bill is payable after sight or after demand (since presentation will enable calculation of the period after which the bill shall be payable).

                (ii)           There is an express stipulation for presentment.

(iii)          The bill is payable elsewhere than at the residence or place of business of the drawee, e.g. at a bank.  (But the drawee for his own convenience may            nominate his bank or some other place as the place for payment, in which case the bill is said to be domiciled. Domiciling a bill is not qualified acceptance, unless it is done in such way as to prohibit the holder from seeking payment anywhere else).

3. Presentment for acceptance is excused, and the bill may be treated as dishonoured where:   -

• The drawee is dead, bankrupt, lacks capacity or is a fictitious person.
• Presentment is impossible, e.g. because the drawee cannot be found.
• Acceptance is refused: s. 42 (2).

4. Presentment for payment

                A bill not payable on demand must be presented for payment on the    due date (as fixed by the bill, e.g. three months after acceptance, or “after sight”) subject to any allowance for Days of Grace: see below.

(a)          Days of Grace - Three days are added to the time for payment fixed by the bill (Unless the bill expressly provides otherwise) and payment falls due on the last day of grace: s. 14(1).  Where the bill is payable by instalments the days of grace are available for each instalment. If the last day of grace falls on:

(i)            a Sunday, Christmas Day, or Good Friday, the bill is payable on the preceding business day,

(ii)           A Bank Holiday (other than Christmas Day or Good Friday), or a Sunday immediately preceded by a Bank Holiday, the bill is payable on the next ensuing business day.

                (b)          Presentment must be at a reasonable hour on a business day, and at the proper place: s. 45 (3).

                (c)           Delay in presentment is excused if due to circumstances beyond the holder’s control: s. 46(1).

(d)          A bill not presented within due time is not invalidated, but it cannot be enforced against persons who drew or endorsed it unless such person’s signature was added within a reasonable time.  (Compare the position of the drawer of a cheque, who is discharged by delay only to the extent he has suffered damage: s. 74 and see 2.)

(e)          Presentment of payment may be excused where:

(i)            after reasonable diligence it cannot be effected, e.g. because the acceptor cannot be found.

(ii)           the drawer is a fictitious person; or

(iii)          presentment has been waived: s. 45 (2).

(f)           A bill is dishonoured by non-payment when: -

                (i)            it is properly presented but payment is refused or cannot be obtained, or

                (ii)           presentment is excused: s. 47 (1).  An offer of a partial payment can be treated as dishonoured for the balance.

5. Procedure on dishonour - The holder of a dishonoured bill must notify the fact of dishonour to all prior parties against whom he reserves a right of action; persons not so notified are discharged.

                Similarly any endorser must reserve his rights of action by notifying         parties prior to himself.

• Inland Bills: Notice of dishonour can be in any form, oral or written, providing it clearly identifies the bill: s. 49 (5). Return of a dishonoured bill is sufficient notice to the drawer: s. 49(9) Notice must be given within a reasonable time of dishonour: 49(12).
• Foreign Bills: Noting and Protesting. Formal notice of dishonour is required in the case of foreign bills (and is optional in the case of inland bills).

Formal notice is achieved by getting the bill re-presented by a notary public (or, if none can be found, by a householder in the presence of witness), who notes on the bill the answer obtained, if any.

The notary or householder then issues a formal certificate of dishonour (called the Protest), setting out the circumstances of dishonour.  The protest and a copy of the noted bill are then sent by the holder to the person or persons he intends to make liable.

6. Notice of dishonour is dispensed with –
   • When after exercise of reasonable diligence it cannot be given, e.g. where the address cannot be found.
   • As regards the drawer:

                (i)            where the drawer and drawee are the same person,

                (ii)            where the drawee is a fictitious person or lacks capacity.

                (iii)          where the drawer is the person to whom presentment for payment was made;

                (iv)         where the drawee was under no obligation to the drawer to accept the bill, or

                (v)          where the drawer has countermanded payment.

