THIRD YEAR NOTES OF BANKING AND NEGOTIABLE INSTRUMENTS

CHEQUES AND OTHER DOCUMENTS INTENDED TO ENABLE A PERSON TO

OBTAIN PAYMENT.

Bills of exchange are dealt with by the bills of exchange act Cap 68.

This act is in fact a code which codifies the practice relating to negotiable
instruments as practiced by the law merchant. Our own law cap 68 is a reproduction
word for word of the bills exchange act of 1882. Because it is a code there are
certain rules of interpretation which apply to codes which do not apply to others
statutes. These rules were explained in bank of England V Vagliano brothers;
according to this case by the House of Lords. The proper way to interpret a code is
to look at the plain meaning of the words used in the code without aid of prior
authorities. But prior authorities can only be called to aid of interpretation if the
word has been given a technical meaning and it is used in the code. Then it means
the drafters of the code intended to import that meaning. It follows therefore that
the first authority in the law of negotiable instruments is the bills of exchange act
itself. We also use cases to retreat how the act/code has been interpreted in
certain circumstances.

A CHEQUE;

According to S.72 of the bills of exchange act; a cheque is a bill of exchange drawn
on a banker, payable on demand

Terms

Bills of exchange

With the bill of exchange there is no bank involved- it can either be addressed to
any person or a bank but a cheque must be addressed to the bank

A cheque is the customers mandate to his banker to pay. S.72 (1) defines a cheque as
a bill of exchange drawn on a banker payable on demand

A bill of exchange. Under S.2 (1) a bill of exchange is 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 fixed or determinable
future time a sum certain in money to the order or to a specified person or to
bearer

According to S.2- S.72(1) of the bills of exchange read together a cheque can be
defined as an unconditional order in writing drawn by one person upon another who
is a banker to pay on demand a sum certain in money to the order of a specified
person or to bearer

Pay Dan or the bearer. Here bearer means whoever presents a cheque to you if it is
not Dan

A cheque must be paid on demand. The modern cheque leaf does not include the
word demand. This omission is remedied by S.9 of the act. Which stipulates that a
bill is payable on demand which is expressed to be payable on demand, or at site,
or on presentation or in which time of payment is not expressed.

By this definition, there are three parties to a cheque;

1. The person who draws the cheque. Known as the drawer

2. The banker on whom the cheque is drawn; called the drawee bank or paying
bank. A paying bank is one which pays the money and the person who is
supposed to receive payments is the payee.

If the drawer is the one to be paid then the drawer and the payee are the same
person. Here it is the same person who writes the cheque and is the one who wants
to be paid.

The order must be an unconditional; in Bavans junior v London and south west bank;
an instrument which was in the form of a cheque but followed with the words
provided the receipt form at the foot hereof is duly signed. The court held that the
receipt requirement was a condition which made the instrument not a cheque

A cheque must be addressed by one person to another being a bank as drawee. The
financial institution’s act Section 3. provides that a bank means any company
licensed to carry on financial institutional business and includes all branches and
offices of that company in Uganda

A bank draft is a cheque written by a branch on the headquarters or another branch.

It follows that the draft drawn by one person on another or on the head office are
not cheques or bills because they are not addressed by one person to another

But S.4(2) of the bills of exchange provides in part that where in a bill, a drawer
and drawee are the same person the holder may treat the instrument as a bill of
exchange or as a promissory note (it is a promise to pay) it is governed by S.82 of
the bills of exchange act.

S.49(2)©(1) provides that notice of dishonor is dispensed with as regards the

drawer where the drawer and drawee are the same person notice of dishonor (once
a cheque has been presented and dishonor notice of dishonor must be given to the
drawer if not he will be free from liability as a general rule)

S.1 of the act defines a holder to mean the payee or endorsee of a bill or a note
who is in possession of it or the bearer

The endorser is a person who orders the money to be paid while the endorsee is a
person to whom the money is to be paid. Normally the first endorser is the payee.

Note; S.23 a forged signature is a total nullity

CERTAINTY OF THE PAYEE.

According to S.6 (1) of the bills of exchange act, the payee must be described with
certainty. Any words which generally identify a person are regarded as certainty.
FICTITIOUS OR NON EXISTING PERSON

s.6 (3) provides that where the payee is a fictitious or non-existing person the bill
may be treated as payable to bearer. The house of Lords considered this provision
in bank of England V vagliano brothers and held by majority of 5-2 that the effect
of the section is that the bill may be treated as payable to the bearer where the
person named or as payee, or to who’s order the bill is made payable on the face of
it is a real person but has not and was never intended by the drawer to have any
right upon it or arising out of it and this is so though a bill so called is not in
reality a bill but in fact a document manufactured by the person who forges the
name of the drawer, forges the signature of the named payee and presents the
document for payment. Both the named drawer and the named payee being entirely
ignorant of the circumstances. Fictitious means feigned or pretended

The application of the subsection, (6) does not depend on the condition that the
acceptor should be aware that the payee was a fictitious or non-existing person.
The Earl of Selborne one of the judges in the case supra, that in cases which fall
under S.6(3) knowledge on the part of the acceptor that the payee is fictitious or
non-existing person is necessary because such implication cannot be gathered from
the subsection. According to bomma manufacturing limited against Canadian bank
of commerce. If the payee on the cheque was a matter of pure invention and not a
real person then such a payee was non existence

the rational of the rule was stated by the court to be that the fictitious payee rule
set out in S.6(3) that a fictitious person was to be treated as payable to bearer was
an exception to the normal rule of Nemo Dat quod Non Habet and through the loss on
the drawer. Bank of England V Vagliano brothers1. A series of documents were
manufactured and were made payable as the acceptor’s bank and the amounts were
paid by the bank over the counter but vagliano was not aware of these documents
drawn on him. The forger (a clerk in vagliano’s employment) fraudulently forged the
signatures of the payee. Vagliano sued the bank to recover the money. Court held

1
(1891) Ac 107
that the loss had to fall on vagliano because the money was paid to whoever
presented the cheque because money was paid to the bearer.

