NEGOTIABLE INSTRUMENTS

INTRODUCTION
There are certain documents, which are freely used in commercial
transactions and monetary dealings. These documents, if they satisfy
certain conditions, are known as negotiable instruments. Negotiable
is a word to mean transferable from one person to another in return for
consideration. Instrument means a written document by which right
is created in favor of some person. The law relating to negotiable
instrument is contained in the Bill o E!"#ange A"t $Ca%& '() and the
C#e*ue A"t $Ca% +,)- which deals with promissory notes, bills of
exchange and cheques. As per the Act, no defnition is given. However,
in simple, a negotiable instrument can be described as a commercial
document which represents money. t passes to a bonafde transferee
free from any defect. Therefore a negotiable instrument refers to a
document, which entitles a person to a sum of money or money value
which is transferable from one person to another by mere delivery or by
endorsement and delivery.
NATURE O. NEGOTIABLE INSTRUMENTS
A negotiable instrument is a !hose in Action. A chose in action is a
property right which cannot be en"oyed by physical possession, but
which can only be enforced by legal action, for #xample a debt, patent
or copyright etc. $ost types of chose in action are assignable but%
&. 'otice to the debtor is always advisable and sometimes essential%
and
(. The assignee can obtain no better rights than the assignor.
). However, out of customary usage certain types of chose in action
have evolved to which these restrictions do not apply. These are
known as negotiable instruments.
*ustice +illis defnes a negotiable instrument as the property, which is
acquired by anyone who takes it bona fde and for value notwithstanding
any defect of title in the person from whom it is taken. According to
Thomas, a negotiable instrument is one, which is transferable by
delivery or by endorsement and delivery without notice to the party
liable, in such a way that the holder of it for the time being may sue
upon it in his own name and, the property in it passes to a bonafde
transferee for value free from any defect in the title of the person from
whom he obtained it.
C/ARACTERISTICS
a) No noti"e0 f made payable to bearer, it is negotiable by mere
delivery, but if payable to order it is negotiable by delivery and
endorsement. 'o notice is required to be given to the debtor.
& , - a g e
b. Goo1 ait#0 A transferee taking a negotiable instrument in good
faith acquires a good title despite the defective title of the
transferor. This constitutes an exception to the rule /'emo dat
quad non habet0, 1no person can pass a better title than his own..
c. .reel2 transerable0 They are freely and easily transferable from
one person to another without any formality. n other words, the
right of ownership of these instruments can be easily transferred
from one person to another by mere delivery, or endorsement and
delivery.
d. Title o #ol1er ree orm all 1ee"ts0 This means that a person
who takes an instrument bonafde and for value 1known as holder
in due course. gets a good title of ownership even though the title
of the transferor may be defective.
e. Re"o3er20 The holder in due course can sue upon the instrument
in his own name for the recovery of the amount. He need not give
notice of transfer to the party liable on the instrument.
f. 4resum%tion0 !ertain presumptions apply to all negotiable
instruments. 'amely that the instrument was2 3
$ade, drawn or accepted for consideration.
$ade or drawn on a date appearing on the instrument and%
Transferred before its maturity date.
T54ES O. NEGOTIABLE INSTRUMENTS
'egotiable instruments are of two types namely2 3
'egotiable by statute.
'egotiable by custom.
nstruments negotiable by statute are2
4ills of #xchange.
-romissory 'otes and%
!heques.
These are recogni5ed by the 4ills of #xchange Act2 There are also certain
other instruments which have acquired the character of negotiability by
the usage or custom of trade. This includes2
i. !ircular 'otes.
ii. 6ividends +arrants.
iii. 7hare +arrants.
iv. 4earer 6ebentures and%
v. Treasury 4ills.
The above documents acquired their negotiability by commercial usage
in #ngland, which was codifed in the year &88( in the 4ills of #xchange
Act &88(. This Act was introduced in 9enya on &:th $ay, &;(< and is the
current law relating to negotiable instruments. There are other
( , - a g e
negotiable instruments in commercial use but they are irrelevant for the
purposes of these notes, which include $oney orders, -ostal orders,
7hare certifcates, =etters of credit etc.
) , - a g e
BILLS O. E6C/ANGE
7ection )1&. of the 4ill of #xchange Act defnes the 4ill as an
unconditional order in writing addressed by one person to another,
signed by the person giving it, requiring the person to whom it is
addressed to pay on demand or at fxed or determinable future time, a
sum certain in money to or to the order of a specifed person or bearer
of the instrument.
4arties to a bill o E!"#ange0
&. Dra7er0 The person who orders money to be paid on his behalf.
(. Dra7ee0 The person to whom the order is given.
). 4a2ee0 The person to whom the money will be paid.
:. En1orser0 The holder of an order bill who signs the back when
transferring it.
>. En1orsee0 The person to whom an order bill is indorsed.
?. Bearer0 The person in possession of a bearer bill.
<. /ol1er0 The payee or endorsee who is in possession of an order
bill or the person in possession of a bearer bill 1the bearer..
8. /ol1er or 3alue0 A holder who has given, or who is deemed to
have given value for the bill i.e. consideration.
;. /ol1er in 1ue "ourse2 A holder who has taken a bill%
!omplete and%
@egular on the face of it,
4efore it was overdue,
+ithout notice of previous dishonor by non3payment,
n good faith,
Aor value,
+ithout notice of any defect at the time of negotiation.
