DELVE BUSINESS CONSULTANTS

LAW OF NEGOTIABLE INSTRUMENT

The term negotiable instrument means a written document transferable by

delivery whoever is in bonafide possession of such a document is presumed to
be the lawful owner of it and therefore entitled to enforce all rights under the
contract.

Other definition is: - (Bill of exchange ordinance cap 215)

 Is an instrument which is by a legal recognized custom of trade or by law
transferable by delivery or by endorsement and delivery in circumstance
that;-
a) The holder of it for the time being may sue on it in his own name
b) The property in it passes free from equities to a bonafide
transferee for value, notwithstanding any defect in the title of the
transferor.

CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT

a) The title to it passes or can be transferred from one person to another by
mere delivery if it is payable to bearer or by endorsement and delivery if
payable to order.
b) The transferee taking the instrument in good faith and for consideration
gets a good title to the same even though the title of the transferor is
defective;
c) The holder for the time being can sue on his name. No notice to the
debtor is necessary, before a transferee sue for the dishonor by the
debtor.

KINDS /TYPES OF NEGOTIABLE INSTRUMENTS

i. Promissory notes
ii. Bill of exchange
iii. Cheque
iv. Treasury Bills etc

I. Promissory Note (S 84 (i)) – BOEO – Cap 215

Is an instrument in writing containing an unconditional undertaking,
signed by the maker to pay a certain sum of money only or to the order
of a certain person or to the bearer of the instrument

ESSENTIALS OF A PROMISSORY NOTE

a) It must be in writing
An oral promise to pay doesn’t become a promissory note it must be
written. No Particular form of words is necessary eg. one may give the
instrument in the following terms:-
I Promise to Pay B or order sh. 10,000/=

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b) The Promise to Pay must be Unconditional

The promise to pay must not depend upon the happening of some uncertain
event. It must be payable absolutely. A conditional promise is not a valid
promissory note. The following are not valid Promises.
 I promise to pay Asha sh. 10,000/= seven day after my marriage with
Ashura.
 I promise to pay Asha sh. 10,000/= on Juma’s death provided Juma leave
me with enough sum to pay.
 I promise to pay Asha sh. 10,000/= as soon as I can.

c) It must be signed by the maker

It is important that the promissory note should be duly authenticated by the
signature of maker

d) The maker must be a certain person

The instrument must indicate with certainty who is the person or are the persons
engaging himself or themselves to pay.

e) The payee must be certain

Like the maker the payee of a promissory note must also be certain on the face
of the instrument. A note is valid even if the payee is misnamed or indicated by
official designation only, provided he can be ascertained by evidence.

f) The Sum Payable must be certain

The sum of money promised to be payable must be certain and definite. The
amount payable must not be capable of contingent additions or subtractions eg.
The following are invalid
 I promise to pay B shs 5,000/= and all other sum
 I promise to pay B shs. 5,000/= and all fines according to rule.
 I promise to pay B shs. 2,000/= and to deliver him black cow next week

NOTE
- However, the sum does not become indefinite merely because
i. There is a promise to pay the amount with interest provided the rate of
interest is stated.
ii. The amount is payable by installments
iii. The amount is to be paid at an indicated rate of exchange or according to
the course of exchange.

PARTIES TO A PROMISSORY NOTE

There are two parties to a promissory note;
a) The maker
The person who make the promissory note.

b) The payee
The person to whom or to whose order the payment
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Example:
Specimen of Promissory note.
Magenga sell goods to Jumanne for 5,000/= to be paid 3 months after
date. If Jumanne Promises to pay in writing, this promise will be a
promissory note.

Jumanne M
DSM
Jan 17, 2007

Tsh. 5,000/=
Three months after date I promise to pay Maganga or to order the
sum Tsh. Five thousands, for the value received

Jumanne
(Sign)

II. BILL OF EXCHANGE

Is a unconditional order in writing addressed by one person to another, signed
by the person (maker) giving it, requiring the person to whom it is addressed, to
pay on demand or at fixed or determinable future time a sum certain in money
to or to the order of a specified or to bearer.