In cluntton v. attenborough & son2 An employer was fraudulently induced by the

clerk to draw cheques in favor of a non-existing payee who’s endorsement was paid
by the clerk in favor of a bona fide transferee (is someone who is a holder for value
- a holder in due course) the bills have been transferred to him but he has given you
consideration.) For value; the third party (the transferee who acted in good faith
obtained payment of the cheques. Glaton after discovering the fraud sued him for
money they had received. The House of Lords held that the equivalent of S.6 (3)
applied and the money could not be recovered.

In vinden v. Hughes a clerk fraudulently induced his employers to draw a number of

cheques in the names of customers of his employers. He obtained the firms signature,
forged the endorsements and negotiated the cheques to an innocent third party
who obtained payment from the firm’s bankers. When the third party was sued for
the money the court held that at the time the cheques were drawn the employer
believed that they were being drawn in the ordinary course of business for the
purpose of the money being paid to the named payees. Accordingly the payees could
not be regarded as fictitious or non-existing person.

In north and south wales bank v. Macbeth, a fraudulent person, white, induced
Macbeth to draw a cheque in favour of Kerr, an existing person who was intended to
have the benefit of the cheque. The house of lords accordingly held that the
equivalent of S.6(3) did not apply because the drawer of the cheque intended that
the payee or his transferee should receive the money. The payee was not fictitious.
The house explained the case of bank of England v. vagliano brother, and clutton v.
Attenborough by saying that the former authority was not a case in which the
drawer intended the payee to receicve the proceeds or the bill. And in the latter
authority the payee was a non-existent person whom no one either could or did

2
(1897) A.C.90.
mean to be the recipient of the proceeds of the cheque..

It appears therefore that . where a cheque is payable to a fictitious or non existing

person it becomes as against a bona fide holder, negotiable without endorsement,
and is to be treated as if in terms made will fall on him or her. And a payee may be
fictitious without being non-existent provided he or she has no interest to receive it.
Treating such an instrument as being payable to bearer means. That any
endorsement forged on it may be disregard the instrument would be caught by S.23
which provides in part that where a signature on a bill is forged or placed thereon
without the authority of the person whose signature it purports to be, the forged or
unauthorized signature is wholly inoperative.

The decision in bank of England v. vagliano brathers, is not very relevant to cheques
because of S.23 which provides that if the drawer’s signature is forged the paying
bank will be liable unless the customers is estopped from denying the genuiness of
the signature. And the bank is futher protected by S.59 (if the bank payees on the
cheque in good faith and in ordinary course of business it is not incumbate on a
bank to see whether the bill was actually forged) of the Act. It should also be noted
that if the cheques in North and south wales bank v. Macbeth had been crossed the
bank would have been protected by S.81 of the Act which sates that where a
banker in good faith and without negligence receives payment for a customer who
has no title or defective title thereto, the banker shall not incur any liability to
the true owner of the cheque by reason only of having received such payment.
Accoriding o the learned authors of patet’s law of banking, the following principles
can be extracted from the cases discussed above. The primary factor is the state of
mind and intention of the drawer of the bill or cheque; if hi

“Missed”

The case of north and south Insurance Corporation against national provincial
bank and the case of Cole v. Milsom.

The cases of north & south insurance corporation v national provincial bank and
Cole v milsom distinguished. Law J said that the case of North and south insurance
corporation v. national provincial bank decided that a document made out of “cash
or order” was not a cheque because it was not a bills of exchange as defined In the
bills of exchange act and that the words “or order” being inconsistent with the
intention of the drawers should be disregarded.

But as Smart says; instruments in this form are not to be regarded as payment to
bearer although in some purposes the practical effect is the same as if they were3

The most important different between a document drawn cash or bearer and one
drawn cash or order is that the former is covered by the bills of exchange act and
is fully negotiable whereas the latter is not.

According to chambering v. young and tower4a cheque drawn “pay… order” and
endorsed (signed) by the drawer. It is a good cheque because it is interpreted to
mean “pay to my order” but a cheque drawn “pay or order” is not a bill of exchange
because there is no payee

A cheque drawn; “pay self or order” is a good bill of exchange authorized by S.4 (1) of
the act. Which states that a bill may be drawn payable to or to the order of the
drawer or it may be payable to the order of the drawee.

ANTEDATING AND POSTDATING

It was generally thought that a postdated cheque would not have qualified as a
cheque because S.72 defines a cheque inter alia as being payable on demand. The
argument was that in the absence of s.12 (2) which provides that a bill is not invalid
by reason only that is it postdated or antedated. A postdated cheque would not

3
Op cit. pp.43-44
4
[1986] 5. NSWLR 496.
even be a cheque as it is not payable on demand

5
However in Hodgson & Lee pty Ltd v. Mardonius Pty Ltd after analysis of certain
provisions corresponding Sections 2,9 and 10 of the bills of exchange act the court
came to the conclusion that a postdated cheque is not payable at a fix or
determinable future time and must therefore be payable on demand. It appears
therefore that postdated cheques are within the meaning of S.72 and S.12 (2) was
not necessary to make them cheques.

The provision that a bill is not invalid by reason only that it is post-dated has
been interpreted to include a proposition that a cheque shall not be invalid by
reason only of its being postdated. Therefore a postdated cheque can be
negotiated between the date of its issue and the maturity date (the date it bares)
and for a reasonable time thereafter. Hogson’s case.

However; a postdated cheque should always be handled with care as they can be
both troublesome and dangerous to the bank. First under S.74, the death of a
customer which comes to the knowledge of the bank determines/ends the customer’s
mandate and consequently all outstanding cheques cannot be honored by the bank

If a bank pays on such a mandate, then it will be liable and accountable to the
personal representatives of the deceased and the holder of a postdated cheque
will have to prove as an unsecured creditor on the estate

Secondly; S.74 gives the customer the right to determine the bank’s duty and
authority by countermand (withdrawing the authority of the bank to honor the
cheque) of payment i.e. to withdraw his mandate before the cheque has been honored.
This means that the person paying the cheque cannot get authority from the bank.
This happened in the case of Thaker Singh (electrician) and sons v. quarbanlite
Ltd6 The respond sold and delivered certain goods to the appellant and received
there postdated cheques payable at monthly intervals to cover the whole purchase
price of the goods. Before the respondent had received any money however, the

5
[1986] 5 NSWLR 496
6
9178 (2) ALR Comm 324. See also jetha Ismail Ltd v. somani Brothers.
appellant countermanded the first cheque. The court of appeal of Kenya held that;
when a negotiable instrument was taken in view of money payment, there was a
presumption that the parties intended it to be a conditional discharge only and
that their original rights are to be restored if the cheques were to be dishonored or
if the drawer acted in the manner inconsistent with giving of cheque such as by
countermand of payment. Since cheques were given in satisfaction of one date, the
appellant’s action in countermanding payment amounted to repudiation of the
agreement

In such a situation according to Esso petroleum Uganda LTD v. Uganda commercial

bank one may sue for the price of goods sold a delivered for which the cheques were
issued

Thirdly; the bankruptcy of a customer may create problems to a bank because of

the doctrine of relation back. Under this doctrine bankruptcy is deemed to have
started on the commission of the first available act of bankruptcy. In the meantime
if posted cheques have been paid it can cause trouble.

