LAW OF NEGOTIABLE INSTRUMENTS

Lecture 1

Week 1

INTRODUCTION

Introduction

The Law of Negotiable Instruments is an area of law highly regulated by

statute, and well established.

The course content will focus exclusively on statutory provisions.

Historical origins of negotiable instruments

- Merchants in Europe during Medieval times, when international commerce

started to flourish, were faced with the problems associated with travelling
and carrying large amounts of money (i.e., cash in gold, silver and bronze
coins) which was both dangerous and cumbersome. They had to find a way to
make payment without using money.

- A piece of paper that represents value in monetary terms was introduced

which promises payment of a sum of money to whoever possessed the
document (the holder). Once the holder handed the document to another
person, the rights embodied in the document were also easily and safely
transferred.

- Negotiable Instruments were historically governed by the Law of Merchants

(Lex Mercatoria) which provided a system of customary commercial rules
uniformly adopted by merchants engaged in international trade.

General comments

- Negotiable instruments are: Bills of Exchange, Promissory Notes and

Cheques.
- In modern commerce there are, in addition to Negotiable Instruments,
several instruments of payment, such as traveller’s cheques, credit cards,
letters of credit, stop orders, debit orders and Electronic Funds Transfers (EFT),
but these are not negotiable instruments.

- The negotiability of instruments in South Africa is governed by the Bills of

Exchange Act (34 of 1964).

Key Concepts

- A negotiable instrument is a very special kind of document representing both

a payment and also an underlying contract. For example, a person can
purchase a motor vehicle and pay by cheque. Principles of both the law of
contract and the law of negotiable instruments will then apply to enforcing
payment. If the cheque is not honoured and payment subsequently not made,
the seller can sue the buyer either on the contract or on the cheque.

- An instrument is a piece of paper which attempts to give a personal right.

Possession of the instrument allows enforcement of the right, such as for
example the right of entry entailed in a movie ticket.

- Negotiation is the process by which the right embodied in the instrument is

passed from one possessor to the next.

- The two most important characteristics of negotiability are:

1. Simplicity in transfer of title. If someone has ‘title’ to an instrument this

means that they are entitled to all the rights or benefits that are part of the
document.

- if document is made payable ‘to bearer’, then the promise to payment

can be given to another person simply by the holder delivering the
document.

- if the document is made payable ‘to order’, then the promise to

payment can be given to another person by the holder signing the back
of the document and delivering it to that person. Signing in this way is
called indorsement.
2. Transferability free from equity. Generally no-one can be given a right
to another which they do not have themselves.

- If A sells goods to B which had been stolen from C, then C may bring an
action against B for return of the goods, and B has to sue A for
recovering the monetary value. This is a transfer with equity. In other
words, the defect in title is passed on from one person to the other.

- The law of negotiable instruments provides for the transfer of rights

free of equity provided that the acceptor of the right acted in good faith
at the time of acquiring the right and gave value in exchange.