That is an instrument is writing containing unconditioned order signed by the

maker directing a certain person to pay a certain sum of money only to, or to the
order of a certain person or the bearer of the instrument, thus a bill is an order
by a creditor upon his debtor requiring him to pay the money to the person
specified.
PARTIES TO THE BILL OF EXCHANGE
There are three parties to a bill of exchange;
i. Drawer
The person who makes the bill is called Drawer. This is a person
who orders money to be paid on his behalf.
ii. Payee
The person to whom the payment is to be made is called the
payee.
iii. Drawee
The person on whom the Bill of Exchange is drawn is called the
drawee. He is also called as an acceptor of the Bill.

iv. Endorser: holder of the bill who signs at the back when
transferring it
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v. Endorsee: person to whom the order bill is endorsed

vi. Bearer: person in possession of a bill
vii. Holder for value: person who has or deemed to have given value
of the bill
viii. Holder in due course: person who has taken a bill which is
complete and regular on the face of it before it was overdue
without notice of the previous dishonour by non-payment, in good
faith for value and without notice of any defect at the time of
negotiation
The drawer, or (if the bill is endorsed to the payee) the endorsee, who is in
possession of the bill is called the “holder” the holder must present the bill to the
drawee for his acceptance when the drawee accepts the bill by writing the words
“accepted” and then signing it, he is called the “acceptor” . Two of the parties
may be the same individual, thus frequently the drawer and the payee are the
same person (when the bill is drawn pay to me or to my order)

ESSENTIALS OF A BILL OF EXCHANGE

To be used the Bill of exchange must comply with the following

i. It must be in writing
ii. It must contain an order to pay. A mere request to pay an account
will not amount to an order. But an order may be expressed in
polite language.
iii. The order to pay must be unconditional
iv. It must be signed by the drawer
v. The drawer, drawee and payee must be certain
vi. The sum payable must be certain. A sum is still certain although it
may be payable with interest, installment and according to an
indicated rate of exchange.
vii. The Bill must contain an order to pay money only
viii. It must comply with formalities as regards date, consideration etc.

Example: SPECIMEN
Maganga sell goods Jumanne for Sh. 5,000/= to be paid 3 month after data
and buys from John goods worth Tsh 5,000/= on a similar term, if maganga
direct Jumanne to pay the sum of Tsh. 5,000 to John.

DSM
Jan 17 2007

Tsh 5,000
Three month after date pay to John or order the sum of five
thousands for value received accepted
Accepted
Jumanne
Maganga = Drawer
To Jumanne Maganga 4
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John = Payee
Jumanne = Drawee/acceptor

Benefit of bill of exchange

i. A Bill of exchange is a Double secure instrument, if the bill is
dishonored by the acceptor, the holder or the payee may took to
the drawer of the bill for payment
ii. Incase of immediate need of money a Bill can be discounted with a
bank by a payee
a. Two separate trade debts can be discharged by a bill of exchange.
Eg. When a buys goods on credit from B for Tsh 10,000/= to be
paid 3 months later and B buys goods on credit from C on similar
terms for similar amount an order by B to A to pay the sum of Tsh
10,000/= to C will discharge two separate trade debts.

Distinction between a Promissory notes and a bill of exchange

Promissory Note Bill of Exchange

(i) Two parties maker & payee
(ii) The maker of the note can not be
the payee (can not be the promisor
and promise)
(iii) Promise to pay
(iv) Prepared by a debtor
(v)No acceptance is necessary
Three parties – drawer, drawee and
payee
The drawer and payee may be one and
the same person
There is an order to pay
Prepared by creditor
Must be accepted by drawee

ACCEPTANCE
It is only the bill of exchange which require acceptance. A bill is said to be
accepted when the drawee, put his signature on it or the signification by the
drawee of his assent to the order of the drawer. After acceptance the drawee is
called acceptor. It is not essential for the holder to present the bill for
acceptance, although it is to his advantage to do as he thereby gains the
additional security of the acceptors name.