Fourthly; if the bank mistakenly honors a postdated cheque and dishonors other
cheques drawn on it by the customer it will be liable to the customer for wrongful
dishonor.

This is the reason why bankers generally and especially when they have never
dishonored the customer’s cheque will not dishonor the cheque until they have
ascertained whether or not a postdated cheque has been paid by mistake

NOTICE OF DISOHONOR

S.47 provides that if a cheque is dishonored, notice of dishonor unless excused

under s.49 (2) © must be given to the drawer

If a notice of dishonor is not given, the drawer will be discharged from liability
both on the cheque and on the consideration for which it was given
The position can be gathered from the case of Emile habib bateekha v. Rosen Akan
7
Eddin where the court of appeal of Sudan said that the holder of a dishonored
bill note or cheque may sue an immediate party liable there on the consideration
as well as on the instrument. And where a negotiable instrument has not been
protested for nonpayment (notice of dishonor not given) and thus cannot be sued
upon) the drawee can use the instrument as evidence in an action on the
consideration and if there has been presentment and notice of dishonor, the
instrument will be prima facie evidence though otherwise it may not be sufficient.

The notice of dishonor must be given by the person entitled to call for payment
and must convey to the recipient that the cheque has been dishonored and he will
be held responsible... If the cheque is not honored one can sue either on the
instrument or on the consideration

PAYMENT BY A CHEQUE

Simply stated the law is that when there is payment by a cheque the presumption is
that the parties intended it to be a conditional discharge only and that the
original rights are to be restored if the cheque were to be dishonored or if the
drawer acted in the manner inconsistent with giving of the cheque such as by
countermanding payment Singh’s in case thaker Singh (electrician) & sons v
Quarbanlite ltd.

The rule was sanctily stated by the court of appeal of the Sudan in Mirghani
Shebeika v. Mohammed Ahamed.8 The general rule is that payment by cheque or
other negotiable instrument is conditional payment and the debtor is not
discharged unless and until the cheque is honored... but there is nothing which
presents a cheque being taken in absolute discharge of the debt. Trusting solely to
the remedies on the cheque.

7
1970] 1. ALR 205, pp. 206-207
8
1972 (1) ALR Comm 346
A good example is provided by the facts of this case; a judgment debtor issued
cheques to the judgment creditor, he waited for six months before presenting the
cheques for payment and they dishonored as stale cheques. Relying on S.44 of
Sudan’s bills of exchange ordinance similar to S.44 of the Uganda bills of exchange
act, the court held that if the creditor takes the bill of a note as conditional
payment and is guilty of laches in respect of it as where a creditor takes a cheque
and takes an unreasonable time in presenting it whereby his debtor’s position is
altered, the cheque is then treated as absolute payment and as between the debtor
and creditor the debt is discharged

OTHER DOCUMENTS TO ENABLE A PERSON OBTAIN PAYMENT.

These documents include promissory notes, treasury bills, dividend and interest
warrants

Treasury bills. These are things issued by the central bank to evidence
indebtedness of the government to the holder thereof.

Dividends and interest warrants. These are given by private companies to a person
to get money.

S.82(1) states that a promissory note is an unconditional note in writing made by

one 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. Or to the order of a specified
person to bearer...

Read page 56-57 of the hand out on promissory notes;

A joint and several note and the other is a joint several note. Because it is signed
by more than one person that is why it becomes a joint note.

Lonmard banking v. gradandas. 1960 ea

In this case the document was worded at one hundred and twenty days (120) after
date “I pay” to ghusalal revji and son LTD Kampala the sum of 5000 for value
received. It was argued that because the usal words I promise to pay. These
documents were not promissory notes.

The court held; that no particular form of words is essential to the valididty of a
note provided the requirements of a section are fulfilled. The rules of grammer
must give way to rules of goods sense. And where a reasonable interpretation of the
whole instrument requires that gramer should be departed from it must be, and
constantly is departed from. In the even it was held that the words “I pay” could
fairly be costrued coroquiary “I promise to pay” and it was a valid not. But the
words I promise to pay be not including the word “pay” was vital and it could not be
considered a valid promissory note

Shily V. Tanganyika plastics

The court held in this case that the aditon of the referance in document after the
words revieved on the note was unusal but both objectionable so long as it was not
intended to impose a condition

A promissory note should be distinguished from an “IOU” an IOU is an account

stated and is not a negotiable instrument unless it also contains an unconditional
promise to pay

GENERAL CONSIDERATION OF CHEQUES

Validity and negotiability. By virtue of S.2(2) a purported cheque which does not
comply with s.2(1) would appear to be invalid. But if it is incohent i.e incomplete, the
instrument may take effect as if validly drawn.

And not all instruments which comply with s.2 are fully negotiable. A valid bill or
cheque imposes liability to pay the sum on appropriate parties. But a bill or cheque
which appears to give rise to such a liability will not do so unless it has been
delivered.

S.15 also permits certain signatories to a bill or cheque absorbing the holder of it
from the duties he might otherwise incur. S.15 also creates a possibility of a
signatory to a bill or cheque even though it is valid and negotiable and has been
delivered to negative his or her liability

INCHOATE INSTRUMENTS OR INCOMPLETE INSTRUENTS.

These are covered by S.19. an inchoate bill or cheque is one incomplete in form that
is lacking some material particular such a cheque with not amount stated or the
payee’s name omitted.

