Commercial Module

SCHOOL OF LAW AND SOCIAL SCIENCES
DEPARTMENT OF LAW
MODULE LL 13 / l L i11
COMMERCIAL LAW II
Majorie G. Johnson-Mwenda
BA, LLB, LLM (UNZA)
Second Edition 2007
©ZAOU
ISBN
ACKNOWLEDGEMENT
The author consulted and referred to leading books on Commercial Law which have
copyright protection. Efforts have been made to reduce as much as possible, quoting from
these books.
The author of this module acknowledges the authors and publishers of the works referred
to in this module which is prepared solely for the Zambian Open University.
2
CONTENTS PAGE
STATUTES ................................................................................................................... 4
'fEXT BOOKS .............................................................................................................. 5
INTilODUCTION ......................................................................................................... 6
UNIT 1 ........................................................................................................................... 7
INSUMNCE ................................................................................................................. 7
Introduction ............................................................................................................... 8
TOPIC 1: Definitions and Functions of Insurance ................................................ 11
TOPIC 2: The Nature of Insurance Contract ........................................................ 19
TOPIC 3: The Principle of Insurable Interest ....................................................... 22
TOPIC 4: The Principle of Indemnity .................................................................... 31
UNIT 2 ......................................................................................................................... 41
NEGOTIABLE INSTRUMENTS .............................................................................. 41
Introduction ............................................................................................................. 41
TOPIC 1: Nature of Negotiable Instruments ......................................................... 41
TOPIC 2: Definition and Function of a Bill of Exchange ...................................... 44
TOPIC 3: Capacity ................................................................................................. 53
TOPIC 4: The holder of a Bill ................................................................................ 54
T()PIC 5: Cheques .................................................................................................. 62
TOPIC 6: Duties of the Banker .............................................................................. 63
SEc·uruTIES .......................................................................................................... 73
3
STATUTES
1. THE INSURANCE ACT, NO. 27 OF 1997
2. AN ACT TO AMEND THE INSURANCE ACT - ACT NO. 26 OF 2005
3. BILLS OF EXCHANGE ACT 1882
4. THE EVIDENCE (BANKER'S BOOKS)

ACT - CHAPTER 44 OF THE LAWS OF ZAMBIA
5. THE CHEQUES ACT - CHAPTER 424 OF THE LAWS OF ZAMBIA
4
TEXTBOOKS
1. Commercial Law in Zambia: Cases and Materials by Mumba Malila. Published

by UNZA Press 2006 ISBN No. 9982 - 03 - 039 - 6
2. Commercial Law in Zambia: Essential Text by Mumba Malila

The University of Zambia 2005 ISBN: 9982 - 03 - 035 - 3
3. R. Lowe 1993 Commercial Law, 6th edition, London, Sweet and Maxwell
4. Bird, Modern Insurance Law, London, Sweet and Maxwell
5. D. Richardson, A Guide to Negotiable Instruments, London, Butterworths
6. G.H.L. Fricdmand 1976, The Law of Agency, 4 th edition, London, Butterworth
7. P.S. Atiyah 1985, The Sale of Goods, J1h edition, London, Pitman
5
INTRODUCTION
This module deals with Insurance and negotiable instruments and securities.
There are two units and under each unit there are various topics covering different issues
relating to each unit.
There are also several activities in each module. These activities are meant to enable the
student to self asses himself or herself to ascertain whether the student understood the
module and has gained something from the module. The answers for all activities are
contained in the various topics of the units.
6
UNIT 1
INSURANCE
Objectives
At the end of this unit you should be able to :
1. Demonstrate the ability to give advise on the legal requirements of insurance

contracts
2. Facilitate the conclusion of valid insurance contracts
7
Introduction
Insurance is not only important in the commercial spheres but also in the personal sphere.
Commercial activities necessarily entails risks. The most efficient means of guarding
against risk is where the insured pays the insurer to bear the risks.
A number of events in Europe that happened acted as a catalyst in the growth of

insurance. For example the great fire of London of 1666 lead to the coming into being of
fire insurance as people became aware of the damage that could be caused by fire.
After the first world war there was an increase in vehicles on the roads in Britain which
resulted in the increase in the number of accidents. Those injured as a result of motor
vehicle accidents were not always compensated as the negligent Motorist may have been
uninsured and may not have had sufficient resources to pay damages. At common Law
an injured person had no right of action against the insurance. He could only take an
action against the wrongdoer.
This resulted in the British Parliament passing the Road Traffic Act 1930 which made it
compulsory for every vehicle driver to have or be covered by an insurance policy. This
Act imposed for the first time in British history, a statutory obligation on all users of
motor vehicles to provide security against their legal liability for causing death of or
bodily injury to third parties or take out insurance cover for such liabilities.
When Zambia was still Northern Rhodesia a number of private insurance companies were
in existence. In 1997 the current Insurance Act No. 27, of 1997 was enacted by the
Parliament of Zambia. This Act repealed the previous insurance Act which was Chapter
392 of the Laws of Zambia. Under the previous Act insurance business in Zambia was
solely carried out by Zambia State Insurance Corporation which was a state owned
monopoly. It was the only institution permitted to carry on insurance business in Zambia.
The Insurance Act of 1997 of Zambia regulates the insurance industry in Zambia.
8
The Insurance Act
Section 99 provides for the function and duties of the Registrar as follows:
(1) The Registrar shall have the functions and powers conferred on him by or under
this Act or any other written law.
(2) Subject to this Act the duties of the Registrar shall include -
a) the formulation and enforcement of standards in the conduct of the
business of insurance with which a member of the insurance industry must
comply;
b) directing insurers and re-insurers on the standardization of the contracts of
compulsory insurance;
c) directing an insurer or a re-insurer where he is satisfied that the contract of
insurance issued by the insurer or re-insurer is obscure or contains
ambiguous terms or terms and conditions which are unfair or oppressive to
the policy-holders, to clarify, simply, amend or delete the wording, terms
o; conditions, as the case may be, in-respect of future contracts;
d) formulate standards for the conduct pf insurance business;
e) make recommendations to . the Minister on any matter affecting the
insurance industry;
f) advise the Government on adequate insurance protection and national
assets and properties; and
g) perform such other functions as the Minister may assign to him.
3) In the performance of his functions, the Registrar shall at all times have regard
to the need to -
a) protect the rights, benefits and other interests of policy holders and any
beneficiaries of policies or insurance; and
b) monitor the solvency of insurers and maintain sound insurance principles
and practice in the conduct of insurance business.
4) The Registrar shall as soon as reasonably practicable after each year ending on
31 st December, furnish to the Minister a report on the working of this Act
9
during that year.
The Registrar referred to in the Act means the Registrar of Pensions and Insurance who is
appointed under the Pension Scheme Regulation Act 1996.
Section 2 of the Act defines "Registrar" as the Registrar of Pensions and Insurance
appointed under the Pension Scheme Regulation Act, 1996
Part IX of the Act deals with Insurance policies which states among others in Section 73
that proposal or other forms must be approved by the Registrar
Section 74 looks at the issue of premium rates and Section 76 deals with payment of
premiums. Section 79 deals with the right of the insured to seek redress in any competent
Court in Zambia .
10
TOPIC 1: Definitions and Functions of Insurance
An insurance Contract may generally be defined as a contract whereby a person called
the insurer agrees in return for a consideration called the premium to pay a sum of money
to another person called the insured on the happening of a certain event whose happening
is uncertain.
Insurance is a wide field and policies can be taken out against a variety of risks for
example Life Insurance, personal Accident Insurance, Property Insurance, Liability
Insurance and Fire Insurance. These are the specific types of insurance contracts most
commonly encountered.
The event should be one which involves some amount of uncertainty. There must be
either uncertainty whether the event will ever happen or not, or if the event is one which
must happen at some time there must be uncertainty as to the time at which it will
happen.
!oiability insurance would cover bodily injury or disease sustained by an employee and
arising out of and in the course of his/her employment.
Insurance is a wide field and policies can be taken out against a variety of risks for
example Life Insurance, Personal Accident Insurance, Property Insurance, Liability
Insurance and Fire Insurance. These are the specific types of insurance contract most
commonly encountered.
11
ACTIVITY 1: Questions for discussion
1. What is an Insurance Contract?

2. Is there an Insurance Act in Zambia? If so what is it called and
when did it come into force?
3. What are the duties of the Registrar under the Act?
Definition - a Life insurance may be defined as a Contract to pay a certain sum of

