Negotiable Instruments Notes The Bills of Exchange Act (Ch 14:02) is the principal law on negotiable instruments. It however unfortunately does not define the term negotiable instrument. An instrument is defined at common law as a document which expresses title to a certain amount of money. It is a physical embodiment of a payment obligation and its possession with any necessary endorsements is the best evidence of entitlement to the money it represents. A negotiable instrument can thus function as a substitute for money or as an extension of credit. For it to operate practically as either a substitute for money or a credit device, it is essential that the instrument be easily transferable without danger of being uncollectible. This is an essential function of negotiable instruments. The transferability or negotiability of the instrument to another person creates the term negotiable instrument. It gives the holder the right to pass on the right therein. Transferability is the passing of rights with or without equities/defects to another person. It gives the transferee only those rights that the transferor possessed. Any defences that can be raised against the transferor can normally be raised against the transferee. Negotiability on the other hand is whereby successive holders of the instrument are entitled to take it for what it appears to be. It is the passing off of one’s title to another upon transfer free of equities or defects from previous holders. Unlike in a transfer, negotiation can make it possible for a holder to receive more rights in the instrument than the prior possessor had. A holder who receives greater rights is called a holder in due course. (A truly negotiable instrument has the characteristic of not only being able to be transferred to a third party by endorsement and delivery, but in addition, enables the holder in due course of the instrument, (in the event of non-payment) to sue not only the drawee, but also the previous holder (previous endorser). Therefore, the holder in this case, takes the instrument free of any defects and obtains a better title to the instrument than the previous holder. That is to say, even if the previous holder obtains the instrument by fraudulent means, provided the next holder (endorsee) is innocent of the fraud, such holder in due course retains all rights to enforce payment against the drawee and in case of need, against all previous holders down the chain).Two main characteristics of a negotiable instrument are: i. It is transferable by mere delivery with any necessary endorsements to another person. To bearer instruments need no endorsements. ii. The transferee can acquire a better title than that of the transferor free from any defects in the title of the transferor, provided the acquisition is in good faith and for value(a holder to whom an instrument is issued or transferred in exchange for something of value). Negotiability of an instrument can either be by statute or by mercantile usage. Types of negotiable instruments Mercantile usage (common law) recognises other negotiable instruments such as treasury bills, banker’s drafts, bank notes and bearer debentures. The Bills of Exchange Act on the other hand recognises 3 types of negotiable instruments namely: a. Bills of Exchange: According to s 3 of the Act, it is an unconditional order in writing from 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 of money to or to the order of a specified person or to bearer. There are 3 parties to a BoE ie the drawer, the drawee and the payee. b. Promissory notes: according to s 89 of the Act, it is an unconditional promise in writing made by a person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time a sum certain in money to or to order of a specified person or bearer. With a promissory note there are two parties ie the maker and the payee. Makers can be more than one to one payee where they are jointly and severally liable. c. Cheques: these are the most common type of negotiable instrument in present day commercial transactions. A cheque is a special type of a Bill of Exchange drawn on a banker only and payable on demand. See s 72 of the Act and Barclays Bank v Bank of England 1985 1 ALLER 385. A cheque is only negotiable when it has the following features: 1. The rights on the face of the cheque must be capable of being transferred from one person to another by delivery alone if it is a bearer cheque or by endorsement and subsequent delivery if it is a cheque drawn in favour of an order. 2. Once the cheque has been negotiated to another person, that person assumes the rights to sue on it in his own name. 3. If a person takes a current and regularly drawn cheque in good faith and for value, he takes that cheque free of equities. A cheque represents the existence of an underlying relationship of indebtedness between two parties, ie the banker and his customer. A cheque book is given to a current account holding customer primarily to facilitate withdrawals by the customer called the drawer who issues a mandate to the bank to debit his account by signing the cheque. The banker is the drawee who has an obligation to discharge the mandate of the drawer provided there is credit in the account. The payee is the person to whom payment is intended or the intended beneficiary noted on the cheque. Where such payee is not stated, the cheque is payable to bearer meaning any person who presents it to the bank. Negotiability of cheques A cheque payable to bearer is negotiated by delivery to another person ie the transfer of possession from one person to another. Where the cheque is payable to a specific person mentioned on the cheque, then it is an order instrument which is negotiated by the endorsement of the holder and delivery. See s 30 of the Act. An endorser, merely by endorsing, impliedly promises to pay the amount of the instrument if the drawer or maker defaults on the payment. A special endorsement is a way of forwarding the cheque to another person by signing at the back of the cheque with the instruction to pay another person. If the payee just signs at the back without giving additional instructions regarding who to pay, then again it becomes a blank endorsement which creates a cheque payable to bearer. If the cheque is endorsed “pay John only” then this is called a restrictive endorsement meaning