• As regards the endorser:

                (i)            where the drawee is a fictitious person or has no capacity, and the endorser was aware of this when he               endorsed,

                (ii)           where the endorser is the person to whom the presentment was made; or

                (iii)          where the bill was accepted or made only for the endorser’s accommodation.

7. Discharge of bills occurs: -
   • By payment in due course, i.e. to a bona fide holder without the payer having notice of any defect in the holder’s title: s. 59. Note that by s. 60 where a banker, in reliance on a forged endorsement, pays a bill drawn on him: -

                (i)            in good faith and;

                (ii)           in the ordinary course of business, the bill is effectively                 discharged and the bank incurs no liability.  (The Cheques Act, s. 1, reduces the importance of this rule    by providing that endorsements are no longer necessary in most cases: see 6.

• By an acceptor becoming the holder of all rights on the bill at or after its maturity: s. 61.
• By renunciation by the holder of all rights against the acceptor: s. 62 (Renunciation must be in writing, or the bill must be delivered up to the acceptor.)
• By intentional cancellation by the holder or his agent: s. 63. (Unintentional cancellation is ineffective.)
• By material alteration of the bill or its acceptance, without the consent of all parties liable upon it, e.g. by alteration of date, amount, etc.: s. 64.

CHEQUES

1. Definition

The law relating to cheques is codified in the Bills of Exchange Act and the Cheques Act, both complementary to each other.  The provisions of the Bills of Exchange Act that apply to a bill of exchange payable on demand apply equally to a cheque, except where it is provided otherwise: s. 73(2) BEA.  The former Act defines “a bill of exchange drawn on a banker and payable on demand”: s. 73(1), BEA.

 A cheque may thus also be defined as a written order addressed by one person known as drawer to a banker to pay money usually to a third person known as the payee.  It may be drawn in favour of a specified person, or payable to his order, in which case it requires endorsement for transfer.  It may also be drawn payable to bearer when it is meant to be transferable by mere delivery.

It is not necessary that the words “on demand” should appear on a cheque, since all bills are treated as payable on demand where no time is specified for payment: s. 10.

A cheque made payable to “cash or bearer” is a bill exchange:  Khan Stores v. Delawer (1959) EA 714:  In this case a cheque duly signed was drawn on a bank, directing the bank to pay “cash” or bearer the sum of Kshs. 2,000/=.  The word “cash” was in manuscript but the word “bearer” was printed.  It was submitted that by writing “cash” in the place specified for the name of he payee only the equivalent of cash payment was intended and not that the cheque should have effect as a bill of exchange and that the words “or bearer” should be disregarded.  LAW J said: “A person who uses cheque forms made out to blank either with the word “cash” or with the name of a 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 the requirements of s. 3(1)” of the Bills of Exchange Act.

From the same case, it would appear, on the other hand, that a document payable to “cash or order” is not a bill of exchange. This, it was argued, following Cole v. Milsome (1951) 1 All E.R. 311, that such a document is not payable “to or to the order of a specified person, or to bearer” as provided in section 3(1) of the Bills of Exchange Act: See op.cit, at page 716.

Stale and Overdue cheques

A stale cheque is one which has been in circulation for a considerable period of time.  Banks generally refuse to honour a cheque which is more than six months old.  This is a matter of business practice only as a drawer is liable on his signature for at least six years.  In practice the holder of the cheque would request the drawer to alter the date or alternatively issue a replacement.  Such request is usually never refused.

An overdue cheque is one which ahs been in circulation for an unreasonable time: s. 36 (3). What constitutes a reasonable time must, of course, depend on all the circumstances of each case.  Thus where a cheque is intended by the drawer to be presented within two or three days, failure to present within that time might amount to unreasonable delay:  Wheeler v. Young (1897) 13 TLR 486. By contrast if a cheque was issued overseas for payment in Kenya, time would have to be allowed for its transmission to Kenya in computing what is a reasonable time.  However, even if a cheque be deemed “overdue” within the meaning f the Bills of Exchange Act, the drawer will not be discharged from his liability on account of this only.  It merely precludes the transferee from being a holder in due course.