A bill without a date when it is drawn is not inchoate/incomplete. Since under S,2(4)
a date is not essential for validity.

Under S.19(2) any person in possession of an inchoate bill has prima facie authority
i.e. the authority is presumed unless it can be proved otherwise to complete the bill
in any way he wishes in order to bind other parties an inchoate bill must be
completed within a reasonable time and strictly in accordance with the authority
given. If a fraudulent person completes the cheque for a grater amount, he cannot
claim it. But if he negotiates it to a holder in due course, that person will be able to
hold the drawer liable for the inflated amount. Vital to this section are the
opening words “Where a simple signature on a blank stamped paper is delivered”
this means the section applies if only delivery of a signed paper has been made.
Therefore the drawer who can prove that he did not deliver the inchoate bill can
escape liability even if the bill has been completed and has come into the hands of
a holder in due course

|NEGOTIABILITY- WHAT BILLS ARE NEGOTIABLE.

THIS is covered by S.7 prima facie all validly drawn bills or cheques are negotiable
instruments capable of negotiation. i.e. capable of being transferred by delivery or
delivery and endorsement with the transferee free of defect of title of prior
holders and free from equities (the bill passes to the payee)

Note; D

delivery means. A transfer of a bearer bill. Or delivery with endorsement it is an

order bill.

However where a bill or cheque bares words which expressly or impliedly prohibits
it transfer it cannot be transferred and hence it is not negotiable although it
remains a valid bill. Bills or cheques which prohibits transfer are draw as follows;

Pay Dan kidega only- by implication it is not negotiable

b. pay john opio “not transferrable” meaning its only the named person who can get
payment.

Or pay john okot with the words not transferrable appearing anywhere on the face
of the bill

Neither S.7 nor elsewhere in the act does it provide for the words not negotiable; in
hibenian bank v. gysin and hason; the court of appeal treated the words as
rendering the bill non transferrable and since a bill which can not be transferred
can not be negotiated (non negotiable)

Delivery.

Delivery is covered by S.20. the effect of this section is to provided that liability
on a bill or a cheque arises not simply because a person has signed a document
which is in the form of a bill or a cheque. Liability arises only when a bill or a
cheque has been issued or delivered. i.e. there is a signature pals delivery to the
holder. The opening words “every contract on a bill” means the liability that one
incurs by becoming a party to the bill in the capacity of drawer, endorser or
accepter in cases of other bills rather than cheques. Hence without delivery the
liability that a person would otherwise incur, is not established. A bill or a cheque
payable to a specified person can only be issued by delivery to that person. A bill
or a cheque payable to bearer is issued by delivery to any one. Where no delivery at
all has been made a person in possession of the bill can enforce it against no one.
E.g. a completed bearer bill is stolen from my desk and given by the thief to X who
transfers it to Y, neither X nor Y has any claim against me as the drawer because of
absence of delivery of the bill. here.

There is one exception to this in S. is negotiated to a holder in due course, a

complete and valid delivery is conclusively presumed in his favor. If the thief
negotiated the stolen bill to X a holder in due course x could enforce payment and
could not avail me as drawer to pre-non delivery since valid delivery could be
presumed in favor of a holder in due course. However complete presumption In favor
of a holder in due course applies only in cases of complete bills not inchoate bills.
Sub section 3 states that where a complete bill is not in the hands of a holder in
due course a valid delivery is presumed only until the contrary is proved. The onus
of proof is on the party seeking to evade liability.

Delivery can be actual or constructive. i.e can be actual physical transfer or it can
be some act that shows an immediate intention to deliver. E.g. if the drawer of a
bill informs a payee that he has drawn the bill and he is holding it on his behalf
there is constructive delivery

Read; essay chapter but change; 6-p174 footnote 13 it should be Cap68 s76(2) and
footnote 15 cap 68 s.76(4), and footnote 14 cap s.76(3)

HOLDER

A holder of a cheque has certain powers and rights. Under S.37(a) he may sue on the
bill in his or her own name. in the case of auto Garage LTD v. & Ors v. motokov

the respondent brought an action against the appellant to recover the amount of
bills of exchanger accepted by the first appellant which had been dishonored. One
of the appellant’s defense argueent was that the respondent was not entitled to
bring the action as he was not the holder in due course of the bills. The court of
appeal for eastern Africa, held that an action on the bill of exchange may only be
brought by the holder of the bill and if the plaintiff is not the holder it is not
enough that he or she is in possession of the bill

Under S.33(4) where a bill has been endorsed in blank any holder may convert the
blank endorsement into a special endorsement by writing above the endorser’s
signature a direction to pay the cheque to or to the order of himself or herself or
some other person

Under S.76(2) where a cheque is uncrossed the holder may crossed generally or
specially. A “special crossing” is when you add the name of the bank. “a general
crossing” this can be paid to any bank

Under S.76(3) if the cheque is crossed generally the holder may cross it specially.

Uder S.76(4) where the cheque is crossed specially or generally the holder may add
the words not negotiable

Under S.68(1) if it is stipulated that where the bill is lost before it is overdue the
person who was the holder may apply to the drawer to give him another bill of the
same character (tenor) “overdue” means three days after the next day. If the
cheque is lost the drawer may demand indemnity. However if the drawer so requires
he or she must give security to the drawer to indemnify the drawer against all
persons whatever in case the cheque allegedly lost shall be found again

S.68(2) provides that if the drawer is quested for the duplicate of a cheque and he
or she refuses, he or she may be compelled to do so.

With certain exceptions the holder of a cheque may negotiate it to another person.
A holder some times has powers to negotiate a cheque even though he or she has no
title or a defective title and has Lord Denning says in Arab bank v. Ross
The Arab bank ltd claimed that they were holders in due course, they failed to
make good that claim. Because the endorsement was not regular on the face of it
but nevertheless it was open to them to claim as “holder”

The difference between the rights of a holder in due course and those of a holder is
that a holder in due course may get a better title than the person from whom he
took whereas a holder gets no better title

A HOLDER FOR VALUE

A holder for value is a holder who has himself given value for the instrument in
addition a holder in possession of an instrument for which value has been given by
some one (the value used, the value need not be given by the party to the bill) is a
holder for value as regards the acceptor and all parties who became parties prior
to giving value under S.26(2) further under S.26(3) a holder in possession who has a
lien over the bill is a holder for value to the extent of his lien. Value is defined in
S.1 to mean valuable consideration. Value may not be given by the party to the bill,
it can be given by the third party.