Rules for Acceptance

a) Presentment must be made at reasonable time on a business day and
before the Bill is overdue
b) When addressed to two or more drawees who are not partners
presentments must be made to them all, unless one has authority to
accept for all.
c) Where the drawee is dead, presentment may be made to this personal
representative

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d) Where the drawee is bankrupt presentment may be made to him or to his

trustee
e) On the presentment the drawee may give General or Qualified Acceptance
i. General acceptance
- Acceptance assents without qualification to the order to the drawer

ii. A qualified acceptance

- The drawee assents subject to qualification
An acceptance is qualified when:-
a) It is conditional
b) Partial i.e. for part only of the amount of the bill
c) Local i.e. to pay only at a particular place
d) Where it undertakes the payment at a time other than that at which under
the order it would be legally due (qualified as the time)
e) Acceptance of some of the drawee, but not all.
NEGOTIATION
A bill is said to be negotiated when it is transferred from one person to another
in such a manner as to constitute the transferee the holder of the bill. It may be
negotiated:-
a) By delivery, in case of a bearer bill
b) By endorsement and delivery, in case of an order bill.
ENDORSEMENTS
Means signing the negotiable instrument of the back or face thereof. It must be
an endorsement of entire bill (not partial). The person who endorses the
instrument is called the endorser and the person in whose favour the instrument
is endorsed is called the endorsee.
Types of Endorsement
a) Blank endorsement (General endorsement)
- This specifies no endorsee and the bill becomes payable to bearer

b) Special endorsement (full endorsement)

-This specifies the endorsee. It becomes full endorser by;
i) Signs his name
ii) Adds a direction to pay the amount to or to the order ofa specified person
c) Conditional Endorsement
This is where the condition is attached to the signature. The endorser limits
or negatives his liability.
d) Restrictive Endorsement
This prohibits further negotiation of the bill eg pay D only. It
restricts/excludes the right of further negotiation.
DISHONOUR
Negotiable instrument (Bill and cheque) may be dishonored by
(i) Non acceptance
(ii) Non payment
Dishonor by Non acceptance
This arises in the following cases;
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
Default in acceptance

Where the Bill is not accepted

Where the drawee makes the acceptance qualified

If the drawee is fictitious person or after reasonable search can’t be
found.
Dishonor by non payment
This is when the maker of the note, acceptor of the bill or drawer of the cheque
makes default in payment upon being duly required to pay the same.
As soon as the negotiable instrument is dishonoured the holder become entities
to sue the parties liable to pay.
NOTES OF DISHONOR
This means formal communication of the fact of dishonor. It serve as a warning
to the person to whom the notice is given that he could now be made liable.

FOREGERY
If any of the signatures on the bill are forged, the signature in question is wholly
inoperative and no person, even if acting in good faith, can acquire the rights
under it.
Case:
S carried on business in London and had a branch in Manchester. X The Manager
of Manchester Branch without any authority from S drew seven bills of exchange,
purporting to do so on behalf of S and signed them ‘x’’ Manchester Manager. The
bills having been dishonored K a hold in due course sued S as drawer

Held:
The bills being drawn by x without authority were forgeries and S was not liable.
DISCHARGE OF THE BILL
A bill is discharged by:-
a) Payment in due course by or on behalf of the drawee or acceptor.
b) The acceptor of the bill becoming the holder of that or after maturity in
his own right.
c) Waiver – When the holder renounces his right under it.
d) Cancellation where it is done intentionally by the holder of his agent and
the cancellation is apparent e.g. cancels the name of any of the parties.
e) Alteration of the bill without the assent of all parties liable on it eg if the
holder agrees to a qualified acceptance the rest of the parties are
discharged from liability.
f) Delay in presenting bill/cheque.
Right and Liabilities of the Parties
i. No person is liable on a bill whether as drawer, endorser or
acceptor who has not signed it, but the fact of his signing it in a
trade or assumed name doesn’t exempt him from liability.

ii. Where a bill/cheque drawn on a partnership account bears the

printed name of the partnership and the signature of one partner,
the other partners are likewise liable.
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iii. Where payee receives payment of a bill drawn by an agent without

authority and knows that is so drawn, he is liable to refund the
amount received to the drawer.
iv. If a person signs a bill and add words to his signature indicating
that signs for or on behalf of a principal he is not personally liable
on the bill.
v. An officer of a company or who signed on behalf of a company a
negotiable instrument in the name other than the proper name of
the company shall be personally liable.
vi. A person who accepts a bill engages to pay it according to the
tenor of his acceptance.
vii. The drawer on presentiment of the bill shall be accepted and paid
according to its tenor.
The endorser engages that on due presentment the bill shall be accepted and
paid according to its tenor and that if it will be dishonoured he will compensate
the holder provided that the requisite proceeding on dishonor is taken.