Discharge of drawer

  If not presented within a reasonable time the drawer is discharged to the extent of any damage he suffers from the delay.  In the absence of such damage he remains fully liable for 6 years, after which his liability is statute-barred: See Limitation Act, Chapter 22.

Summary on delay in presentation: -

In the case of bills other than cheques, the drawer and endorsers are completely discharged: s. 45, 45;

With respect to delay to present cheques ;

                (i)  the endorsers are discharge under s.45; and

                (ii)  the drawer discharged is only to extent of damage suffered:                      s. 74.

Damage suffered by drawer .  Example: A drew a cheque for pounds 100 in favour of B, who failed to present it for some time.  When drawn, A’s account had funds to meet the cheque, but during the intervening time the bank went into liquidation.  HELD:  B could claim for the money as a creditor of the bank, but A was under no liability and B had no claim against him: Wheeler v. Young (1897).

Undated and post-dated cheques

Undated Cheques - A banker is not bound to honour such a cheque, but it must be remembered that any holder is entitled to fill in the correct date: s. 20 (1). Any date appearing on a bill is presumed to be the correct date.

Post-dated cheques - These are not really cheques, since they are not payable on demand.  However, a banker is entitled to pay post-dated cheque when it falls due.  If he pays it before its date he cannot debit the customer’s account, and must bear the loss if the customer stops the cheque before its due date.

(Post-dated cheques are frequently used today instead of bills of exchange payable at some time after sight, e.g. where a purchaser of goods issues a post-dated cheque for goods to be delivered later, thus being entitled to stop the cheque if the goods are not delivered when agreed.)

Stamping - A cheque must be stamped (Kshs.2).  The stamp can now be impressed printed or merely adhesive (though an adhesive stamp must be cancelled by the person issuing the cheque):  Stamp Duty Act, 1961.

Payment by cheque

(a)  Conditional Payment - Payment by any bill is conditional only.  A creditor is entitled therefore to refuse payment by cheque, and in any case payment is not effective until the cheque is honoured. (But a creditor who takes a cheque in payment may be estopped from action against the debtor if the cheque is dishonoured because he negligently failed to demand payment himself. Though the cheque will remain enforceable by other parties against the drawer for six years: Limitation Act,).

(b)  Cheques through the post – If a cheque is sent through the post and is          lost, the loss falls on the sender, unless the creditor requested this method of payment. Such a request will not be implied; it must be express:  Pennington v. Crossley & Sons                (1897), 77LT 43; (1895-9) All E.R. Rep.Ext.1727.

(c)  Cheques as evidence of payment – An unendorsed cheque which appears to have been paid by the banker on whom it was drawn is prima facie evidence of receipt by the payee of the sum stated on the cheque, even without the payee’s        endorsement: Cheques Act. s. 4(2).

Crossings on cheques

A crossed cheque is one with two parallel lines drawn across it; and between these lines may be added specific words or their abbreviations e.g name of bank, “and company”, “not negotiable” and so on.  The object of crossing a cheque is to convey instructions that it is not be paid otherwise than through a bank, or to make some other stipulation as to the manner of payment: s. 76.  A crossing is a material part of a cheque and any unathorised alteration of a crossing is unlawful (s.78) and discharges the cheque: s. 64.

The drawer or any holder may cross a cheque or add to an existing crossing, e.g. where the holder of a cheque crossed generally adds the words “Not negotiable”

Crossings are usually intended as instructions to the paying banker, but a crossing “account payee” is an instruction to the collecting banker.

Types of Crossing

 (a)         General crossing – indicated by drawing two transverse lines across the face of the cheque, thus, with or without the addition of words “& Co.” between the lines (or such other words as “not negotiable”.  See below.)