money on the death of a person in consideration of due payment of a certain annuity for
his/her life
Specific Types of Insurance
Life Insurance
Everyone has an insurable interest in his/her o,vn life . Life insurance is an insurance in
which the insurer's liability is dependent upon human life. It is insuring your life against
death. One can also have an endowment policy where an agreed amount is paid at the
end of a specific period or to his/her family if he/she dies before them.
Part IX of the Insurance Act deals with Insurance Policies in general and it provides for
certain protection in case of life policies in Section 83, 84, 85 and 86
Fire Insurance
General principles of Insurance covers, insurance against fire. However, there may be
certain problems in particular that of causation. For example, there may be explosion in
addition to the fire. In such an instance damage caused by an explosion will not be
12
covered by a policy against damage by fire unless the explosion was caused by fire in the
popular sense. Everett v London Assurance 1
If an explosion causes or intensifies a fire, the insurers will be liable for damage due to
that fire, unless the policy expressly excludes damage from explosion. In Stanley v
2
Western ins Co.
The Court stated that:
"Any loss resulting from an apparently necessary bona fide effort to put out a fire,
whether it be by spoiling the goods by water, or throwing articles of furniture out of the
window or even the destroying of a neighbour's house by an explosion for the purpose of
checking the progress of the flames, in a word, every loss that clearly and proximately
results, whether directly of indirectly for the fire, is within the policy"
There must be actual ignition so that damage due to heat would not be covered. In Harris
v Poland3 a woman insured her jewelry under a comprehensive policy insuring her (inter
alia) against loss by fire. She was nervous about its safety, so she hid it in the sitting
room grate. Later, forgetting about the jewellery, she lighted the fire, and the jewellery
was damaged. The insurers contended that there was no loss by "fire" since the damage
had been caused by fire in a place where the fire was intended to be, i.e., in the grate.
Held; by the King's Bench Division, that it was a loss by "fire".
The insured must show that the loss for which a claim is being made was caused by one
of the perils which the insurers have contracted to cover.
Liability Insurance
Under contracts of liability insurance, the insurer undertakes to indemnify the assured
against legal liability to third persons. An example is Motor insurance, which 1s
compulsory. A case on liability insurance is Forney v Dominion Insurance Co. Ltcf
1
(1865) 19C.B.(N.S) 126.
2
(1868) L.R 3 EX.71
3
!ALL E .R. 204
4
(1969) 1W.L.R. 928; (1969) 3All E. R. 831.
13
A policy against liability for negligence is valid and enforceable e.g. negligence by the
employer that results in injury to an employee
. However, an insured cannot on the grounds of public policy recover for the
consequences of an international criminal Act, even though he was unaware that the Act
was in fact a crime.
Hase!dine v Hosken 5 " A solicitor had a professional indemnity policy. He suffered loss
by entering into a champertous agreement (Champcrty meaning e.g a Solicitor who acts
under an agreement with his client that he should receive a specified proportion of the
money recovered is guilty of champerty) and sought to enforce his professional
indemnity policy. He pleaded that he did not know that he was committing the common
law misdemeanor at the time of the agreement.
It was held by the Court of Appeal that he could not recover.
SCRUTTON, LJ ............... It is clearly contrary to public policy to insure against the

commission of an act, knowing what act is being committed, which is a crime, although
the person committing it may not at the time know it to be so".
In Gray v Barr 6
A went into B's house and went upstairs carrying a loaded shotgun to frighten B. During
a scuffle the gun went off and B was killed. It was held that the cause of death was A's
deliberate act of going upstairs carrying the gun. Consequently the death was not caused
by "accident" within the meaning of A's insurance policy. The court of Appeal held that,
even if there had been an "accident", a claim by A under a policy covering his liability
for accidents would have failed on grounds of public policy. The trial judge stated that
"the logical test, in my judgement, is whether the person seeking the indemnity, was
guilty of deliberate, intentional and unlawful violence, or threats of violence. If he was,
5
(1933) IK.B. 822.
6
(1971) 2Q.B.554;
14
and death resulted therefrom, then, however unintended the final death of the victim may
have been, the court should not entertain the claim for indemnity".
Where the insured intentionally commits a tort such as defamation, that is publication of
false and derogatory statement about a person without lawful justification this principle
also applies.
If acts such as criminal negligence e.g. reckless driving, or statutory offence e.g. speeding
are committed this will not prevent him from claiming and recovering under an
indemnity policy.
A Zambian Case dealing with liability of an Insurer is Zambia State Insurance
Corporation Limited V Northern Breweries Limited7 .
"This is an appeal and cross appeal against a decision of the High Court in which the
learned trial Judge ordered the appellant to pay the full insured sum of K50,000,000.00
together with interest at the current bank deposit rate from the date of the writ of
summons to the date of Judgment and thereafter at 6% per annum until full payment.
The trial Judge dismissed the claim for consequential loss.
The brief facts are that the respondent took out an insurance policy generally known as
the Boiler and Pressure Vessel Insurance policy. The policy was to indemnify, inter alia,
the respondent for damage to the boiler or other apparatus in the schedule of the policy
and to other property insured. In due course, the boiler was damaged. The respondent
made a claim under the policy. However, the appellant repudiated the claim. The
appellant issued summons claiming K50, 000,000.00 under the policy as well as damages
for consequential loss and interest. The consequential loss calculated as special damages
came to Kl 15, 966,062.00 (One hundred and Fifteen million, Nine hundred and Sixty six
thousand Sixty-two kwacha). The learned trial Judge found that the damage to the boiler
did not amount to "collapse as defined under the policy". The learned trial Judge found
that the boiler was damaged as a result of the negligence of its servant and that the said
7
SCZ Judgment No. 6 of2000
15
damage fell within the confines of the policy. Judgment was given in favour of the
respondent. The appellant appealed.
Held: The learned trail Judge having found that the collapse of the boiler was not a
collapse as defined in the policy misdirected himself in holding that insurance companies
are there to cover negligent acts. Negligence was specifically exempted in the policy.
Motor Insurance
There are restrictions and limitations in motor vehicle insurance policy. There are
different types of Motor-Vehicle policies. The main cover is when the insured is driving
a specified car but there are policies that extend to:
a) persons driving the insured vehicle with his consent and/or
b) the insured himself while driving some other vehicle not owned by him or held by
him under a hire-purchase agreement. The policy will only remain effective
while the insured has an interest in the specified vehicle. In Tattersall v Drysdale 8
a policy with reference to a specified car, contained an extension covering the
insured while driving other cars. The insured sold the specified car and drove
another car. It was held that as soon as he sold the specified car, the policy ceased
to be effective.
c) Another clause that may be found in a policy is a user clause.
In Wood v General Accident, Fire and Life Assurance Corporation 9 a policy on a

Daimler car only covered its use for "social, domestic and pleasure purposes".
The insured made a journey with the object of making a business contract at the
end of it. An accident occurred. It was held that the accident was not covered
because the journey was not within the user clause.
8
(1935)2K.B. 174
9
(1948) 65 T.L.R. 53
16
d) One very common clause is one that excludes liability if the vehicle is used in an
unroadworthy condition. In the case of Clarke v National insurance and
Guarantee Corporation Ltd1° a motor policy excluded liability while the car (a
four seater Anglia) was being driven in an unsafe or unroadworthy condition.
During a journey in which there were eight passengers an accident occurred and
the car was destroyed. The insurer's repudiated liability. The Court of Appeal,
reversing the decision of Davies L.J., held that (1) as the overloading seriously
affected the steering, braking and control of the car it was unroadworthy, (2) the
car was in an unroadworthy condition at the time of the accident even though it
could have been safely driven at a low speed; (3) accordingly the insurer's were
entitled to repudiate liability.
Property Insurance
A person can insure property if he/she has an insurable interest in it. For example
the legal owner of a property can insure it as he has insurable interest. A Tenant
of land has insurable interest by reason of his/her possession and his/her
contractual right of occupation. A mortgagee has an insurable interest in the
mortgaged property up to the amount of the mortgaged debt.
In Lucena V Craufurd11 The Crown Commissioners insured a number of enemy

ships which had been captured by British vessels but were still on the high seas.
The statute which gave them authority to capture enemy ships empowered them to
take charge of such ships only when they reached British ports. A number of
ships were lost at sea before they reached port. The issue was whether or not the
Commissioner had an insurable interest in the ships.
Held; by the House of Lords, that they did not.
The Topic of insurable interest is looked at in detail in Topic 3
10
(1964) 1 Q.B. 199; (1963) 3 All.E.R. 375
11
(1806) 2 BOS & PNR 269
17
ACTIVITY2: Questions for discussion
1. Name two specific types of insurance and discuss them.
18
TOPIC 2: The Nature of Insurance Contract
Offer and acceptance
The general contract law of offer and acceptance is applicable to the formation of a
contract of insurance.
Mumba 12 quoted the following from MacGillivray and Parkington on Insurance Law,
which explains the formation of a Contract:
"In order that the building Contract shall be concluded there must an offer put forward by
one party to the contract and acceptance of it by the other. An offer is usually made by
the proposer who completes a proposal form and sends to the insurers for their
consideration. Counter proposals may however be made by the insurers so that
negotiations may end with the insurers making a final offer of insurance cover to the
applicant which is up to him to accept by the instance tendering the premium due".

1. Is there a similarity bet\:veen contract law and the formation of a contract of
insurance?
Explain
Procedure
A proposal form is completed by the person seeking to be insured for submission to the
insurers. The insurers may reject the proposal in which case there is no Contract. If the
insurers accept the proposal a contract may come into existence but if the acceptance has
a condition attached to it such as that no insurance can take place until the first premium
12
Mumba Malila Commercial Law in Zambia: Cases and Materials, 2006
19
is received then there is no cover until the premium is paid or tendered. As seen m
Cannings v Farquhar1 3 The Company received a proposal for life insurance which they
accepted. The letter of acceptance stated "no insurance can take place until the first
premium is paid". Subsequently the insured fell over a cliff and was seriously injured.
The premium was tendered but refused and then C died. It was held that (1) on the facts
of the case there was no contract to insure, (2) even if there had been such a contract it
would have been on the implied condition that the risk was the same when the policy was
called for.
Thus, an acceptance will only have effect in law if the parties have agreed upon material
terms of the contract they wish to make. The material terms are:
a) the definition of the risk to be covered
b) the duration of the insurance cover
c) the amount and mode of payment of the premium
d) the amount of the insurance payable in the event of a loss
There must be consensus ad idem, that is "agreement as to the same things"
ACTIVITY 4: Questions/or discussion

1. At what point is an insurance contract formed? Discuss
2. What are the material terms of the Contract that the parties have to agree on?
Formallities
A contract of insurance can be in any form but in practice it is embodied in a written

document called a policy. English law does not provide any requirements as to the form
of the Contract. Thus, an oral insurance contract, if it can be proved will be valid and
binding between the parties, provided there is agreement on the material terms.
13
(1886) 6Q.B.D. 727.
20
Section 75 of the Insurance Act No. 27 of 1997 states that "no person shall issue a policy
containing provisions which are not in clear type face with letters of a size not less than
eight point".
This provision implies that an insurance policy must be in writing. However, section 80
of the same Act states that:
"A policy issued to any person before or after the commencement of this Act shall not be
invalid nor shall it be unenforceable by that person, by reason only of the fact that the
person contravened or failed to comply with the provisions of any enactment in force
applying to that policy". This section shows this assumption as not being entirely correct
due to the general meaning conveyed by this section.