HOLDER AND HOLDER IN DUE COURSE

A person is called holder of a negotiable instrument if he satisfies the following
two conditions
a) He must be entitled to the possession of the instrument in his own name
b) He must be entitled to receive/recover the amount due on the instrument
from the parties liable under the instrument.

Holder in case of loss or destruction

Where a note, Bill or cheque is lost or destroyed its holder is the person who was
entitled to the instrument in his own name at the time of such loss or
destruction. For example the finder of a lost instrument payable to bearer, or a
person in the possession of such instrument is not a holder, simple an agent
holding an instrument for his principal with also not be a holder of it although he
may receive its payment.

HOLDER IN DUE COURSE

A person is called a holder in due course if he satisfies the following condition
a) He must be a holder

b) He must have become for consideration either the possessor of the

instrument if payable to bearer, or payee or endorsee thereof if payable to
order, such consideration must not be unlawful and need to not be
adequate.
c) He must have obtained the instrument before its maturity. He must
become the holder before the amount becomes payable thereon. A
person taking the bill or note on the duly on which it becomes payable is
not a holder as he takes it after it has become payable since the
instrument may be discharged at any time on the day.

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d) He must have obtained the instrument in good faith

e) He must receive the instrument complete and regular on the face of it.

Distinction between a Holder and Holder in due Course

BASIS HOLDER HOLDER IN DUE

COURE
Consideration Can be a possessor or He acquire possession for
payee of an instrument consideration
even without
consideration
Good faith He need not become the He must become the
possessor in good faith possessor in good faith
Right to have better title He cannot have a better He can have a better title
than transferor title than that of than that of transferor.
transferor
Right to enforce rights He cannot enforces his He can enforce his rights
against all prior parties rights against all the prior against all the prior
parties. parties.

Payment in Due Course

A payment is said to be in due course if the following conditions are fulfilled
a) The payment must be in accordance with the apparent tenor of the
instrument. E.g. Payment of the post-dated cheque before maturity is
not according to the tenor of instrument.
b) The person to whom payment is made must be in possession of the
instrument
c) The payment must be made in good faith, without negligence and
under circumstance which do not afford a reasonable ground for
believing that the person to whom it is made is not entitled to receive
the amount.

BACK NEGOTIATION

An instrument is said to be negotiated back to the holder when an endorser,

after he has negotiated an instrument, again become its holder before its
maturity.

a) Party who cannot be sued

The holder cannot enforce payment against an intermediate party to

whom he was previously liable. This rule is made to prevent multiplicity of
actions and it is an exception to general rule that a holder in due course
can sue all parties.

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b) Part who can be sued

The holder can enforce payment against an intermediate party to whom
he was previously not liable

Example:

A B C D E F

The endorsement by F to B is a negotiation back, B cannot sure C, D,E,F but can

sue A because A is prior to B’s original endorsement.

NB
Maturity
The maturity of a promissory note or Bill of exchange is in the date on which it
falls due.

Days of Grace
Every instrument payable others than or demand is entitled to three days or
grace, unless the bill itself provided otherwise.

If the third day of grace falls on a public holiday the bill is payable on the last
proceedings business day or on the succeeding business day.

III. CHEQUE
A cheque is a bill of exchange which is drawn upon a specified banker and
payable on demand thus the law relating to bill of exchange also applies to
cheque.

Essential characteristics of cheque

I. It must be in writing
II. There must be an express order to pay not request to pay.
III. Drawn upon specified banker
IV. And other refer bill of exchange
-
Parties to a cheque
a. Drawer – the person who draws the cheque
b. Banker – the bank on which the cheque is drawn
c. Payee – the person in whose favor the cheque is drawn is called the
payee, can be third party or the drawer himself
CROSSING OF A CHEQUE
A cheque is said to be crossed when it bears a cross i.e. its face two parallel
transverse lines which are drawn on the cheque.