that the cheque cannot be negotiated to anyone else. Crossings on cheques Fraud on endorsement of cheques can be necessitated by the mere fact that a bank does not have the signature of the intended beneficiary so a signature can be forged and a cheque is endorsed to someone else in a fraudulent transaction. In order to minimize fraud on cheques, a cheque can be crossed and certain words added with the effect of restricting negotiability or transferability of the cheque. The Act defines a general crossing in s 79 as where a cheque bears across its face an addition of: a. The words “and company” or any abbreviation thereof between two parallel traverse lines with or without the words ‘not negotiable‘ or b. Two parallel traverse lines simply, either with or without the words ‘not negotiable’. Such a cheque crossed generally shall only be payable to another banker according to s 82(1) of the Act. The general crossing can also have the words ‘a/c payee’ (account payee) between the lines. This directs the collecting banker to pay only the specified payee. The specified payee can however further endorse it to another person by a special endorsement. See Standard Bank of SA v Sham Magazine Centre 1977 (1) SA 484; BCCZ v UDC Ltd 1990 (2) ZLR 397 (SC) and Philsam v Beverley Building Society 1972 (2) SA 546 (R) where the learned judges are argued for the view that the effect of these words is not to render the cheque non transferable. It can still be transferred to subsequent payees. A cheque with the words ‘not transferable’ with or without the parallel lines is totally not transferable and only the payee’s bank account can receive the money. The words ‘not transferable’ are however different from ‘not negotiable’. ‘Not negotiable’ on a crossing on a cheque simply means that the person to whom it is further transferred shall not have a better title than that which the person from whom he took it had. Such a cheque is transferable subject to equities (defences held by previous holders) and the holder can never benefit from the status of being a holder in due course. The crossing ‘not negotiable’ affords the drawer protection should the cheque be stolen or lost because whoever receives it does so subject to equities. Section 85 of the Act also allows recovery of compensation by the true owner of the cheque crossed in this manner from whoever receives it after the theft or loss and gave it consideration, however innocent that person may be. See Zimbabwe Banking Corp Ltd v Pyramid Corp Ltd 1985 (1) ZLR 358, Pafitis v Naoumoff 1965 RLR 526 and Tedco Management Services v GMB 1997 (1) SA 196 (ZS). Section 79 of the Act provides for special crossing whereby the cheque bears across its face the name of the banker with or without the words ‘not negotiable’. Such a crossing which does not have traverse lines is meant to simply specify the bank to be paid unlike the general crossing which does not specify the bank. See also s 82 of the Act. Holders in due course A cheque can be transferred free from equities (free from defences) meaning that the person who gets transfer of the cheque gets a safe title and would not ordinarily be vulnerable to those defences which would have been raised by the predecessors in title. Such a holder is referred to as a holder in due course. According to ss 28 and29 of the Act, every holder of a complete and regular cheque is prima facie deemed to be a holder in due course. In order to hold a cheque in due course, the following pre-conditions will have to be satisfied: a. That he became the holder of it before it was overdue and without notice that it was previously dishonoured if that was the case, b. That he took the bill in good faith and for value, c. That at the time the bill was negotiated to him he had no notice of any defect in title of the person who negotiated it. Defences against a holder of a cheque There are two defences that can be raised: a. Absolute defence These are the only defences that can be raised against a holder of a cheque in due course as listed in the case of Smith v Theatre Café 1949 (4) SA 519. They are also available against ordinary holders. 1. Forgery of defendant’s signature or endorsement (s 23) 2. Lack of contractual capacity 3. Fraud rendering contract void eg mistake by misrepresentation 4. Material alteration meaning drastic alteration without the agreement of he defendant. 5. Incomplete bill eg unclear cheque 6. Etc. b. Relative defences A defendant can also raise relative defences against ordinary holders and these are mistake, lack of capacity, illegality, set off, prescription and discharge of obligations. The right to enforcement of payment on a negotiable instrument including a cheque is given to a holder. Bankers’ liabilities The Act also protects banks from certain liabilities arising out of transactions with Bills of Exchange in particular cheques. a. Section 83 provides that a paying bank that pays a crossed to another banker in good faith and without negligence is not liable to the true owner of the cheque for any defects. An exception to this is where the signature of the true owner has been forged b. Section 75 exempts a bank from liability if in the ordinary course of business and in good faith pays an unendorsed or irregularly endorsed cheque. See Arab Bank v Ross 1952 1 ALLER 709 on regularity. See also Biddulphs Removals & Storage v Standard Chartered Bank & CABS HH/116/96. c. Section 59 protects a banker who in good faith and in the ordinary courses of business pays a crook a cheque whose endorsement is forged, except for fraud on the signature. d. The collecting acting acquiring cheques in its own right after giving value for it is also protected with the rights accorded to a holder in due course. See Bank of Credit & Commerce Zimbabwe v UDC 1989 (2) ZLR 1. e. A collecting bank can be delictually liable to the true owner of a cheque for negligently and unlawfully collecting the cheque. He has an obligation to exercise reasonable diligence when collecting cheques. See Zimbabwe Banking Corp v Pyramid Motor Corp 1985 (4) SA 553 (ZS). f. Section 85(1) entitles the true owner of a stolen or lost cheque marked ‘not negotiable’ to recover its value from any person who has been possessor after the theft or loss and has given consideration for it. Refer to earlier discussion for further details.