A HOLDER IN DUE COURSE

S.28 provides that a holder who satisfies certain further conditions is a holder in
due course.

For one to be a holder in due course

a. He must be holder

b. A holder for value

c. And satisfy other condition in order to be a bolder in due course.

A holder in due course obtains a perfect title to the bill free of defects. And may
in some cases obtain title to the bill even though his transferer had no title at all
e.g. where the transferer had stolen a bearer bill. Because such a bill does not need
endorsement.

A holder for value who is not also a holder in due course does not seem to have any
better title than the transferer. E.g. A draws a bill accepted by B in Favor of C, C
transfers the Bill for value to D. as a result of duress or misrepresentation by D,
and D transfers it for value to E. if E has notice of the defect in D’s title he is
simply a holder for value, whereas if he has not not notice and complies with S.28,
he is a holder in due course and is unaffected by the defect in D’s title. Indeed if E
is a holder in due course then if he transfers the bill to F, F has the right of a
holder in due course even if he has not given value and knows the defect in D’s title,
provided that he was not a party to any fraud or iligality on the part of D.

The definition of a holder in due course is given in s.28(1) as a holder who has given
value or has lien for a bill which he took;

a. Complete and regular on the face of it.

If the bill is not complete, then no one who takes it can be a holder in due course.
Thus a person who takes an inchoate instrument can not be a holder in due course.
If a bill is not regular on the face of it then again no one can be a holder in due
course. E.g. a bill marked not negotiable or not transferable is valid but is not
regular so if a bill is not negotiable it can not be transferred and therefore
non=negotiable..

Similarly any discrepancy in front of the bill will render the bill irregular in other
wards face mean back and front

In Arab bank v. ross

An instrument which was paid to Fahti Faisal

And which had been endorsed Fahti &Faisal babbrisky. It was held irregular in that
part of the payees name was omitted in the endorsement
 b. The bill must be taken before it was over due.

If a bill is a time bill i.e. due and payable on the specified future debt, then three
days after that date or the next business day if that day is a non business day it
is over due and any one then taking the bill cannot be a holder in due course though
he may be a holder for value

Under S.35(30 a bill payable on demand or a cheque which to be valid must be

payable on demand is deemed to be over due, when it appears on the face of it to
have been in circulation for an unreasonable length of time. What is unreasonable
length of time will be judged by the facts of each case

c. Without notice that it had previously been dishonored if such was the fact.

It may be observed that this provision seems unnecessary since if it had been
dishonored it would be over due. But this is to forget that a bill may be dishonored
for a reason other than non payment although this is the most common ground of
dishonor. Non acceptance by a drawee of the bill also constitutes dishonor and such
non acceptance before the bill is due for payment. When a cheque is dishonored by
the drawee bank it will bare on the face of the answer or reason for non payment
such as “refer to drawer” probably there is no money on the drawers account. Or it
can be technical dishonor i.e. “words and figures differ” meaning words and figures
do not agree. There after any transferee of the cheque would have patently have
notice of previous dishonor

d. In good faith and for value.

Under S.89, a thing is deemed to be done in good faith where in fact it is done
honestly whether it is done negligently or not

Value is defined in accordance with S.1 and 26 and it only means consideration. It
should be noted that a person must himself have provided value to be a holder in
due course.

These requirements are further explained in s.29. this section means that if no
evidence is laid on the issue of good faith and or value both will be assumed to be
present. Hence the party wishing to challenge the good faith or the provision value
by the holder must produce some evidence on the point. Subsection (2) goes further
and provide that every holder is presumed to be a holder in due course. However the
subsection that where it is admitted or proved that either the acceptance or the
issue or the negotiation of the bill is affected by fraud, duress or illegality the
holder is presumed not to be a holder in due course. The value need not have been
provided by the current holder

e. Without notice of any defect in title of the person who negotiated it.

To be a holder in due course, the holder must have the title negotiated to him
without any defect in the title of the transferer. This provision is intended to
cover not merely defects in title but also equities, notice may either be particular
or general

Particular notice is notice of a particular fact avoiding the bill

General notice or implied notice is knowledge of some illegality of fraud but

lacking precise details. Also willful or fraudulent refusal to investigate
circumstances surrounding the bill when they obviously invite investigation may be
deemed general or implied notice

Deriving title through a holder in due course (essays pp1850) read on your own.

) read on your own.

Negotiation

On to become a holder in due course must have a bill negotiated to him and
negotiation consist of transfer of negotiable instrument to a person who takes free
from defects and from equities however to take free of title and equities the
holder msut be a holder in due course. And S.28 states that a holder in due course is
a person to whom a bill is negotiated. Therefore the word negotiation in S.28(1)b
means transfer which constitutes the transferee, the holder and that holder
satisfies all the other conditions to be a holder in due course.

Negotiation which is covered by Sj.30 consist of delivery or endorsement and

delivery to a holder. It follows from these that a payee cannot be a holder in due
course. Re johns ltd v. walling and gillo. It was contended on behalf of the
respondent that they were holders in due course of the cheque for 500 pounds
within the meaning of S.29(1) bills of exchange act of England which is similar to
S.28.

The court said that the expression holder in due course does not include the
original payee of the cheque. It is true that under the definition clause in section 1
of the act, the word payee of a bill unless the context other wise requires- but it
appears from S.28(1) that a holder in due course is a person to whom a bill has been
negotiated and from S.30 that a bill is negotiated by being transferred from one
person to another and if payable to order by endorsement and delivery. In view of
these definition it is difficult to see how the original payee of a cheque can be a
holder in due course within the meaning of the meaning of the Act.