The effect of such a crossing is to make the cheque payable only to a collecting banker, i.e. it precludes the paying banker from paying cash for the cheque across the counter.

(b)          Special crossing – indicating the name of a particular banker, with or without the addition of two transverse lines.  The effect is that the paying banker must pay the cheque only to collecting banker named on the crossing, and to no other.

(c)           Not negotiable - A cheque crossed with these words is deprived it is negotiability, and it becomes an ordinary transferable chose in action, i.e. it can be assigned, but the assignee obtains no better title than was possessed by his assignor: s.81.  This is a general crossing and the legal effect of adding these words to a cheque is “not to impede transfer but to perpetuate in the hands of any transferee whatever defect or infirmity of title may affect the person who first transferred the cheque with those words on it” ,  Halsbury’s p.177.

Thus where a clerk took a blank cheque from his employer, which was already crossed “not negotiable,” and fraudulently made it payable to P. it was HELD that the employer could recover the value from P (who had obtained cash), since the clerk had no title to the cheque and P could get no better title than the clerk had: Wilson & Meeson v. Pickering (1946). KB 422; (1946) 1 All ER. 394. Similarly, in Fischer v. Roberts (1890) 6 T.L.R. 354, CA, one partner in fraud of the other endorsed to the defendant a cheque drawn in favour of the firm crossed and marked “not negotiable”.  The defendant gave cash for the cheque. The other partner on discovering the fraud brought an action for recovery of the amount of the cheque. Held, the amount could be recovered.

(d) Account payee (or Account payee only)

The crossing on a cheque with the words “account payee” or such similar words is not a statutory crossing but is a recognized and obeyed                 by banker’s custom.

By an amendment to the BEA in 2002, where a cheque is crossed and     bears on its face the words “account payee” or “a/c payee” with or without the word “only” the cheque is not transferable and is only valid                between the parties thereto: section 81A(1) BEA, inserted by Act No. 2 of 2002.

The words are a direction to the banker collecting payment that the proceeds when collected are to be applied to the credit of the account of the payee designated on the fact of the cheque. A collecting bank which collects for some person other than the payee named may therefore be prima facie liable for negligence and will be liable to the true owner for the amount of the cheque.  In House Property C. v. London County and Westminister Bank (1915) 84 L.J.K.B 1846, a                 cheque was drawn in favour of F.S.H and other or bearer” and crossed “account payee”.  N., the bearer, paid the cheque into his own account at his bank. The bank credited him with the proceeds without making        any enquiries as to his title to the cheque. It was held that having regard to the crossing, the bank were negligent and liable to the true owner of the cheque.

If a bank collects the cheque on behalf of another bank, they are not bound to see or ensure that the other bank credits the payee with the                 amount of the cheque: see Imported Co. Ltd v. Westminister Bank (1927) 2KB 297.

A paying banker is not generally affected by this crossing. The paying banker “has nothing to do with the application of the money aster it has once been paid to the proper receiving banker” – per Bigham J. In Akrokerri (Atlantic) Mines Ltd. V. Economic Bank (1904) 2KB 465, p. 472.  A cheque crossed “account payee” is still negotiable: see National Bank v. Silke 1891 (1Q.B. 435.  But a bill payable to “payee only” is not negotiable: see Charlesworth’s Mercantile Law, 14ed p. 453.

Alterations on a cheque. Any material alteration of a cheque or other bill discharges from liability any party to the bill who did not assent to the alteration. On a cheque, alterations of date, amount, name of payee, or of any crossing would be material.

Bankers therefore should not pay a cheque unless any alteration is         initialed by the drawer, and where the words ‘or order’ have    been altered to “bearer” the normal practice is to insist on the              drawer’s full signature by way of assent.

(Note the distinction between apparent and non-apparent alterations: see under “material alterations” above. See p.34.