1. a) Does an Insurance Policy have to be in writing?
b) State the relevant sections of the Insurance Act, and explain.
21
TOPIC 3: The Principle of Insurable Interest
Definition
It is generally true that a person who would foreseeably suffer financial loss from the
occurrence of an event has an insurable interest in the subject matter which it is sought to
insure against that event.
An insurable interest is essential in all insurance Contracts. It is the insured's interest in

the subject matter of loss at the time of such loss. The subject matter of insurance may be
for example a motor car or a house or it could be an event the happening of which would
create a legal liability e.g. a Lawyer insuring himself or herself against claims for
professional negligence. Or in a life policy the life of the assured is the subject matter of
the insurance.
A distinction can sometimes be made between the "subject matter" of the insurance and
"the interest of the insured in the subject matter" For example the subject matter of the
insurance may be a material property of value such as a car but, the subject matter of the
contract is the interest of the insured in the subject matter would be the financial interest
for example the sum of K20, 000, 000.00 (the amount insured for) or insurable interest
of the policy holder in the subject matter, the car, of the insurance. Example: John
bought a house for Kl 00, 000,000.00 and insures it against fire. The subject matter of the
insurance is the house but the subject matter of the Contract is his financial interest in the
house which is the sum of K 100, 000,000.00.
If the car is sold by A whilst the policy is still in force to B then the insurance contract
would be terminated because the interest insured against has ceased to exist.
The authority for this proposition is Castellain v Preston (1883) where the Court said that
"what is i1 that is insured in a fire policy? Not the bricks and materials used in building
the house, but the interest of the insured in the subject matter of the insurance".
22
Preston had signed a contract to sell a house. It was damaged by fire before the sale had
been completed, and the insurance company in ignorance of the sale, paid him £330 due
under the policy. Afterwards the sale was completed, and he received the full purchase
price for the house from the buyer. The insurance company claimed that the contract of
fire insurance was one of indemnity and that the amount of the purchase price, which
Preston had received, should be taken into account in calculating the loss he had suffered.
Held; by Court of Appeal, that this contention succeeded.
BRETT, L.J. (at p 495)... Every contract of marine or fire insurance is a contract of
indemnity, and of indemnity only, the meaning of which is that the assured in case of a
loss is to receive a full indemnity, but is never to receive more. Every rule of insurance
law is adopted in order to carry out this fundamental rule, and if ever any proposition is
brought forward, the effect of which is opposed to this fundamental rule, it will be found
to be wrong. There are many propositions bearing on the question, and many rules may
be glanced at which are well known in insurance law. The doctrine in order to carry out
the fundamental rule. It is a doctrine which is in favour of the assured, because where the
loss is not an actual total loss, but is what as a matter of business, is treated as equivalent
to a total loss, this rule is adopted to carry out the fundamental doctrine and give the
assured a full indemnity. Grafted on that doctrine came the doctrine of abandonment,
which is only applicable to cases of constructive total loss, and is introduced in favour of
the underwriters, so that they may have to pay no more than an indemnity. So it appears
that these two doctrines were introduced in order to carry out the two limits of the
fundamental doctrine to which I have referred, namely, that the assured shall get a full
indemnity, and that he shall get no more.
14
In the case of Macaura v Northern Assurance Co. Ltd.
The appellant was owner of a timber estate. He assigned the whole of the timber to a
company called Irish Canadian Saw Mills Limited. The appellant owned almost all the
shares in that company. In the course of its operation the company owed him a substantial
amount of money. He insured the timber against fire but it was gutted by fire. He claimed
14
( 1925) All ER REP 51
23
on the policy. The insurance company repudiated liability on grounds that the appellant
had no insurable interest in the timber.
Held; by House of Lords, that this contention succeeded, and that the action failed.
LORD SUMMER (at p. 55) ... This appeal relates to insurance on goods against loss by
fire. It is clear that the appellant had no insurable interest in the timber described. It
belonged to the Irish Canadian Sawmill Co. Ltd, of Skibbereen, Co. Cork. He had no
lien or security over it, and, though it lay on his land by his permission, he had no
responsibility to its owner for its safety, nor was it there under any contract that enabled
him to hold it for his debt. Be owned almost all the shares in the company, and the
company owed him a good deal of money, but, neither as creditor nor as shareholder,
could he insure the company's assets. The debt was not exposed to fire nor were the
shares, and the fact that he was virtually the company's only creditor, while the timber
was its only creditor, while the timber was its only asset, seems to me to make no
difference. He stood in no legal or equitable relation to the timber at all. He had no
"concern in" the subject assured. His relation was to the company, not to its good, and
after the fire he directly prejudiced by the paucity of the company's assets, not by the fire.
For there to be insurable interest there must be:

a) property, life or limb, rights, interest capable of being insured against.
b) Such property, life or limb, right, interest must be the subject matter of the
insurance.
c) The insured must bear some legal relationship to the subject matter whereby
he/she would benefit by the safety of the property, life or limb rights, interest
and he/she would be prejudiced by any loss, injury or damage.
Other cases are Livia Carli & others v Satem & A1ohamed Bashan~fer & other/5 and
Datoo & another v Estate Duty Commissioner1 6
15
(1959) EALR 701
16
(1967 EALR 208 (High Court of Tanzania)
24
1. Discuss what is meant by "the subject matter of an insurance". Give one
example of "the subject matter" of an insurance
2. Discuss what is meant by the "interest of the insured in the subject matter". Give
one example of the "interest of the insured in the subject matter"
The Doctrine of Uberrimae Fidei
An insurance Contract is a Contract Uberrimae Fidei. That is it is a Contract based on the

utmost good faith and if the utmost good faith is not observed by either party the contract
may be avoided by the other party. This is a fundamental principle governing insurance
transactions.
Chitty on Contracts states that "the reason for this principle of insurance law is that
contract of insurance are founded on facts which are nearly always in the exclusive
knowledge of one party (usually the assured) and, unless this knowledge is shared, the
risk insured against may be different from that intended to be covered by the party in
ignorance."
In the case of Brownlie v Campbell 17 Lord Blackburn clearly stated the principle of full
disclosure as follows:
"In policies of insurance, whether Marine insurance or Life Insurance, there is an

understanding that the contract is uberrimae fidei that if you know any circumstances at
all that may influence the underwriter's opinion as to the risk he is incurring and
17
(1880) 5 App. Cass 925,954
25
consequently as to whether he will take it or what premium he will charge if he does take
it, you will state what you know. There is an obligation there to disclose what you know;
and the concealment of a material circumstance known to you, whether you thought it
material or not, avoids the policy."
The duties which arise under the principle of uberrimae fidei are:
a) a duty to disclose material facts
b) a duty not to misrepresent material facts
c) a duty not to make fraudulent claims

1. What is the Doctrine of Uberrimae Fidei?
2. Why is this doctrine important?
3. List the duties under this principle.
a) Duty of disclosure
This duty is owed by both the insured to the insurer and the insurer to the insured.
The duty to disclose is confined to facts actually known to the party on whom the duty
falls. There is no duty to disclose what is unknown. The onus is on the insurer to prove
that a material fact has not been disclosed i.e the insurer alleges it. This onus would be
difficult to prove as the insurer would have to prove that the insured did not disclose a
material fact. A fact may be said to be material if it would influence a prudent insurer in
deciding whether to accept the risk, and if so, on what terms. In Mutual Lffe Insurance
Co. of Ne,,v York v Ontario Metal Products, Ltd, 18 it was shown that it is irrelevant that
the insured does not consider the matter to be material. The duty of disclosure is mutual.
The insurer also owes that duty to the insured.
18
( 1925) A.C 344
26
In Banque Finnciere de La Cite SA v Westgate Insurance Co. Ltd. 19 the Judge of first
instance applied such a duty on an insurer and proceeded to award damages for breach of
that duty. Both the Court of Appeal and the House of Lords held that the only remedy for
breach was the usual one of avoidance of the contract.
In Carter V Boehm 20 looked at the issue of utmost good faith and the duty of disc~osure.
He said "Insurance is a contract upon speculation. The special facts upon which the
contingent chance is to be computed lie most commonly in the knowledge of the i::isured
only; the underwriter trusts to his representations, and proceeds upon confidence that he
does not keep back any circumstances in his knowledge to mislead the underwriter into a
belief that the circumstance does not exist. The keeping back of such a circumstance is a
fraud, and therefore the policy is void. Although the suppression should happen through
mistake, without fraudulent intention, :yet still the underwriter is deceived, and the policy
is void; because the risk run is really different from the risk understood and intended to
be run at the time of the agreement. Good faith forbids either party, by concealing what
he privately knows to draw the other into contract from his ignorance of that fact and his
believing the contrary.
Examples of material facts are in the instance a motor policy, previous accidents on
conviction for dangerous driving. In the case of a fire policy, previous fires c,n the
premises or adjoining premises. In the case of a Life policy that the insured is suffering
from a serious illness. Life Association of Scotland v Forster21 and Locker and Woolfv
West Australian Insurance. 22
A fair and reasonable construction of the questions and answers in a proposal forrn must
be adopted. In Austin V Zurich General Accident and Liability Insurance Co., Ltd. 23 a
proposal fom1 for motor insurance stated "Do you suffer ..... from loss, or loss of use of
19
(1991) 2 AC 249
20
( 1766) 3 Burr 1965 Lord Mansfield
21
(1873) M. 351
22
(1836) IK.B. 408.
23
(1944}, 77 Lill Rep. 409
27
limb or eye, defective vision or hearing or from any physical infinnity?" The proposer
said "No". The insurance company maintained that his eyes must be defective because
he wore "thick" glasses.
Held; by the Kings Bench Division, that the answer was a true one. His eyesight was
sufficient for the purpose of driving and therefore was not "defective" within the meaning
of the question in the proposal form.
Exceptions: Facts which the insured does not have to disclose:
• Facts which the insured does not know so long as his not knowing is not due
to negligence
• Facts which diminish the risk e.g the installation of a new burglar alarm
• Facts of which the insw-er knows or is presumed to know
• Facts which the insurer waves his right to inquire further