Defenses to a cheque

s.20(1) talks of every contract in a bill which means that the relationship of the
parties is contractual

a. failure or absence of consideration; S.26 codifies the common law rules relating
to variable consideration. However it must be emphasized that in contract the
plaintiff must prove that he or she gave consideration as it was said in the case of
Lombad banking ltda v. gandy and Anor; consideration sufficient to support a
simple contract as provided by s.26(1)a need not move directly from the promisee
as long as some right, interest, profit, benefit accrues to the promisor or some fore
barence detriment, loss or responsibility is given , suffered or under taken by the
promisee. Centrally to the general trule that in contract the plaintiff must prove
consideration, a party to a bill of exchange does not have to prove consideration.
This is because s.29 provides that every party who’s signature appears on a bill is
prima facie deemed to have become a party there to for value. This is a rebuttable
presumption of fact. The party resisting payment of a bill has the o rebut by
proving either that there was absence of failure of consideration or that
consideration was illegal………..Sirley v Tanganyika Tegry plastics LTD case The fact
that the cheque relied on by the appellant as establishing his to a promissory note
was drawn on the client’s account rebutted the presumption in favor that he was
holder for value. There was no consideration. In sturring products v. d… case 239.
The plaintiff brought an action against the defendant to recover the price of goods
sold and delivered to the defendant or in the alternative the amount of a cheque
drawn by the defendant for the price. The goods were left at the defendant’s shop
and he issued a cheque for the price. The bank returned the cheque to the plaintiff
unpaid. The goods were taken back by the defendant’s agent. The action on the
cheque failed because there was total failure of consideration. Inspectors plastics
Mould ltd v. Atico Ltd a cheque was given to purchase a jewel mold. The plaintiff
supplied a defective mold on which the defendant spent a considerable amount of
money, when the defendants sued under summary procedure on the bill, the
defendants argued that the bill was meant to cover a mold which had not
materialized and therefore there was no consideration. The court held that has
regards the claim on the cheque this had to fail because the evidence showed that
there was no total failure of consideration. African overseas trading co v. glamani
1966. In this case the court held that the bill of exchange affected with illegality
was not legally enforceable. In all contracts a promise which forms part of an
illegal transaction is not legally enforceable as a court will not allow itself to be
an instrument of fraud. … Hasanali isa and Co v. Gerald produce shop. Is an
authority for the preposition that inadequacy of consideration affords no defense
to a demand on a bill or a promissory note as it is not for the court to inquire into
the adequacy of consideration but ot consider whether or not there has been any
consideration

total failure of consideration, illegality of consideration is a total defense to a

claim on a cheque

failure to present the cheque in proper time

decided by the late justice odel esso petroleum v. Uganda commercial bank.
(pp202 of the essays.) s.

facts

the petroleum co was supplying products to a dealer and the dealer was using
cheques to pay for the goods supplied by the company but he connived with the bank
official who kept cheques and didn not present them. The company staterded
asking for the all the cheques were presented and were dishonored.

The company argued that the cheques were not presented within a reasonable time
by the drawer. It was held that even if they were presented late, the drawee was
not found liable because even if they had been presented there was no money.

it is provided that a bill payable on demand must be presented for payment within
a reasonable time after its issue in order to render the drawer liable. And within a
reasonable time after its endorsement in order to render the endoser liable
s.44(3)b. in determining what is a reasonable time, regard must be had to the nature
of the bill, the usage of trade, with regards to similar bill and the facts of a
particular case. If it is not so presented the endorser shall be discharged. However
where the cheque is not presented for payment within a reasonable time of tis issue
the drawer will not be discharged to the extent of any actual damage which he or
she suffers as a result of such a failure.

Failure to give notice of dishonor.

The bills of exchange act contains detailed rules relating to notice of dishonor.
When a cheque has been dishonored by non payment notice of dishonor must be
given to the drawer and each endorser and any drawer or endorser to whom such a
notice is not given is discharged. Notice may be given as soon as the cheque is
dishonored and must be given within a reasonable time there after under S.48(1). In
the absence of special circumstances notice is not deemed to have been given
within a reasonable time unless when the person giving and the person to receive
notice reside in the same place. Notice is given or sent off in time to reach the
latter on the same day after dishonor. Or where les person giving notice and the
person receiving notice, reside in different places the notice is sent off on the
same day after dishonor. If there be a post, at convenient hour on that day, and if
there is no such a post on that day then on the next post thereafter. These rules
are applied strictly by the courts. ….. in gorind ukeda patel v dhangi nanji, notice
was not given for 7 days. The court of appeal of Kenya held that on the evidence it
was clear that no notice of dishonor had been given within a reasonable time and
the appellant had not given any evidence to show that he had acted with due
diligence or that there were any special circumstances justifying the delay. The
court here was referring to S.49(1) equivalent of Uganda. That delay in giving notice
of dishonor is execused where delay is cause d by circumstances beyond the control
of the parties giving it and not imputable to his or her default, his conduct or
negligence.

In case 243

The issue which arose in this case was whether notice of dishonor was necessary in
the case of cheques, the court of appeal for estern Africa said that by equivalent of
section 54 of bills of exchange act

Prima facie therefore a cheque falls within the provisions of the bills of exchange
relating to notice of dishonor of bills of exchange. But in practice notice of
dishonor to the drawer is rarely legally necessary. As the absence of effect in the
drawer’s hands, the most universal cause of dishonor execuses it as does
countermand of payment.
This case supors two propositions;

First S.73 extends S.48 to cheques

Secondly; that notice of dishonor is dispensed with where the payee and the
drawer are the only parties interested and where the cause of action is
attributable to the drawer

In Nanji Khodabhjai v Sohan Singh (1957) EA 291

A cheque was dishonored on the 25th of april 1955 and notice of dishonor was given
until the 29th 1955. Just for days, the court held that the defendant was discharged
because there were no special circumstances to justify any delay and notice should
have been given on the 26th of april 1955 the day following dishonor

In Raichura v. Uganda Chemists Ltd (1956)

It was decided that if a cheque is given in support of an anticident date obligation

and by reason of failure to give notice of dishonor. The liability on the cheque as
such is discharged and the anti-cident date (past consideration) obligation is
similarly discharged in the sense that there can be no claim on the original
contract

Where the cheque when dishonored is in the hands of an egent, he may himself give
notice to the parties liable on it or he may give notice to the principle according to
s.48(b). if he gives notice to the principle. The agent must do so within the same time
as if he were the holder. The principle upon receiving notice has himself the same
time for giving notice as if the agent had been an independent holder.