In criminal law, a person commits a felony punishable by up to seven years imprisonment if, with intent to defraud, he alters, obliterates or adds to the crossing on a cheque or alters such a cheque: s. 356, Penal Code, Cap. 63.

Endorsements. The general rules about endorsements apply to cheques.

Note that the Cheques Act, dispenses with the need for an endorsement where the apparent payee of a cheque is paying it into his own account. Alterations on a cheque may however be permitted in the following cases.

• A holder of an uncrossed cheque may cross it specially or
• The holder of a cheque crossed generally may cross it specifically or add the words “not negotiable”.
• A banker to whom a cheque is crossed specially to another banker for collection.
• A banker may cross specially to himself a cheque sent to him for collection. Under s.4 (1) of that Act, a banker who in good faith and in the ordinary course of business pays a cheque drawn on him to a banker, does not incur any liability due to the absence of, or irregularity in endorsement of the cheque.

Duty of bankers as to crossed cheques. The banker is a liable to the true  owner for any loss occasioned where: -

• He pays a cheque which is crossed specially to more than one banker (unless the additional special crossing merely indicated that one of the bakers named is to collect merely as agent for the other).
• He pays a cheque crossed generally otherwise than to a bank, i.e. treats it as an open cheque.
• He pays a cheque crossed specially otherwise than to the banker named in the crossing or his agent: s. 79.

Protection of paying banker. The drawee bank is statutorily protected against liability if it pays in the following circumstances.

(a)          Cheques with forged endorsements: provided they are paid: -

(i) in good faith; and

(ii) in the ordinary course of business: s.60,BEA.

1. Crossed cheque: provided the bank pays a cheque drawn upon it,

                (i)  in accordance with the crossing,

                (ii)  in good faith, and

                (iii) without negligence: s, 80, BEA.

1. Cheques not endorsed or irregularly endorsed: provided the cheque is drawn on the bank and is paid: -

                (i) in good faith; and

                (ii)  without negligence.

Protection of collecting banker  

A collecting banker is the banker who presents a cheque to the drawee bank on behalf of a customer.  He is protected from liability where he receives payment for a customer who has no title or has a defective title, provided he does so: -

                (i) in good faith;

                (ii) without negligence (whether or not the cheque is crossed): s. 3(2), Cheques Act

The Cheques Act extended statutory protection to all “prescribed instruments”, an expression which includes any “document …intended to enable a person to obtain payment from the banker of the sum of money specified…”, draft drawn by the banker as well as any other instrument the minister may specify.

The banker must respect the “account payee” crossing and accept such a cheque only if there is a satisfactorily explanation as to why it cannot go to the banking account of the named payee that is, he goes to a bank with money or cash and asks to have an account opened and the bank accepts the money and opens an account for him.

NOTE:

(a)          The section applies only to customers.  A person becomes a customer as soon as he opens an account. Casual acts of service such as where the bank obliges someone, not having an account, by cashing his cheques from time to time, do not make such person a customer: Commissioners of Taxation v. English Scottish & Australia Bank Ltd          (1920) A.C. 683.

(b)  The following have been held to amount to negligence by a collecting bank:

                (i) Opening an account for someone without making adequate                 enquiries about him:  Hampstead Guardians v. Barclays Bank (1923)   …. See also Ladbroke      & Co. v. Todd (1914) 111 L.T. 43 and         Lumsden & Co. v. London Trustee Savings Bank (1971) 1 Lloyd’s Rep                 114.

                In the Lumsden case, Lumsden & Co. plaintiff stockbrokers employed    a Mr. Blake         as a temporary accountant.  It was the practice of the    plaintiffs to draw cheques in       favour of their clients in an abbreviated                form.  So a cheque payable to Brown Mills & Co. would simply be             drawn in favour of Brown.