1. Why is it important to disclose material facts?
2. Give an example of a situation and highlight the material fact or facts.
b) Duty not to misrepresent material facts

If there is misrepresentation of material facts, whether fraudulent or innocent a contract
of insurance, like any other contract is voidable at the option of the aggrieved party.
However, for the insurer to avoid liability three conditions must be fulfilled:
• The statement must be material
• The statement must have induced the insurer to enter into the contract
• The statement must be false
28
In Merchants and Mamifacturers Insurance v Hunt and Thorne 24 a proposer for a motor
policy was asked;
"Have you or any person who to your knowledge will drive the car been convicted of
driving offences?" The answer given was "no." The proposer's son, who, as the proposer
know, would drive the car, had in fact been convicted of four such offences, although the
proposer did not know this. It was held that the answer "no" amounted to a representation
that there had been no conventions and as this was untrue, the insurers were not liable.
The following are courses of action available to an insurer who discovers a
misrepresentation or breach of the principle of Utmost good faith:
a) the insurer may repudiate liability

b) the insurer may ignore the breach and allow the contract to continue
c) the insurer may bring an action for delivery up and cancellation of the policy
d) if the policy has matured for payment the insurer may refuse to make payment if
and when the insured institutes proceedings the insurer would plead breach of
contract in defense.
In Patel v Old Mutual Fire and General Insurance Co. of Zambia Ltd (High Court for
Zambia/ 5 the claim by the Plaintiff failed and judgement was for the Defendant
IACTIVITY 9: Questions for discussion

1. Does an insurance policy become void if there is misrepresentation of Material
facts? Discuss.
24
(1941) lK.B. 295 (1941) 1 All E.R. 123
25
1969 ZR 154
29
c) Duty not to make fraudulent claims
If the insured makes a fraudulent claim the insurer can avoid all liability even though the
insured was on risk when the loss occurred. If the claim is honest but exaggerated, it will
not have this effect.
In other words the consequences of making a fraudulent claim is that the insured will
forfeit all rights tmder the policy and it can be tenninated for breach.
A material statement in a claim is fraudulent if the insured either knew it to be false or

else was reckless as to its truth. Mere carelessness will not suffice. The onus of proof is
on the insurer
Norton v Royal Fire & Life Ass. Co. 26
26
( 1885) I T.L.R. 460
30
TOPIC 4: The Principle of Indemnity
Most Contracts of insurance are contracts of indemnity. The Main exception are life
insurance, personal accidents insurance and sickness insurance of the insured. The
fundamental rule is there would be practical difficulties in fixing a monetary value on
human life and limb. An insurance contract that is a contract of indemnity means that in
the event of loss resulting from a risk insured against, the insured cannot recover more
than his actual financial loss. The insured should be placed in the same position he/she
was in immediately before the happening of the event insured against.
In the case of Darell v Tibbitts 27 a Landlord of property received

£ 750 under a fire insurance policy when the property was damaged by fire. Subsequently
the tenant, who had covenanted to repair, did so. It was held that since the contract of
insurance was one of personal indemnity of the landlord the msurance moneys were
repayable to the insurers since the landlord had suffered no loss.
In the leading case of Caste/lain v Preston28 the English Court of Appeal stated amongst
others that: "The Very Foundation, in my opinion, of every rule which has been applied
to insurance law is this, namely, that the contract of insurance contained in a marine or
fire policy (and that equally applies to accident policy other than personal accident) is a
contract of indemnity and of indemnity only, and that this contract means that the
insured, in case of a loss against which the policy has been made, shall be fully
indemnified, but shall never be more than fully indemnified. This is the fundamental
principle of insurance law and even a proposition brought forward which is at variance
with it, that is to say, which either will prevent the insured from obtaining a full
indemnity, or which will give the assured more than a full indemnity, that proposition
must certainly be wrong."
It should be noted that practically the insured could recover less if he /she under insures.
27
(1880) 5 Q.B.D. 560
28
(1883) 1 lQ.B.D. 380
31
The issue of public policy is taken into account on the issue of recovery by the insured. It
is illegal and against public policy for the insured to recover more than his/her actual loss.
Why is this so? If the situation was allowed where an insured could recover more than
her/his actual loss situations could arise where there could be willful destruction of
his/her insured property. This would not be in the interest of the general public.
Furthennore, an insured should not be allowed to make a profit from a misfortune
29
In Zambia State Insurance Corporation v Serios Farms Ltd the Court stated that "an
insurance Policy only covers the losses which were subject matter of the insurance itself
and that any consequential losses cannot be claimed under the policy unless expressly
stipulated in the contract. There was no such stipulation suggested in this case and the
awards complained of could not possibly be supported on the basis that the contract of
insurance in question provided for them.
ACTIVITY JO: Questions/or discussion

1. What insurance Contracts are not contracts of indemnity? Why are these
excluded?
2. Can an insured person recover more than his/her actual loss? Discuss
Motor car Insurance
If the car is a total loss, i.e. beyond economic repair or if the car is damaged to such an
extent that the cost of repair would exceed the market value of the vehicle the insurer
may deal with the claim as a total loss. In such an instance the insured would be paid, by
the insurer, the market value of the vehicle before the accident that is at the time of the
loss or the market value of a similar type, age and condition. In such circumstances the
29
(1987) ZR93
32
insurer is entitled to the salvage or remains of the insured vehicle and may do whatever
he wants to do with it.
If there is partial damage the insurer indemnifies the insured by paying for the cost of
repairing the damage vehicle.
It should be noted that an insurance contract is personal to the insurer and the insured. If
the insured decides to part with possession of the subject matter of the insurance the
insurance comes to an end.
In Regerson v Scottech Auto l1iobile & General Insurance Compan/ 0 the Plaintiff
insured his vehicle for twelve months. During the course of the twelve months he
exchanged the car for another one. The new car was involved in an accident. The insured
put in a claim for the damage which claim was rejected by the insurer as the new car was
not insured. The Court held that since the subject matter of the insurance had changed the
insurance company was not liable to meet the claim

1. Can an insured transfer, on an agreement with another party only, her insurance
contract to that person?
The Concept of Loss
Contracts of insurance providing cover for loss or damage only extends to loss or damage
to the subject Matter of the insurance itself. That is, the loss must be covered by the
policy.
30
( 193 1) 48 TLR 17
33
Within the meaning of the word "lost" goods are not "lost" within contract of insurance
when the insured intentionally parted with the property.
Where property is insured against loss, an insured will therefore not have a claim unless
he can prove (a) that there has been a loss (b) that the loss was caused by the risk (event)
insured against. The event/risk insured against is always defined by the
insurance/contract. In Holmes v Payne 31 a necklace disappeared and after a thorough
search could not be found. The insurers who had insured it against loss thereupon agreed
to replace it. Subsequently it was found. It was nevertheless held that on the facts of the
case there had been a "loss" and accordingly the insurers remained bound by their
agreement to replace, although they were entitled to the necklace as salvage.
In Eisinger v General Accident Fire and L(fe Assurance Corporation 32 The plaintiff
agreed to sell his car to a rogue in return for a cheque which was dishonored. He claimed
under a policy covering "loss" of the car, but Lord Goddard C.J. held that a person who
had agreed to transfer the ownership of a car could not be heard to say that he had lost it
what he had lost was the proceeds of sale.
On the other hand goods may be lost even though the owner knows of their physical
whereabouts. In Webster v General Accident Fire and Life Assurance Corporation the
Plaintiff parted with possession of his car to a rogue who falsely represented that he had a
buyer for it. The rogue sold it at an auction and disappeared. The buyer at the auction
acquired a good title, Parker J. held that there had been a "loss" of the car, and the
plaintiff was entitled to recover under the policy covering loss.
Since the purpose of insurance contract is to protect the insured against misfortune and
not own misconduct if an insured unlawfully and intentionally brings about an event
insured against the insured will not be allowed to recover. This rule reflects public
31
(1930) 2K.B. 301
32
(l 955) I W.L.R. 869; (1955) 2All E.R. 897
34
policy. In Bre.'Jjord v Royal Jnsurance 33 the deceased insured his life and then shot
himself. Suicide was a crime. It was held that his personal representative could not
recover under the policy as it was against public policy for a person to benefit from a
criminal act.

