NEGOTIABLE INSTRUMENTS

Aim To introduce you to commercial instruments which are used in financing trade. Introduction Negotiable instruments are commercial documents that are used as means of payment for goods and services. By using these documents, the need to always pay for goods or services in physical cash is obviated. This unit examines only four of such documents. These are: bill of exchange, cheque, promissory note and bankers credit.

Concept of negotiability. This allows a bill to change hands by being transferred from one person to another, if the bill had been endorsed by the previous holder/s. This makes it possible for payment to be easily effected for goods and services. Types (1) Bill of Exchange. A bill of exchange is defined " 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 a determinable future time, a fixed sum in money to a specified person according to his order, or to the bearer of the bill. (Section 3(1) Bills of Exchange Act, Cap 227 Laws of Fiji Islands 1985). There are equivalent definitions in the Bill of Exchange Acts of Niue (Section 3(1)), Samoa (Section 3), Tonga, Kiribati, and Solomon Islands. This includes the UK Bill of Exchange Act 1882 applicable in other USP countries.

You should answer the following questions by reading the relevant provisions in the statutes. The questions are: (a) How many types of Bill of Exchange exist? (b) What are the requirements for the validity of a Bill of Exchange? (c) Who are the parties to a Bill of Exchange? (d) What are the liabilities of the parties to a Bill of Exchange? (e) Who is a holder in due course? (f) What are the rules regarding presentment for acceptance? (g) What is the measure of damages of a dishonoured bill? (h) How is a Bill of Exchange discharged? If you have clear answers to these questions, then you should be confident that you have fully understood what a Bill of Exchange is all about. (2) Cheques. This is defined as a Bill of Exchange drawn upon a banker payable on demand. A cheque may be crossed specially or generally with or without the words not negotiable or A/C payee only written on the face of the cheque. Where a cheque is crossed, the proceeds would have to be paid through a bank account. It cannot be paid over the counter. You should answer the following questions by reading the relevant provisions in the statutes. These are: What is the effect of crossing a cheque? What are the duties of a banker when a cheque is crossed? What is the lifetime of a duly drawn out cheque?

How many parties are there to a drawn cheque? Name them. How are collecting and paying bankers protected? If you have clear answers to these questions, then you should be confident that you have fully understood what a cheque is all about. (3) Promissory notes. This may be defined as an unconditional promise in writing made by one person to another signed by the maker, engaging to pay, on demand or at a determinable future time, a certain sum in money, to, or to the order of a specified person or to bearer. You should answer the following questions by reading the relevant provisions in the statutes. These are: What is presentment in connection with promissory note? What is the liability of the maker? How is a promissory note delivered? What is a promissory payable on demand?
Please read the case of Williams & Gly Bank Ltd v Belkin Packaging Ltd (1980-4) LRC (Comm.) 33.

If you have clear answers to these questions, then you should be confident that you have fully understood what a promissory note is all about. (4) Commercial credit. This is also known as document credit, letter of credit of bankers commercial credit. This is defined as: "an undertaking by a bank to pay a sum of money to whom the credit is addressed, or to accept or purchase a bill of exchange drawn or held by that person and this is either absolute or more usually given on condition that the person

fulfils the requirements set out in the credit. (Pennington, et. al., (1978), pp. 1). You should answer the following questions by reading the relevant cases listed in this unit. The questions are: How many parties are there to a bankers credit? Name them. What are the respective functions of the parties to a credit? How many types of credit exist? What is the effect of making a credit irrevocable?
Please read the following cases: Guaranty Trust Co. of NY v Hannay & Co (1918) 2 KB 623. Panoutsos v Raymond Corp (1971) 2 KB 473.

What are the possible scenarios of conflict of laws that might arise in connection with a documentary credit? What are the underlying considerations and how are the conflicts resolved?
Please read the case of Bony Thon v Commonwealth of Australia (1951) AC 201.

If you have clear answers to these questions, then you should be confident that you have fully understood what a commercial credit is all about. Who is a holder in due course in respect of a letter of credit?

What are the general duties of the holder and the liabilities of the parties? Can the original payee be a holder in due course?