When a bank is holder a cheque of its customer as agent for collection and it is
dishonored, it should give immediate notice of dishonor to the customer. Thus in
Esso standard limited v ug commercial bank, when the cheques presented for
collection were dishonored for lack of funds, UCB immediately notified the
appellant of the dishonor.
Material alteration

S.63 where a bill is materially altered without the assent of the parties liable on
the bill the bill is avoided except as against the party who has himself made,
authorized or assented to the alteration. But where the cheque has been materially
altered and the alteration is not apperent and the bill is in the hands of a holder
in due course, such a holder may avail himself of a cheque has if it had not been
altered and can enforce payment of it according to its original character

The test of materiality is whether the alteration affects the right or liabilities of
any of the parties to the cheque, whether it affects them prejudiciary or not or
even beneficiary, and the onus of proving non materiality of the alteration when
apperent is upon the person claiming under the cheque

Material alteration

These are provided for under S.63(2) which says in part; in particular the following
alteratons are material namely

a. Any alteration of the date

b. The sum payable

c. The time of payment]

d. The place of payment

e. And where a bill has been accepted generally the addition of the place of
payment without the acceptor’s consent

The opening words are in particular… which means that those are mere examples
they are not exhaustive.

KOCH V. DICKS (1933) 1 Kb 307

It was held that an alteration in drawing a bill which changed it from an inland
bill to a foreign bill was a material alteration. An inland bill is drawn and payable
within east Africa but any other bill a foreign bill.

And yet alteration of the place of payment is not enumerated in the equivalent of
S.53(2). Again S.77 provides that a crossing authorized by the act is a material part
of the cheque and shall not be lawful for any person to oblaterate, add or alter the
crossing except as authorized by the act. If any of these things is done, other ways
than in accordance with the act that will amount to a material alteration

Overman v Rahentulla

A bill was altered by a eracing the anme of the payee and inserting in lieu thereof
the name of alibi Joma Mohamee, when the defendant objected that the bill had
been materially altered without the consent of the parties liable on the bill, and
that it was avoided under S.63, it was held that the bill having been materially
altered without the consent of the acceptor, the bill had been discharged as far as
the acceptor who was the appellant in the case was concerned

Forged signatures

It is provided that a person cannot be liable where his signature has been forged or
placed on the cheque without his authority. A person in possession of the cheque in
which the drawer’s signature or the endorser’s signature has been forged, or placed
thereon without authority has no title and therefore no right to retain the cheque or
discharge the cheque according to S.23. a bank who pays out on a customer’s cheque
which has been forged must credited the customer’s account with the amount paid.
If the forgeries are not due to the customer’s negligence or if the customer is not
estopped from setting up the forgeries

Other than in the case of a holder in due course between immediate parties and as
regards a remote party, it may be shown that the delivery has been conditional for
special purpose only and not for the purpose of transferring property in the cheque
under S.20(2)b, non fulfillment of a condition is a defense for example A gives B a
cheque on agreement that A would pay B cash n Condition that after payment he
would give him back the money if that cheque is dealt with out side the condition
prima facie set, then that is a defense but if that cheque is given to a holder in due
course, he would have a paramount interst.

In the case of baxendile v banet

Is an authority for the preposition that if a person signs a blank cheque in the
space provided for the drawer’s signature but never delivers it for the purpose of
completion, he will not be liable to any body not to even a holder in due course

Where un-over due cheque cheque is negotiated, it can only be negotiated subject to
any defect in title affecting it at maturity and hence forward no person who takes
it can acquire or give a better title than that from which a person from whom he
took had

There are other defenses such as lack of capacity, mental incapacity, duress, undue
influence etc. these defense are core extensive with defenses in the law of
contract.

Crossing on cheques

Read Esses chaper 7

simply a written authority given by the customer to his bank to pay in accordance
with the instruction contained in the authority a specified sum of money.

A crossing on a cheques forms part of the instructions given by the customer to his
banker and like all instruction in the mandate given by the customer must be
complied with by the drawee or paying bank. Hence a paying bank which ignores a
crossing rules will generally be in breach of its contract with the customer. The
result being that it may be unable to debit the customer’s account even it has
provided the funds to meet the cheque

A crossing may also affect the rights of third parties in that it may modify the
negotiability or transferability of a cheque. A paying bank which ignores the
crossing on the cheque may thereby incur liability to the true owner of that cheque.
A holder in due course will be a true owner as will it seems a holder

The holder of a barer cheque is the person who is in possession of it who has given
value and has not notice of any defects in title of his transferer.

And the holder of an order cheque is the payee or the endorsee of it with the title

No one can have a title If the signature of the drawer or the endorsement in his
favor or any endorsement which preceeds the one in his favor is forged or an
authorized. Therefore the true owner of an order cheque baring a forged or an
authorized signature is the payee or endorsee immediately before the invalid
endorsement. Before the drawer issue the cheque to the payee he is the true owner
S.75-77

GENERAL AND SPECIAL CROSSING

Crossing of cheques is provided for in s.75 of the bills of exchange Act. It provides
for both general and special crossing of cheques

A cheque my be crossed generally or specially by the drawer

The holder may cross a cheque generally or specially.

Where a cheque is crossed generally then the holder may cross it specially.

And where the cheque is crossed generally or specially, the holder may add the
words not negotiable.
The bank. Where a cheque is crossed specially, the bank to who it is crossed can
cross it specially to another bank for collection.

Then where an uncrossed cheque or a cheque crossed generally is sent to a bank for
collection, the bank may cross it specially himself

Note crossing of a cheque can be done on a bankdraft.

Under S.7 7 a crossing cheque is a material part of the cheque.

The effect of crossing.

The effect of crossing is covered by S.78, this section provides that a crossed
cheque must be paid into a bank account. It is crossed generally it can be paid into
any bank account. If it crossed specially it must be paid to the bank named in the
crossing..

A special crossing should mention only one bank unless the other bank is for
collection i.e. if you cross it to two banks then non of then should honor it, unless
the other bank is a collective bank

The crossing of cheques is supposed to give added protection to the customer.

Because whoever gets the cheque must pay it into the account and if he does not
have one he must open one which is easier to trace if there is a problem with the
cheque.