1. A had a motor car accident and damaged his car in addition to his laptop that was
inside the car.
Can the laptop be considered by the insurance company as part of the "loss" under
the motor vehicle insurance? Discuss
Causation
The doctrine of Proximate Cause
The insured under an insurance contract cannot recover from the insurer unless the loss is
caused by an event covered by the insurance contract. In Marsden v City County
Jnsurance 34 a shop keeper insured his plate- glass against loss or damage arising from any
cause except fire. In due course, fire broke out in the insured's neighbor's property,
prompting a mob to gather. The mob then rioted, and in consequence, broke the plate -
glass. The court had no difficulty in holding that the riot and not the fire was the cause of
the loss, and that therefore the insured could recover.
The risk or danger insured against is an insured peril, e.g. in a fire policy, fire is the
insured peril.
33
(1938) AC 586
34
(1865) LRI CP 232
35
TOPIC 5: Assignment and Transfer
Life Policies
A person can effect a policy on his own life and thereafter assign it, i.e the policy money,
to another person (the assignee) who has no insurable interest. It can be assigned to
secure a bank overdraft or as collateral security on a mortgage.
It is obvious that a life policy cannot be transferred from one person to another.
There is a distinction between the assignment of the policy moneys and the transfer of the
policy itself.
Indemnity Policies
A mortgagor who has insured his house can assign to his mortgagee the right to recover
under the policy if he (the mortgagor) suffers loss. As the basis of the assignment is the
continuing insurable interest of the assignor, it follows that if he parts with the property
the assignment will become valueless. Commissioners v Royal Exchange Assurance
Commission. 35
An insurance policy being a personal contract can be transferred by the insured to another
party with the consent of the insurer. The reason for this rule is that the insurer has to
know whom they are covering. Peters v General Accident Fire & L~fe Assurance
Corporation Ltd. 36
If the insurer does not give its consent then the insurance policy cannot be transferred. If
the insurer gives its consent then a new policy comes into existence and the transferee
becomes the insured. An example is in the case of the sale of land when the vendor may
transfer his policy to the purchaser with the consent of the insurer.
35
(1895) I 1 T.L.R. 476
36
(1938) 2 All E.R. 267.
36
l. What is the different between Assignment of insurance policy and Transfer of
insurance policy?
Warranties and conditions
Warranties
An insurance contract may contain warranties, conditions and descriptions of the risks.
Under the sale of Goods "Warranty" was actually a term of the contract not going to the
root of it, whereas "Condition" was a vital term of the contract.
In insurance law, however, the words "warranty" and "condition" both refer to vital terms
going to the root of the Contract.
For a clause in an insurance contract to amount to a warranty the word warranty need not
be mentioned e.g "The answers in the proposal form shall form the basis of this contract
and shall be deemed to be incorporated herein."
Warranties are in essence promises made by the insured regarding the fact or the thing
He/she undertakes to do or to refrain from doing.
The answers to this clause could have the effect of being warranties.
e.g warranties may be in the policy document or in the proposal form.
If there is a breach of warranty the insurer can repudiate liability under the policy i.e the
insurer is discharged from all liability as from the date of the breach. Warranties in
insurance contracts must be strictly complied with.
37
In Dawson's Ltd. v Bonni37 a proposal form for the insurance of a motor vehicle
contained the question "State address where car will usually be garaged." A wrong
address was inadvertently given. The fonn provided that the answers were to form the
basis of the contract. Subsequently the vehicle was destroyed by fire and a claim was
made under the policy. By a majority of three to two the House of Lords held that the
insurers were entitled to avoid on account of a breach of warranty.
In West v National ,"lvfotor and Accident Insurance Union, 38 the insured was alleged to be
in breach of warranty as to the value of the property insured. The insurers, while relying
on the terms of the contract to enforce an arbitration clause in the contract, rejected the
insured' s claim.
Held; that by relying on the term of the contract to enforce the arbitration clause, the
insurers had waived their right to avoid the contract, which was the only right they had.
Conditions
Conditions are terms that are found in Insurance policies. Conditions may be dispensed
with if they are unnecessary. If there is ambiguity the court will interpret them against
the insurer and he will be held liable. A breach of condition is actionable only .if it
causes the loss.
In RE Bradley and Essex and Sujfok Accident Indemnity ~<:i~ociety39 a small farmer effected
an employer's liability policy. This contained eight "conditions" the performance of
which was said to be a condition precedent to the insurers' liability. It was conceded that
some of the conditions were conditions subsequent while others were not conditions at
all. One "condition" started with a statement that the premium was to be fixed by
reference to the wages paid; then came a sentence requiring the insured to keep a wages
book and produce it on demand ; and then followed a provision for payment of an
increased premium in certain cases. The insured only employed one person "his son" and
37
(] 922) 2 AC 413.
38
(1954), 1 Lloyd'sRep.463
39
(1912) !K.B. 415,
38
did not keep a wages book. The son was injured and the insured made a claim which the
insurers resisted on the ground that no wages book had been kept. A majority of the
Court of Appeal held that (1) the whole clause must be read as one, (2) as such it was not
a condition precedent, and accordingly (3) the insurers were not entitled to repudiate
liability. [The form of policy was severely criticized by Farwell L.J.].
The burden of proving a breach of condition lies on the insurers. In Bond Air Services v
Hil/ 40 a condition in an aircraft insurance policy stated that the insured was to observe
the statutory regulations relating to air navigation. Another condition provided that: "The
observance and performance by the insured of the conditions of policy ... are conditions
precedent to the insured's right to recover". The aircraft crashed and the insured claimed
under the policy, but the insurers maintained that the burden of proving that he had
complied with condition lay on the insured.
Held; by the Queen's Bench Division, that this contention failed. It was the duty of the
insurers to prove that the assured had broken a condition if they wished to avoid liability
under the policy.
Misrepresentation
A contract of insurance is avoidable if there is misrepresentation of material facts.

However, the following three conditions must be satisfied:
a) The Statement must be material
b) The insurer must have been induced by the statement to enter into the contract
c) The statement must be false
In Merchants and Afanufacturers Insurance v Hunt and Thorne 41 a proposer ..... for a
motor policy was asked: "Have you or any person who to your knowledge will drive the
car been convicted of driving offences?". The answer given was "No". The proposer's
10
' (1955) 2 All ER 476
41
(1941) lK.B. 295; (1941) All ER 123
39
son who, as the proposer knew, would drive the car, had in fact been convicted of four
such offences, although the proposer did not know this. It was held that the answer "No"
amounted to a representation that there had been no convictions and as this was untrue,
the insurers were not liable.

1. What is the effect of a breach of warranty by the insured? Discuss
2. What are "Conditions" in relation to insurance contracts?
3. Are conditions and warranties interchangeable in an insurance contract?
40
UNIT2
NEGOTIABLE INSTRUMENTS
Objectives
At the end of this unit you should be able to have an appreciation of the rules governing
negotiable instruments.
Introduction
Negotiable instruments are essential in business and commerce, not only in Zambia, but
internationally.
Instruments such as cheques are used on a daily basis not only by business entities but
also by individuals.
TOPIC 1: Nature of Negotiable Instruments
Property which cannot be reduced into physical possession is called a chose in action
(chose is a French word meaning a "thing"). A chose in action does not exist in material
shape but is a right that can be enforced in a court of law. It is a right or interest in
something of value, for example shares in a company, rights under an insurance policy,
patents and copyright.
A chose in possession is moveable property in actual physical possession such as a herd

of cows or a library of books or a K20, 000.00 note. This is moveable property in
material form.
The commonest form of choses in action in commercial use may be grouped under the
heading "Documents of Title". Since such documents are the evidence of the right of a
person to money or goods which is not in the person's actual possession.
41
The document of title is actually the main proof of ovmership. Since it is the means of or
instrument of obtaining or establishing ownership it is thus called an "instrument",
meaning a document of title.
Both the person who is to deliver the money or goods and the person who holds the right,
that is the person who can claim the goods or money wiII both be mentioned in the
instrument.
In Crounch V Credit Foncier of Englancf2 Blackbum J put it:

"When an instrument is by the custom of the trade transferable, like cash, by delivery and
is also capable of being sued upon by the person holding it pro tempore, (pro tempore
means for the time being; for the present only) then it is entitled to the name of a
negotiable instrument and the property in it passes to a bona fide transferee for value,
although the transfer may not have taken place".
Negotiable Instruments are a small category of choses in action. Negotiable Instruments

are used both locally and internationally in commercial transactions.
Definition
A negotiable instrument may thus be defined as a chose in action, the full and legal title
to which is transferable by mere delivery of the instrument with the result that complete
ownership of the instrument and all the property it represents passes free from equities to
the transferee, providing the transferee takes the instrument in good faith and for value.
Examples of negotiable instruments are Bills of Exchange, Promissory Notes and
Cheques.
Bills of Exchange are mainly used to procure credit especially in the sale of goods. Bills
of Exchange can also be used to settle debt. In international transactions bills of exchange
are normally used to facilitate payments with banks and other financial institutions.
42
(1873) L.R 8 Q. B. 374,381
42
Promissory notes are more modem than bills of exchange and they are used to a limited
sense in international trade.
Cheques are a more recent creation and are widely used in Zambia.
The Bills of Exchange Act 1882 codified for the United Kingdom the Law relating to
Bills of Exchange, Promissory notes and Cheques.
In Zambia the Bills of Exchange Act, 1882 and the Cheques Act Chapter 424 of the Laws
of Zambia are statutes governing negotiable instruments. Negotiable instruments apart
from cheques are not frequently used in commercial transactions in Zambia.
....'
ACTIVITY 15 : Questions for discussion

l. Name three different types of negotiable instruments and discuss them
Bills of Exchange
There are initially three parties to a bill as follows:

a) drawer - the person who makes the order
b) drawee - the person to whom the order is given (e.g in the case of a cheque the
Bank to whom the cheque is drawn is the "drawee"
c) acceptor - if the drawee agrees to comply with the instructions on the bill and
signs it, he becomes the acceptor as he accepts it.
d) the person to whom the order is payable is called the Payee. The payee may
indorse the bill by signing his name at the back of the bill in order for the bill to
be hornoured.
43
e) The signature is known as indorsement and the person signing becomes the
indorsor.
f) The indorsee is the person to whom he/she is warranting the bill
g) The holder is the payee who has its physical possession or someone else who
subsequently obtain physical possession under an endorsement. Section 2 of the
Act defines "holder'
A C71VITY 16: Questions for discussion

1. Explain the following
a) drawer
b) drawee
c) acceptor
d) payee
TOPIC 2: Definition and Function of a Bill of Exchange
Section 3 of the Bills of Exchange Act 1882 defines a Bill of Exchange. It states as
follows:
3 (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 (i.e a sum at any time capable of being
calculated or ascertained )to or to the order of a specific person, or to
bearer.
(2) An instrument which does not comply with these conditions, or which orders
any act to be done in addition to the payment of money, is not a bill of
Exchange.
(3) An order to pay out of a particular fund is not unconditional within the meaning
44
of this section; but an unqualified order to pay, coupled with (a) an indication
of a particular fund out of which the drawee is to re-imburse himself or a
particular account to be debited with the amount, or (b) a statement of the
transaction which gives rise to the bill, is unconditional.
(4) A bill is not invalid by reason