Blake fraudulently opened an account with the defendant bank in the name of a fictitious J.A.G Brown whose profession he gave as a self employed chemist and described him with titles such as “SD. Sc., PhD”.  The branch manager of the defendant bank who though that he was dealing with two reputable professional men, failed, contrary to his instructions, to make, inquiries with Blake’s bank.Blake transferred some of the cheques due to Brown Mills & Co. but simply made payable to Brown into the fictitious J.A.G Brown’s account with the defendant bank.

                It was held that the defendant bank had acted negligently in opening    the account and was not protected by s. 4(1) of the English Cheques              Act 1957 (equivalent to s. 3 (1) Cheques Act, cap 35.

(ii) Collecting payment for a customer of a cheque made out to the customer’s employer without making enquiries: Underwood Ltd. V. Bank of Liverpool and Martins Ltd (1924) 1 KB 775.  In this case, U was the sole director and practically the sole shareholder in U Ltd. He had a private account with L bank.  The company had an account with X bank, but the L bank did not know of this account.  Cheques payable to the company were endorsed, “U Ltd-U, sole director,” and paid into the private account of U at the L. bank.  It was held that U, Ltd were entitled to recover the amount of the cheques, because L bank were negligent in not inquiring whether U Ltd.  Had an account, and if so, why the cheques were not paid into it.

                (iii) Paying into a customer’s private account a cheque payable to him   in an official capacity: Ross v. London County Bank (1919) 1 KB.678;                 120 L.T. 636.

(iv) Receiving payment for customer of cheques clearly indicating they are payable to him only as agent for someone else without inquiring as to the customer’s title to the cheque: Bute (Marquess) v. Barclays Bank (1955). 1QB 202; (1954) 3 All E.R. 365. See also Midland Bank v. Reckitt (1933) AC 1.

(v)  Receiving payment of a cheque for a customer, when the cheque is drawn by the customer’s employer in favour of a third party or bearer, without inquiring as to the customer’s title to the cheque:  Lloyds Bank Savory (1933) AC 201.

                (vi) Failing to notice the account of the customer from time to time       and consider whether it is a proper or a suspicious one: Lloyds v. Chartered Bank of India (1919) 1 K.B. 40.

It is however not negligent for a bank to pay a bearer cheque for a large               amount over the counter without making inquiries unless there are         “very special circumstance so suspicion” such as when the cheque is       presented by a “tramp or a postman or an office bay” – per Wright J. See also Auchteroni & Co. V. Midland Bank Ltd.  (1928) 2 K.B. 294.

(c) Where a collecting banker is negligent he may be sued for damages for the tort of conversion by the true owner of the cheque.

Termination of banker’s authority

A banker’s authority to pay a cheque drawn by his customer is terminated by: -

(a)          Countermand of payment, written or oral, though if oral countermand is made, it is the practice to insist on written confirmation and merely to postpone payment pending receipt of confirmation: s. 75, BEA.

(b)          Notice of the customer’s death - Observe that it is not the death which terminates the authority, but notice of the death.

(c)           Notice of lunacy of the customer.

(d)          Notice of the presentation of a bankruptcy petition against the customer.

Note that if the bank receives notice of an act of bankruptcy committed by the customer himself but should not pay our cheques drawn by him in favour of third parties (otherwise it may be liable to make good such payments to the trustee in bankruptcy).

(e)          The making of a receiving order in bankruptcy against the customer.

(f)           The service of a garnishee order attaching the balance of the customer’s account, i.e. a court order addressed to a debtor commanding him not to pay the stated debt to his creditor but to hold the money pending further orders from the court (which may eventually direct that the money shall be paid to some other person).

(g)          Notice of a breach of trust, i.e. when a customer is about to use trust funds for his own purposed.

(h)          Notice of a defect in the presenter’s title.

(i)           Insufficient credit in the customer’s account, or where payment would increase the customer’s indebtedness beyond some agreed limit.