Can be two types

i. Open or un crossed cheque.

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An open cheque is payable at counter of the drawer bank on the

presentation of the cheque it is risky.

ii. Crossed cheque

This is payable only through a collecting banker and not directly at the
counter of the bank. It is more secure.

Types of crossing
i. General crossings
Where a cheque bears across its face two parallel transverse lines without
only words or with words and company and or not negotiable written in
between these two parallel lines it is called general crossing.
ii. Special crossing

A cheque is said to be crossed special where it bears across on its face in

addition of other
I. The name of a banker
II. The name of a banker with the words not negotiable
III. The name of a banker with the words and company.

Where the cheque is crossed special the banker on whom it is drawn shall not
pay it otherwise than to the banker to whom it is crossed or his agent for
collection it is safer than the general.

DISHONORING OF CHEQUE (BOUNCING)

Reasons for dishonoring cheque could be;
I. Insufficient money in the drawers account
II. The amount written in words and figures might be different.
III. The signature may not correspond with the specimen given .Some
accounts may need signature of two people.
IV. If more than six month have elapsed between the date of the cheque and
the day it is represented at the bank, the cheque is said to be stale

CASES IN WHICH A BANKER MUST REFUSE TO HONOR A CUSTOMERS

CHEQUE
a) Where the banker receives instructions from the customer not to
honor (stop payment)
b) Death- When the banker receivers a notes of the death of his
Customer.
c) Insolvency –When the banker receivers the notes of the insolvency
of his customer.

CASES IN WHICH A BANKER MAY REFUSE TO HONOR THE CHEQUE

a) Insufficient funds
b) Presentment at different Branch
c) Presentment after banking hours
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d) Stale cheque
e) Post dated cheque
f) Un dated cheque

Termination by banker to pay acheque (Countermand of payment)

An oral countermand is sufficient but whether oral or written it must actually
reach the banker.

Case
C Drew a cheque on his bank and on the same day after business hours,
countermanded payment by telegram, the telegram was put in the letter box and
owing to the negligence of the bank’s servant, didn’t reach the manager until
two days later. In the meantime the cheque was cashed.

Held:
The cheque was not countermanded because;
Countermanding means notice to the banker, there was no such a thing as a
constructive countermand.

DIFFERENCES BETWEEN CHEQUE AND BILLS OF EXCHANGE

BASIC CHEQUE BILL OF EXCHANGE

i) Drawer It always drawn on bank It can be drawn upon

and individual as well as
a bank
ii) Payable on demand It is always payable on At a need not be payable
demand on demand

iii) Acceptance It does not require an It requires an acceptance

acceptance of the drawer
iv) Crossing It can be crossed It cannot be crossed
v) Countermanding It can be revoked by It cannot revoked by
countermanding countermanding

ATM – AUTOMATIC TELLER MACHINES

One can take money using the plastic card. Cash point cards are invariably
issued to customers only on the acceptance of written terms and conditions of
the banks which includes
i. The customer agrees not to pass the cash card point nor disclose the PIN
to other person
ii. The bank is authorized to debit the customer’s account with the account
of all withdrawals

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Review question
Q.1
a) Define a cheque
b) What are the duties of banker to a customer
c) What do we mean by a negotiable instrument
Q. 2
a) How do you distinguish a cheque form a bill of exchange
b) Define the following terms as they apply in the law of negotiable
instrument

i. Non – existent payee

ii. Fictitious Payee
iii. Endorsement in blank
iv. Restrictive endorsement
v. Conditional endorsement
Q.3
a) State the name to whom a bearers cheque has been
negotiated for the third time (4 marks)
b) A cheque in the form of “order instrument” has been
presented to the drawee and returned marked refer to drawer
Required:
Mention (4) situation under which a cheque may be returned to payee
with an endorsement “refer to drawer”
c) (i) What is the legal effect of a drew infavour of “P” is not yet encashed?
ii) How will that cheque be treated in case it is presented for encashment?

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