(a) That it is not dated;
(b) That it does not specify the value given, or that any value has been given
therefore;
(c) That it does not specify the place where it is drawn or the place where it is
payable
It should be noted that all cheques are bill of exchange. An example of a bill of exchange
is as follows:
Kl 0, 000,000.00 Lusaka
1st July 2006
30 days after date pay to my order Ten Million Kwacha (Kl 0,000,000.00)
value received
To: George Banda

Plot 222 Longacrcs
Lusaka Betty Zimba
Bill payable after date
K4,000,000 Lusaka
th
30 April 2006
30 days afler date pay to the order of
Lloyds Bank Ltd, the sum of Four Million Kwacha
45
John Jones
To Messrs Richard & Co.
Ndola
This bill is payable 30 days after 30 th April
Bill payable after sight
Kl 00,000.00 Lusaka
th
30 March 2006
30 days after sight pay to me or my order the sum of
one hundred thousand K ,vacha
Roy Frank
To. Albert Banda
Kitwe
'Sight means the first 'sighting' of the bill by the drawee

1. What is a bill of exchange?
2. What section of the Bill of Exchange Act 1882 defines it?
a) It must be an unconditional order as opposed to a mere request. The most

common order is the word "PAY". Words of politeness do not necessarily
prevent the instrument from being a bill of sale. For example "Please Pay" would
be a valid bill. On the other hand "Please let the bearer have One hundred
thousand Kwacha and place to my account and you will oblige" was held not to
be an Order in the case of Hamilton V Spoottswoode (1849) 4 Exch. 200, and
therefore not a bill.
46
If the Order is conditional upon the payee doing something it is not a bill
of exchange.
In Bavin & Sims V London and South Western Bank (1900) I Q B 270 a
document directed payment "provided that the receipt form at the foot hereof is
duly signed" was held to be conditional, and thus not a valid bill.
The plaintiff did some work for the Great Northern Railway Company. The
company gave them a document drawn on the Union Bank of London in which
they ordered the Union Bank to pay a sum of money to the plaintiffs provided the
receipt form attached to the document was duly signed, stamped and dated. The
document was stolen from the plaintiff before the receipt had been signed. It
ended up in the hands of the defendants' customer. The customer's husband took
it to the defendants, completed the receipt without the plaintiffs' authority and
ordered that the document be paid into his wife's account. The defendants
credited the customer's account and later received payment from Union Bank.
The plaintiff sued the defendants in conversion to recover the money.
KENNEDY, J. gave judgement in their favour. The defendants appealed. One of
the issues was whether the document was a cheque.
Held; by the Court of Appeal, dismissing the appeal, that the plaintiffs were
entitled to recover the money from the defendants. Held further that the
document was not a cheque (and therefore not a negotiable instrument)because
payment was ,:::onditional
If however the document read "Pay X K 100, 000. 00 and it is stated that the
receipt at the back must be signed it has been held that the order to pay is
unconditional and therefore a valid bill. This is the case of Nathan v Ogdons, Ltd
(1905) 94 LT 126
47
Reference can also be made to the case of Pindi Dasghai v Ved Parkash
43
Manda/
The appellant drew a post-dated cheque in favour of the respondent. It was

however orally agreed that the respondent should not present the bills for payment
until the appellant's account was credited by an amount equivalent to the face
value of the cheque, by a firm named Messrs Taj and Walia. The said firm went
into liquidation and the appellant stopped payment. The cheque was thus
dishoured upon presentment. The respondent brought this action. He averred that
the oral agreement was inadmissible as it would alter the terms of a written
agreement thus rendering the cheque conditional.
Held; that there was a well established exception to the parol evidence rule
whereby an oral agreement stipulating a condition precedent to a written
contract's coming into effect is admissible to show that the condition precedent
has not occurred, and thus show that there is in fact no agreement.
The cheque was thus not a conditional bill; void for offending the definition of a
bill as under section 3. Rather it was merely inoperative until the appellant's bank
was credited. Since this did not occur, the cheque could not be enforced when it
fell due.
A debt may be discharged by payment of a bill of exchange but if the bill is
dishonored the debt revives.
b) It must be in writing. Writing is defined in section 2 as including printing.

In practice bills of exchange and cheques are normally drawn on printed forms
to minimize the risk of forgery.
c) A bill must be addressed by one person to another. Thus a document

addressed to no one cannot be a bill. A Bank draft may be said strictly
speaking not to be a bill as it is not addressed to another although the
43
( 1948 - 49) Kenya Repo1ts 9
48
dra\\ier and the drawee are the same person. The holder may however treat
it as a bill of exchange or a promissory note.

1. Can a b:11 of exchange be oral?
l
2. "Please if you so wish pay X K500, 000.00". Does this comply with
the requirements of a bill of exchange. Give reasons for your answer
Section 6(1) states that the drawee must be named or otherwise indicated in a bill with
reasonable certainty.
Section 6(2) states that a bill may be addressed to two or more drawees whether they are
partners or not, but an order addressed to two drawees in the alternative or to two or more
drawees in succession is not a bill of exchange.
The drawer and the drawee may be the same person. Section 5 provides that:
( 1) A bill may be drawn payable to, or to the order, of, the drawer; the person giving
the order or it may be drawn payable to, or to the order of, the drawee, the person
to whom the order is given e.g draw cheque payable to self.
(2) Where in a bill drawer and drawee are the same person, or where the drawee is a
fictitious person or a person not having capacity to contract, the holder may treat
the instrument, at his option, either as a bill of exchange or as a promissory note.
49
:j
·/'
J'
t
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.}I:ft•·
~.;.;
Section 7(1) provides that where a bill is not payable to bearer, the payee must be named
or otherwise indicate therein with reasonable certainty.
:}
:,'\•
•il,;<
l d) It must be signed by the person giving it, the drawer. If the instrument is not signed
·;,,ii,/
;
by the drawer it is not a bill.
!~
Section 23 provides that:
No person is liable as a drawer, endorser, or acceptor of a bill who has not signed it as
such: Provided that
1) Where a person signs a bill in a trade or assumed name, he is liable thereon as if
he had signed it in his own name:
2) The signature of the name of a firm is equivalent to the signature by the person so
signing of the names of all persons liable as partners in that firm.
e) It must be payable on demand or at a determinable future time. Section 10

provides:
(1) A bill is payable on demand
(a) Which is expressed to be payable on demand, or at sight, or on
presentation;
or
(b) In which no time for payment is expressed
(2) Where a bill is accepted or indorsed when it is overdue, it shall, as

regards the Acceptor who so accepts, or any indorser who so indorses it,
be deemed a bill payable on demand.
The holder is allowed to demand payment immediately.

The bill may expressly indicate the date on which it is payable. Alternatively, it may
fix payment by reference to some event provided it is an event which must happen.
50
f) It must require payment of a sum certain in money.
g) To or to the order of a special person or to bearer
Section 3 (2) states that if an instrument orders an act to be done in addition to
the payment of money it is not a bill of exchange. A bill may be made payable to
a named payee or it may order payment to a specified person or order.
Section 9(1) provides that the sum payable by a bill is a sum certain within the meaning
of the Act although it was required to be paid.
a) with interest (the relative rate of interest to be stated)
b) by stated instalments
c) by stated instalments, with a provision that upon default in payment of any
instalment the whole shall become due
d) According to an indicated rate of exchange or according to a rate of exchange to
be ascertained as directed by the bill (exchange rate prevailing at time of
payment)
2) Where the sum payable is expressed in words and also in figures, if there 1s a
discrepancy between the two, the sum denoted by the words is the amount payable.
3) Where a bill is expressed to be payable with interest, unless the instrument otherwise
provides, interest runs from the date of the bill, and if the bill is undated from the
issue thereof.

1. In what instance can the drawer and the drawee be the same person?
2. Can payment be made on a bill that has no drawer's signature?
It is important to point out that the word "certainty" is a recognizable feature in the law
relating to bills of exchange.
51
Section 10 states that a bill is payable on demand. This means that a holder can demand
payment immediately.
1. A bill is payable on demand
a) Which is expressed to be payable on demand, or at sight, or on presentation; or
b) In which no time for payment is expressed.
2) Where a bill is accepted or indorsed when it is overdue, it shall, as regards the
acceptor who so accepts, or any endorser who so indorses it, be deemed a bill
payable on demand
Section 11 deals with bills payable at a future time.

A bill is payable at a determinable future time within the meaning of this Act which is
expressed to be payable
(1) At a fixed period after date or sight
(2) On or at a fixed period after the occurrence of a specified event which is
certain to happen, though the time of happening may be uncertain.
An instrnment expressed to be payable on a contingency is not a bill, and the
happening of the event does not cure the defect.
Section 23 states that no person is liable as drawer, indorser, or acceptor of a bill who has
not signed it as such subject to certain provisos. This section should be read with section
91 that deals with signature. In Elliot v Bax - Ironside 44 the directors of a company had
accepted a bill on behalf of a company. The drawer required the directors to indorse the
bill personally, and they did so, signing the name of the company as well as their own
names. They were held personally liable on the endorsement on the basis that the
company was already liable on the bill by virtue of the acceptance.
Section 24 deals with forged or unauthorized signature. The Section provides that:
Subject to the provision of this Act, 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 and no right to retain the bill or to give a
44
( 1925) 2KB301
52
discharge therefore or to enforce payment thereof against any party thereto can be
acquired through or under that signature, unless the party against whom it is sought to
retain or enforce payment of the bill is precluded from setting up the forgery or want of
authority. Provided that nothing in this section shall affect the ratification of an
unauthorized signature not amounting to forgery.
TOPIC 3: Capacity
Capacity is one of the three requisites to liability on a bill of exchange, the other two
being signature and delivery.
Section 22 of the Act deals with capacity of parties. Capacity to incur liability is treated
in the same way as a person would be treated under the general law of contract.
i.e if a person with no capacity to contract e.g a minor signs a bill and the bill 1s
dishonoured he cannot be sued
Negotiable bills
Section 8 of the Act deals with what bills are negotiable.