The bank is entitled to refuse to pay a cheque if it exceeds the customer’s entitlement by as little as a shilling, and it cannot pay part of a cheque. It is wrongly refuses to honour properly drawn it is liable to the customer for damages for breach of contract, but is not liable to the holder. A bank may also be liable for damages for libel if it makes a defamatory comment unjustifiably on a cheque, e.g. where it wrongly makes a cheque “no funds”.

PROMISSORY NOTES AND MISCELLANEOUS INSTRUMENT

1. 1. Promissory note

This is an unconditional promise in writing by one person to another, signed by the maker, and engaging to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person or to bearer: s. 84 (1), BEA.

In deciding whether any particular document is or is not a promissory note, the form of words used is immaterial.  It must, however, consist substantially of a promise to pay, and nothing else: per Law J. in Rahemtula  Jethalal Ismail v. Sherbany N. Jivraj (1865) EA 550, at p. 552.  The intention of the parties is a factor in deciding whether a particular document is or is not a promissory note; p. 554, ibid.

In this case an undertaking to repay a loan which contained the words “received …… cash Kshs. 5,000/= which sum is to be paid within 30 days of the presentation of this draft” was held not intended to be a promissory note but a receipt for a loan containing the terms on which the parties had agreed that the loan should be repaid.  The maker and the payee were from a class or person to whom promissory notes were well known. The document was ambiguous and did not amount to a negotiable instrument.

Certainty of time:  A document expressing a sum to be payable “on or before” a stated date introduces uncertainty and was held not a promissory note:  Williamson and other v. Rider (1963) 1 Q.B. 89.

Endorsement by maker:  An instrument in the form of a note payable to the maker’s order is not a note unless and until it is endorsed by the maker.

Joint several liability:  A note may be made by two or more makers who may be liable on it jointly or severally.

Presentment:    A promissory note made payable at a particular place must be presented at that place in order to render the maker liable.  Presentment is not necessary in any other case to render the maker liable: See section 88, BEA and also Pan African Credit and Finance Limited v. Fricmills International Limited, Nairobi High court, Civil Suit No. 1795 of 1987.

With respect to an endorser, presentment is essential to render him liable.  This is necessary because he must satisfy himself that the holder has endeavoured to obtain payment from the maker who is the party primarily liable for payment.

Consideration:  A total failure of consideration is a defence against a claim on a promissory note made by an immediate party, but it is not a defence against a remote party who is a holder in due course:  Shirley v. Tanganyika Tegry Plastics Ltd. (1968) E.A. 529, CA.

Delivery:  A promissory note is inchoate and incomplete until delivery to the payee or bearer: s. 85.

Stamp Duty:

2. 2. Difference from bills of exchange

(a)  Acceptance of a note is never necessary, since there is no drawee.

A bill, where payable after date, is generally accepted; where it is payable after sight, a bill must be presented for acceptance to fix the maturity date of the bill and presentment for acceptance is necessary to render the prior parties liable.  Furthermore a bill can be accepted for honour.

(b) A promissory note (unlike a bill) cannot be drawn in a set.

(c) The maker is the person liable primarily to pay.

In a bill, the drawer is only liable until the drawee accepts. Thereafter the acceptor becomes primarily liable for payment.

(d) A promissory note must contain an unconditional promise to pay.

The promise can never be conditional.The acceptor of a bill may make a conditional promise to pay.

(e) A promissory note is a promise to pay: a bill is an order to pay.

(f) Where there is more than one maker of a note, they can be liable jointly and severally according to the terms of the note.

In the case of a bill, where there are two or more acceptors are always jointly liable.

(g) A bill may be treated as a promissory note where

                (i)            drawer and drawee are the same person,

                (ii)           the drawee is fictitious or lacks capacity; s. 5 (2).

3. Bank notes. A bank note is a promissory note issued by a bank to pay to a bearer on demand the amount of the note. When presenting a note for     payment it is not necessary for the bearer to reveal how he came by the note, but if the circumstances arouse suspicious the bank would be entitled to refuse                payment until satisfied of good faith; if however, the bearer sued the bank for                 its refusal, the burden of proving bad faith would rest on the bank.
4. Joint, and joint and several notes. Where a note is issued by two or more person, their liability may be joint or joint and several depending on the            circumstance.