Note0
The payee cannot be a holder in due course because the bill
is made payable to him, it is not negotiated to him.
The diBerence between a holder for value and holder in due
course is important because a holder for value can only
acquire the same title as his transferor, whereas a holder in
due course can sometimes acquire a better one.
A bill must have all the following essentials0
,& t must be an or1er i.e. it0s terms must be imperative. 4ut the use of
the word /please payC0 does not prevent an instrument from being
an order.
'& The order to pay must be un"on1itional i.e. there must be no other
condition attached to the making of the payment such as /pay x one
thousand shillings and notify me0
8& The order must be in 7riting&
+& t must be addressed by one %erson to anot#er&
: , - a g e
> , - a g e
Essentials or C#ara"teristi"s o an En1orsement0
a) t must be written on the face of the bill or on its reverse side or on a
slip of paper attached to the bill. This slip of paper is technically
referred to as an allonge&
b) An endorsement must be signed by the endorser.
") t must be an endorsement of the entire bill.
1) f the bill is payable to the order of two or more persons who are not
partners, all must endorse the bill.
e) An endorsement may be blank, special, restrictive or conditional.
) +herein a bill is payable to order, the payee or endorsee is wrongly
designated, or his name is mis3spelt, he may endorse the bill as
therein described, adding as he thinks ft, his proper signature.
T2%es o En1orsement0
a. Blan9 En1orsement& An endorsement is said to be blank when the
endorser simply writes his signature on the back of the bill and the
bill so endorsed becomes payable to the bearer even if it was
originally payable to order.
b. S%e"ial En1orsement& A special endorsement takes place where
the endorser signs his name and adds a direction to pay the amount
stated in the bill to a specifed person. A special endorsement
specifes the person to whom or to whose order the bill is to be
payable. A blank endorsement can be turned into a special
endorsement.
c. Con1itional En1orsement& This is an endorsement, which restricts
limits or negatives the liability of the endorser. t limits the endorser0s
liability on the bill e.g& sans recourse 1without recourse. which means
that the endorser disowns all liability. t may also be endorsed sans
frais 1+ithout expenses., which means that the endorser will accept
liability for the value of the bill but not for the expenses of enforcing
it.
d. Restri"ti3e En1orsement& This is an endorsement that prohibits
further transfer or negotiation of the bill. t limits transferability e.g. a
bill endorsed /pay x only0. This gives the right to the endorsee 1x. to
claim payment on the bill but prohibits him from transferring the right
of payment to anyone else.
RULES O. NOTICE O. DIS/ONOUR
a. The notice may be given by the payee or his agent.
b. t must be given within a reasonable time of the dishonour.
c. t may be given in the payee0s name or that of his agent.
d. t may be oral or written.
e. f written, it need not be signed.
f. @eturn of the dishonoured bill is suDcient notice.
g. The notice may be given through the post if trade usage or
custom permit.
? , - a g e
g) t must be given to the drawer or endorser or their personal
representatives if they have since died.
#) f the drawer or endorser has been declared bankrupt, the notice
must be given to their trustees in bankruptcy.
NOTING AND 4ROTESTING O. BILLS
A foreign bill must be protested if dishonoured. Epon the dishonour of a
bill the payee must hand it over to a notary public who presents the bill
to the acceptor for a second time.
Noting t#e bill involves making of a minute by a 'otary -ublic, who
has to present the bill either at the acceptorFs oDce if it is made payable
there, and if made payable at a bank then to that bank, and gets the
answer given for non3payment of the bill. Then he aDxes to the bill a
slip of paper which he has brieGy typed 1or written. on it the fact that he
presented this bill to the named drawee at the place and date, the cause
or reason for protesting the bill, the demand made, and the answer
given, if any, or the fact that drawee or acceptor could not be found. He
then appends his signature and aDxes a stamp, this being the stamp
required on a legal document. This formal process is called protest>.
4ROTESTING A BILL A protest is a formal declaration by a notary
public attesting to the fact that a bill has been dishonoured on
presentation to the acceptor. t0s contents include2
'ame of the person on whose behalf the protest is made.
@eason for the protest.
6ate and place in which the protest is made.
-articulars of the notary public.
The dishonoured bill or a copy thereof must be attached to the protest.
A protest is conclusive evidence that a bill has been dishonoured.
DISC/ARGE O. A BILL
An instrument is discharged when all rights and obligations arising under
it have completely ceased to exist. 4ut when any particular party is
discharged the instrument may still continue to be negotiable and the
un3discharged parties remain liable on it. Aor example if the bill is not
presented for payment on its due date of maturity, the endorsers are
discharged from their liability, but the acceptor remains liable. A party
may be discharged from liability in the following ways2
a. B2 %a2ment0 +hen payment is made or after the maturity of the
bill to the holder in due course by the drawee or acceptor, all
parties to the instrument are discharged.
b. B2 renun"iation:7ai3er0 +hen the holder at or after maturity
renounces his rights against the acceptor, unless the holder
delivers the bill to the acceptor.
< , - a g e
There are two parties to the note2
The maker and%
The payee.
The rules relating to bills of exchange in general apply to
promissory notes.
8 , - a g e