Statutory protection of a paying banker

S.58 provides that a bill is discharged by payment in due course or on behalf of the
drawee and it says that payment in due course means payment made at or after
mercurity of the bill to the holder there of in good faith and without notice that his
title is defective. This means for example that apart from S.23 if payment is made
to a person upon the forged endorsement that will not amount to payment in due
course because such a perso does not have a defective title but in fact has not title
at all. A holder is the payee or endorse of cheque who is in possession of it or the
bairer. Therefore if a bairer cheque which is not crossed is stolen from the payee
and is presented and payed by the bank, that will discharge both the bank and the
drawer.

A strict application of S.58 would make bankers to loose money.

Thus s.59 came in to protect the paying bank. The effect ot this section is that
when a paying bank pays a cheque in good faith and in the ordinary course of
business, the bank is deemed to have paid the bill in due course although such
endorsement has been forged or made without auhority. For example the section
will apply if the cheque is still a valid negotiable instrument. This means that a
cheque which has been materially altered within the meaning of S.539(1) is not
covered by S.59.

The requirement of good faith is a simple one, because S.59 provides that a thing is
deemed to be done in good faith where it is in fact done honestly whether it is
done negligently or not whether payment was made in the ordinary course of
business will be decided on the basis of custom of bankers. But it appears that
payment of a crossed cheque over the counter to a person other than the drawer can
not be regarded as payment in the ordinary course of business

Similarly payment long after the advertised working hours will not qualify as
payment in ordinary course of business.. baines v. national provincial bank ltd (1927)
137.

Payment of a large sum of money over the counter to a person of suspicious

appearance and demeanor may not be regarded as being in the ordinary couse of
business auchteron and co v. midland bank ltd

However it should be noted that S.59 does not protect the bank when it pays on an
irregular endorsement. E.g. kidega signs kidega.
Under S.78(2) when a drawee bank pays a crossed cheque contrary to the crossing, it
is liable to the true owner of the cheque for any loss he may sustain owing to the
cheque having been paid.

However under the proviso to the Section, the bank will not be liable if it pays the
cheque in good faith and without negligence

s.59 is similar to S.79 except that S.59 applies to crossed cheque, while S.79
appears to cover all cheque whether crossed or not. S.79 providees that where a
bank on whom a crossed cheque is drawn In good faith and without negligence pays
it if crossed specially to the ban banker. The bank paying the cheque is to be
entitled to the same rights and be placed in the same position as if payment of the
cheque had been made to the true owner.

It provides further, that if a crossed cheque which is properly paid in accordance

with the crossing has come into the hands of the payee, the drawer shall be
entitled to the same rights and be placed in the same position as if payment of the
cheque had been made to the true owner. The practical effect of this provision is
that if a crossed cheque is delivered to the payee and it is lost or stolen, the loss
must fall on the payee

Under S.79, the crossed cheque is paid in accordance with its crossing in good faith
and without negligence, the paying banker cannot be liable to the true owner if the
payment was made to another person.

S.59 and 79 operate differently, under S.59 the paying bank is required to pay in
good faith, whereas under S.79 the paying bank is required to pay in due course. The
paying bank must pay in the ordinary course of business under S.59 but under S.79
the paying banker is required to pay in due course.

The paying bank must pay in the ordinary course of business under S.59 but under
S.79 the paying banker is only required to pay without negligence.

S.59 requires that cheques must be endorsed and endorsement must appear to be
genuine but S.79 does not mention endorsement.

If s.58 and 59 are complied with then there is payment in due course.

Under S.78 and 79 the bank is deemed to have paid the true owner if the
requirements are satisfied.

The authors of Pagets law of banking says that the true owner of a cheque must be
the party with an unassailable title (undiffitable) whether in possession of it or not.
For the reason that the cheque is a negotiable instrument.

Statutory protection of a collecting banker

The protection of a collecting bank is contained in section 81. It provides that

where a bank in good faith and without negligence receives payment for the
customer of a cheque crossed generally or specially to itself and the customer has
no title or a defective title there to, the bank shall not incur any liability to the
true owner of the cheque by reason only of having received such a payment. A banker
receives payment for the customer not withstanding that it credits its customer’s
account with the amount of the cheque before receiving payment.

When a bank opens and operates an account or collects a cheque for the customer
the test of negligence on its part is whether the circumstances of the transaction
actual or proposed conduct of the account are so out of the ordinary course that
they ought to have aroused reasonable suspicion in its mind and cause it to make
inquiries or to take references to satisfy itself as the customer’s identity and
circumstances

The drawer of a cheque received by another who intended to steal it and its
proceeds remains the true owner of the cheque and the proceeds even after the
theft so as to lawfully entitle him to bring an action for conversion

And where a bank collects a cheque for a customer who has no title to the cheque,
the banker is liable in conversion for the customer’s lack of title once the true
owner proves his title and the act of taking by the customer

The absence of negligence intention, or knowledge on the part of the banker are
immaterial defenses under S.81 of the act and lack of prudence on the part of the
true owner is immaterial whether the issue arises at common law or by statute

Discharge of a bill

A bill is made and it is discharge.

The best way to discharge a bill is payment in due course under S.58

When you pay under a forged endorsement, the payment is discharged if payment
complies with the requirement of S.59, i.e. pay in good faith and the ordinary course
of business

Another way of discharging a bill is when an acceptor of a own right this is

according to S.60

By waiver. The holder of a bill at or after it maturity absolutely and an

unconditionally renounces his right against the acceptor, the bill is discharged….
This should be at or after maturity. S.61(1)

Liabilities of any party to a bill may in the like maner be renounced by a holder
before or after its maturity but this does not affect the rights of a holder in due
course.

By cancellation. S.62

Under S.63, a bill can be discharged by any material alteration

In case of signature then both parties to the joint account must sign
Read;

Devaynes v noble (layton’s case) (1816)1 Mer 527

Deeley v Lloyds bank ltd (1912) AC 756

Whether the

Makau nairuba v crane bank

She had 57 million in total, but at one

HELLEN OBURA J Held

That the plaiiff did not sign the paying slips hence she since did not present to
the counter or sign them by her sell. She therefore did not widraw the money. The
bank therefore has a duty to explain how money was paid on the forged signature.

That banks are expected to exercise a standard of care, caution and diligence
when handling a cutstomer’s accounts.

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