(a)          On a joint note, each maker is fully liable for the whole amount, but a    person suing to enforce the note has only one cause of action and can                sue all, or one or any combination, but cannot later bring a          second                 action against parties not sued in the first.

                If the maker of a joint note dies, his estate ceases to be liable on the      note,

(b)          On a joint and several note, each maker is fully liable but a holder has    several rights of action, e.g. he may sue all, or any one, or bring                 successive actions against the makers. And the death of a maker does   not relieve his estate from liability on the note.

NOTE: Where a note runs “I promise to pay” and is signed by two or more makers, it is deemed to be a joint and several note: 86(2), BEA

5. Miscellaneous banking instruments

• Bankers’ drafts. These are drafts to order payable on demand, drawn by an officer of a bank upon itself or upon some other officer of the same bank: Bill of Exchange Act. Drafts may be crossed, and the crossing has the same effect as the crossing on a cheque. The Cheques Act, s.2 extends the protections given bankers by the B.E.A to cover bankers drafts.
• Prescribed instruments. Under the Cheques Act, apart from cheques and bank drafts there are other “prescribed instruments” which include “a document issued by a customer of a banker which is not a bill of exchange but is intended to enable a person to obtain payment from the banker of the sum of money specified in the document.” The sections of the BEA relating to the crossing of cheques and crossed cheques are applied in relation to these prescribed instruments: see s.82 BEA.

It is provided also that the Minister for Finance may, by notice in the      Kenya   Gazette, specify any other document to be a prescribed                 instrument.  Such a document is also known as a conditional order          when it conveys an order to a bank to pay a sum of money to a named payee subject to a condition addressed to the drawee bank.  It is not a valid bill or a cheque in the light of the definition of a valid bill as an unconditional order.

Note that a document apparently a cheque may in fact be a conditional                order, e.g. a cheque stating on it that payment is not to be made unless an attached receipt form is signed. But the mere fact that              cheque contains a receipt from does not make it a conditional order, unless payment is made conditional on the signing of the receipt.

The type of traveller’s cheque which requires to be countersigned by    the holder in the presence of the paying agent before the agent may pay it, it is submitted, a conditional order in this category.  This is               because it seems that the paying agent can only pay if that condition to                 sign before his is complied with by the holder.

• Dividend and interest warrants. These are drafts issued by a company and ordering its bank to pay the stated sum to a named person. They can be protections given by the Cheques Act.
• Deposit receipts. These are acknowledgment by a banker that he holds funds to a certain amount for the depositor. They are not negotiable instruments.

6. Quasi-negotiable instruments. The following documents have some of the         qualities of negotiability, but not all, and are therefore not    negotiable          instrument: -

• Bills of Lading: receipts for goods shipped, signed by the carrier or his agent. A bill of lading is a document of title to the goods specified therein, and possession of the bill entitles the holder to delivery of the goods. But it is not a negotiable instrument, so that a transferee gets no better title than was possessed by his transferor.
• Dock warrants: documents issued by a dock or Warehouse Company acknowledging that it holds certain goods on behalf of the person named, or his endorsee. They are documents of title assignable by delivery plus endorsement, but they are not negotiable instruments and the endorsee gets no better title than his transferor.
• American share certificates usually have a transfer form printed on the back, and the owner can sign this form leaving the name of the transferee blank. This then operates as a power of attorney to a subsequent transferee to fill in his own name of the name of another, the person named being entitled to apply to the company for registration as a shareholder. Such transferee gets no better title than his transferor.

• IOU’s. These are merely written admissions of the existence of a debt (with an implied promise to pay at some future date). They are not negotiable but can be signed.

                Note that if the document contained an express promise to pay, it would be a   promissory note