a) the drawer of a bill may draw a bill that is not negotiable. The bill may prohibit
transfer in which case such a bill is non-transferable although it is valid between
the parties thereto. Such a Bill is called a non-transferable bill. e.g. "pay David
James only" e.g. Pay D James with words not transferable appearing on the face
of the bill
In National Bank V Silke 45
The defendant drew· a cheque payable to the order of one Moriarty. The cheque was
crossed and marked "Account of JF Moriarty, National Bank, Dublin," Moriarty
endorsed the cheque to the plaintiff The plaintiff sent it to London for collection and
it was dishonoured. In the meantime, the amount of the bill had been carried to
Moriarty's credit in his account with the plaintiff and drawn upon by him. The
plaintiffs sued as holders for value. The defendant contended that the plaintiffs could
45
(1891)1QB 435
53
not sue upon the cheque and that only Moriarty could acquire a right to sue upon it.
The Court of Appeal held that the cheque was transferable and the plaintiffs could
therefore sue upon it as holder for value
TOPIC 4: The holder of a Bill
The term "holder" is defined in Section 2 of the Act to mean "the payee or endorsee of a
bill or note who is in possession of it, or the bearer thereof'. The holder has to establish
ownership by showing his title to the bill. The bill must have been negotiated to him. If
the bill is payable to order, he must not only get possession of the bill, but he must also
obtain the indorsement of the previous holder. In Daniel Meyer (Export) Ltd V Makali
Cycle lvfart46 the appellants drew a bill on the respondent, payable to or to the appellants'
order. They then endorsed the bill in blank and delivered it to Barclays Bank (London)
Ltd. The latter endorsed the cheque to Standard Bank of South Africa 'for collection'.
The bill was redelivered to the appellant. The respondent accepted the bill but later
dishonoured it when presented for payment. The question arose as to whether the
appellant could enforce the bill.
Held; that (a) only a holder, as defined under section 2 of the Bills of Exchange
Ordinance can enforce a bill, i.e a payee in possession, endorsec in possession of an order
bill and any person in possession, of a bearer bill.
E.g if A draws a bill on B in favour of C or order and hands the bill to C., C, as the payee
in possession, is the holder. If C negotiates the bill to D by indorsement coupled with
delivery, D, as the indorsee in possession, is now the holder. If D likewise negotiates to
E, E becomes the holder and so on.
Section 27 of the Act provides for "holder for value". A holder for value is generally
similar to that of a mere holder. It means a holder who has given or is deemed to have
given, valuable consideration for a bill, section 27 states that:
46
(1956) EAL R 26 (Court of Appeal of East Africa)
54
(l) Valuable consideration for a bill may be constituted by
a) Any consideration sufficient to support a simple contract; e.g goods, services,
money etc. that is sufficient to constitute a 'bargain" or a "deal". It
st
recognizes a part debt or liability as value (e.g a ton of coal delivered on l
April will be considered "value" for my cheque that I hand to the coal
merchant on 30th April
b) An antecedent debt or liability. Such a debt or liability is deemed valuable
consideration whether the bill is payable on demand or at a future time.
(2) Where value has at any time been given for a bill the holder is deemed to be a
a) holder for value as regards the acceptor and all parties to the bill who became
parties prior to such time.
(3) Where the holder of a bill has a lien on it arising either from contract or by
implication of law, he is deemed to be a holder for value to the extent of the sum
for which he has a lien. E.g if the security held by a Bank is Kl, 000,000.00 and
K500, 000.00 is owed to B then the Bank is holder for value to the extent of the
lien. The creditor therefore has a right to retain property of his debtor until such
time as the debt is discharged.
Section 29 of the Act provides for a holder in due course. It states that:
(l) A holder in due course is a holder who has taken a bill, complete and regular on
the face of it, under the following condition; namely,
a) That he became the holder of it before it was overdue, and without notice that
it had been previously dishonoured, if such was the fact: e.g if bill is due and
payable on 21 st May then on and after 22nd it is overdue and therefore the
person is not a holder in due course.
b) That he took the bill in good faith and for value, and that at the time the bill
was negotiated to him he had no notice of any defect in the title of the person
who negotiated it.
55
(2) In particular the title of a person who negotiates a bill is defective within the
meaning of this Act when he obtained the bill, or the acceptance thereof, by fraud,
duress, or force and fear, or other unlawful means, or an illegal consideration, or
when he negotiates it in breach of faith, or under such circumstances as amounts
to a fraud.
(3) A holder (whether for value or not), who derives his title to a bill through a
holder in due course, and who is not himself a party to any fraud or illegality
affecting it, has all the rights of that holder in due course as regards the acceptor
and all parties to the bill prior to that holder.
There must be a holder and the bill must be complete and regular on the face cf it
The three conditions mentioned in the section must have been satisfied by the holder.
Once satisfied he obtains a defensible title and can enforce the bill against all parties
thereto.
ACTIVITY: 20 Questions for discussion

1. Define the term "holder" and state the section of the Act where it is defined
2. What is a holder for value?
Section 38 (1) and (2) states that

The rights and powers of the holder of a bill are as follows:
1) He may sue on the bill in his own name:

(2) Where he is a holder in due course, he holds the bill free from any defect of title
or prior parties, as well as from mere personal defences available to prior parties
among themselves, and may enforce payment against all parties liable on the bill:
A person in possession of a bill must not have had knowledge that it had been previously
56
dishonoured and must be able to show that he acted honestly and that he had no
knowledge of any defect in title of the transfer and neither did he entertain any suspicion.
In Jones v Waring & Gillow 47 it was held that a holder in due course is
one to whom a bill is "negotiated". Thus the original payee can never be a holder in due
course.
Refer also to NS Rawat v Rattan Singh 48 the respondent was the drawer of a bearer bill
which eventually ended up in the appellant's possession as endorsee for value.
The bill in question had been dishonoured by the bank, with the words 'refer to
drawer' written on its face, before it came into the hands of the appellant. The
appellant was cognisant of both these facts when he took the bill. He brought an
action to enforce the bill.
Held; (a) The appellant, as endorsee in possession, was a holder of the bill. (b) Since he
had notice of the dishonour, he was not a holder in due course. He thus took the cheque
subject to any defects at the time of the transfer to him. As holders for value, however,
they could enforce the bill against the respondent for its value.
i
-----1
1. What are the rights of a holder of a bill? Discuss
L----------------------------------------------------------~
Section 39 states when presentation of a bill for acceptance is necessary

I) Where a bill is payable after sight, presentment for acceptance is necessary in
order to fix the maturity of the instrument
2) Where a bill expressly stipulates that it shall be presented for acceptance, or
where a bill is drawn payable elsewhere than at the residence or place of business
47
(1926) AC 670
48
(1956) EALP 453 (Uganda)
57
of the drawee, it must be presented for acceptance before it can be presented for
payment
3) In no other case is presentment for acceptance necessary in order to render liable

any party to the bill
4) Where the holder of a bill, drawn payable elsewhere than at the place of business
or residence of the drawee, has not time, with the exercise of reasonable diligence,
to present the bill for acceptance before presenting it for payment on the day that
it falls due, the delay caused by presenting the bill for acceptance before
presenting it for payment is excused, and does not discharge the drawer and
indorsers.
Where a bill is drawn payable after sight, presentment for acceptance is essential,
since until the date of sighting by the drawee is ascertained it will be impossible
to calculate the maturity date of the bill. If it is presented for acceptance on 13 th
January then the 30 days commence to rum from then making the due date 12th
February
Section 41 lays down rules as to presentment for acceptance that a holder of a bill has to
uphold.
l) A bill is duly presented for acceptance which is presented in accordance with the
following rules:
a) The presentment must be made by or on behalf of the holder to the drawee or
to some person authorized to accept or refuse acceptance on his behalf at a
reasonable hour on a business day and before the bill is overdue:
b) Where a bill is addressed to two or more drawees, who arc not partners,
presentation must be made to them all, unless one has authority to accept for
all, then presentment may be made to him only:
c) Where the drawee is dead presentment may be made to his personal
representative
58
d) Where the drawee is bankrupt, presentment may be made to him or to his
trustee
e) Where authorized by agreement or usage, a presentment through the post
office is sufficient
2) Presentment in accordance with these rules is excused, and a bill may be treated
as dishonoured by non-acceptance
a) Where the drawee is dead or bankrupt, or is a fictitious person or a person not
having capacity to contact by bill
b) Where, after the exercise of reasonable diligence, such presentment cannot be
effected
c) Where, although the presentment has been irregular, acceptance has been
refused on some other ground.
3) The fact that the holder has reason to believe that the bill, on presentment, will be
dishonoured does not excuse presentment.
Section 45 states the rules as to presentation for payment.

A bill must be presented for payment to the drawee or his agent on the due date at the
proper place within a reasonable time after its issue on a business day and that failure in
any of these respects will discharge the drawer and endorsers.
Section 46 provides for instances 1,,vhen delay in making presentment for payment is
excused.
Section 48 deals with Notice of dishonour and the effect of non-notice by the holder of a
bill.
The holder has a duty to give notice of dishonour to the drawer and each indorser. The
drawer or endorser who does not receive such notice will be discharged. The right of the
older to get back his money exists only providing he gives notice of dishonour to the
prior parties.
59
Liabilities of Parties
Section 55 of the Act states that:

"(l) the drawer of a bill by drawing it:
a) engages that on due presentment it shall be accepted and paid according to its
tenor, and that if it be dishonoured he will compensate the holder or any
indorser who is compelled to pay it, provided that the requisite proceedings
on dishonour be duly taken;
b) Is precluded from denying to a holder in due course the existence of the payee
and his then capacity to indorse.
(2) The indorser of a bill by indorsing it

a) Engages that on due presentment it shall be accepted and paid according to its
tenor, and that if it be dishonoured he will compensate the holder or a
subsequent indorser who is compelled to pay it, provided that the requisite
proceedings on dishonour be duly taken;
b) Is precluded from denying to a holder in due course the genuineness and
regularity in all respects of the drawer's signature and all previous
indorsement;
c) Is precluded from denying to his immediate or a subsequent indorsee that the
Bill was at the time of his indorsement a valid and subsisting bill, and that he
had then a good title thereto
The drawer and the indorser have similar obligations under the Act.
Under Section 54 of the Act the acceptor of a bill by accepting it becomes the principal
debtor on the instrument and liable to pay it
Section 54 states that:
The acceptor of a bill, by accepting it:
(1) Engages that he will pay it according to the tenor of his acceptance:
(2) Is precluded from denying to a holder in due course: This is intended to mean
someone who except for the forgery of the drawer's signature etc. would have
been a holder in due course.
60
a) The existence of the drawer, the genuineness of his signature, and his capacity
authority to draw the bill;
b) In the case of a bill payable to drawer's order, the then capacity of the drawer
to indorse, but not the genuiness or validity of his endorsement; The acceptor
is not responsible for the genuiness of endorsement
c) In the case of a bill payable to the order of a third person, the existence of the
payee and his then capacity to indorse, but not the genuiness or validity of his
indorsement.

l
l..What are the obligations of the drawer and the
endorser?
Traveller's Cheques
Traveller's cheques are widely used by business people, tourists and travelers
worldwide. Two signatures are required. One when the traveller's cheque is being
issued and the counter signature when receiving payment against the Traveller's cheque.
Traveler's cheques are not Bills of Exchange but they are regarded as negotiable
instrument. In S v Katsikari/9 (A) it was held that traveler's cheques were not Bills of
Exchange.
49
(1980) (3) SA 580
61
TOPIC 5: Cheques
Section 73 of the Bills of Exchange Act defines a cheque as a bill of exchange drawn on a
banker payable on demand. A more detailed definition of a cheque if section 3(1) is read
with Section 73 is "an unconditional order in writing addressed by one person to another
who must be a banker, signed by the person giving it, requiring the banker to pay on
demand a sum certain in money to or to the order of a specified person or to bearer.
Cheques are a narrow class of negotiable instrument but not all negotiable instruments
are cheques.
The person who draws the cheque is known as the drawer. The banker on whom the
cheque is drawn is called the drawee or the paying banker. The person to whom the
cheque is drawn payable is known as the payee. If the drawer draws a cheque payable to
himself/herself then the drawer and the payee are the same person.
Although Section 3(4) (a) of the Act states that a bill is not invalid merely because the
date is omitted one may argue that an undated cheque is not complete on the face of it.
The drawee Bank in Zambia usually do not pay against an undated cheque. It would
normally be returned with the remark "date required".
The drawer may cross a cheque:

a) to guard against fraud
b) to safeguard against loss and
c) to safeguard against theft
It is more difficult for a fraudulent person to obtain value for a crossed cheque.
When a cheque is crossed it cannot be paid over the cow1ter. It has to be presented for
payment by a Banker.
62
Section 76 to 81 deals with crossing of cheques.

1. vvhat is a cheque?
2. Who are a drawer and a drawee?
3. What arc the advantages of crossing a cheque? Discuss
TOPIC 6: Duties of the Banker
The cheques Act Chapter 424 of the Laws of Zambia provides certain statutory protection
to the Bankers, Section 2, 3, 4 and 5
2. Protection of bankers paying unendorsed or irregularly endorsed cheques etc.

1) Where a banker in good faith and in the ordinary course of business pays a
cheque drawn on him which is not endorsed or is irregularly endorsed, he
docs not, in doing so incur any liability by reason only of the absence o±:
or irregularity in, endorsement and he is deemed to have paid it in due
course
2) Where a banker in good faith and in the ordinary course of business pays
any such instruments as the following, namely:
a) a document issued by a customer of his which, though not a bill of
exchange, is intended to enable a person to obtain payment from him
of the sum mentioned in the document;
b) a draft payable on demand drawn by him upon himself, whether
payable at the head office or some other office of his bank;
he does not, in doing so, incur any liability by only of the absence ot:
or irregularity, in endorsement, and the payment discharges the
instrument
63
3. Rights of bankers collecting cheques not endorsed by holders
A Banker who gives value for, or has a lien on, a cheque payable to order which
the holder delivers to him for collection without endorsing it, has such (if any)
rights as he would have had if, upon delivery, the holder had endorsed it in blank.
4. Unendorsed cheques as evidence of payment
An unendorsed cheque or other instrument to which subsection (2) of section Two

applies which appears to have been paid by the banker on whom it is drawn is
evidence of the receipt by the payee of the sum payable by the cheque or other
instrument, as the case may be.
5. Protection of bankers collecting payment of cheques, etc.

(1) Where a banker, in good faith and without negligence-
a) receives payment for a customer of an instrument to which this section
applies; or
b) having credited a customer's account with the amount of such an
instrument, receives payment thereof for himself; and the customer has
no title, or a defective title, to the instrument, the banker does not incur
any liability to the true owner of the instrument by reason only of
having received payment thereof.
(2) This section applies to the following instruments, namely:
a) Cheques;
b) any document issued by a customer of a banker which, though not
a bill of exchange, is intended to enable a person to obtain payment
from that banker of the sum mentioned in the document;
c) any draft payable on demand drawn by a banker upon himself,
whether payable at the head office or some other office of his bank
64
3) A banker is not to be treated for the purposes of this section as having
been negligent by reason only of his failure to concern himself with
absence of, or irregularity in, endorsement of an instrument.
The Banker owes his customers the following duties:

1) The Bank owes the customer a duty to honour cheques. In Rolin V Stewart a bank
dishonoured three cheques in error. They were presented again and they were
honored.
There was no loss proved. Substantial damages were awarded to the customer.
If the Bank refuses to pay without adequate reason the Bank will be liable to its customer
in damages
In Trust Bank of Africa V Marques 50 Nicholas J stated on appeal: "A banker is of course
under a duty to honour his customer's cheques if there are available funds to meet them,
or if provision has been made for an overdraft and failure to do so may result in his
incurring a liability for damages. Such damages where the customer is a businessman or
trade include damages for injury to his credit. The right to claim such damages has been
recognized in a number of cases. It is clear from these decisions that it is not in every
case that a customer, whose cheque has been dishonoured is entitled to recover damages
for injury to his credit. He is only so entitled where he is a businessman or trader. Such
damages are therefore, special damages, that is to say damages which arose under the
special circumstances of the case".
Section 75 deals with revocation of banker's authority.

The duty and authority of a banker to pay a cheque drawn on him by his customer are
determined by:
l) Countermand of payment (stopping of cheque). This authority must be in writing and
must be brought to the attention of the teller or ledger clerk
2) Notice of the customer's death
A banker's authority to pay is also terminated by:
50
( 1968) (2) SA 796
65
a) Notice of lunacy of customer
b) Notice of presentation of a Bankruptcy Petition against him
c) Notice of a Receiving Order/ notice of winding up
d) Service of garnishee order attaching the whole of the balance
e) Notice that the customer is an undischarged bankrupt
f) Notice of a breach of trust (ie if Trustee wants to use money otherwise than
the trust
g) Where the customer's balance is insufficient to pay the cheque.
3) A Banker has a duty of secrecy to its customer. It is suppose to keep its

customer's affairs secret as the relationship between a banker and customer is
confidential. In the case of Tounier V National Provincial Bank of England:5 1
(1924) IKB 461, the plaintiff was a customer of the defendant bank. In due course
his account was overdrawn and he signed a document agreeing to pay off the
overdraft amount by weekly installments of £1. The plaintiff wrote on the
document the name and address of a certain company whose employment he was
about to enter as a traveler on a three months contract.
When the agreement to repay was not observed the acting manager of the branch
telephoned the company in order to find out the plaintiff's private address and he
spoke to two of the company's directors. The plaintiff alleged that in those
conversations the Acting Manager had disclosed that the plaintiff account was
overdrawn and that promises for repayment were not being honored and further the
Acting Manager had expressed the opinion that the plaintiff was betting heavily, the
bank having traced a cheque or cheques passing from the plaintiff's to a book maker.
As a result of those conversations the plaintiff further averred, the company refused to
renew the plaintiff's employment when the three months had expired. The plaintiff
brought an action against the bank for damages for slander and for breach of an
implied term of the contract between him and the bank that the bank could not
disclose to third persons the state of his account or any transaction relating to it.
51
(1968) (2) SA 796
66
The court of first instance entered judgment for the bank. On appeal:
Held; by the Court of Appeal, that the obligation of secrecy went beyond the state of
the account and extended to all transactions that go through the account and to the
securities, if any.
Bankers, L.J said "at the present day I think it may be asserted with confidence that
the duty is. a legal one arising out of contract and that the duty is not absolute but
qualified. It is not possible to frame any exhaustive definition of the duty. The most
that can be done is to classify the qualification, and to indicate its limits. On principle
I think that the qualifications can be classfied under four heads; (a) where disclosure
is under compulsion by law; (b) where there is a duty to the public to disclose; (c)
where the interest of the bank requires diclosure; (d) where the disclosure is made by
the express or implied consent of the customer".
There are certain instances when a banker may disclose information relating to the
customer's account.
Compulsion by Law
There are certain legislation in Zambia under which a banker may be compelled to
disclose details of account to Government authorities such as Zambia Revenue Authority,
the Anti-Corruption Commission and the Drug Enforcement Commission. In addition,
under the Evidence (Banker's Books) Act Chapter 44 of the Laws of Zambia a Bank may
be subpoenaed to produce confidential details of a customer's account. Sections 6, 7 and
8 of the Act reads:
6. A banker or officer of a bank shall not, in any legal proceedings to which the bank
is not a party, be compellable to produce any banker's book the contents of which
can be proved under this Act, or to appear as a witness to prove the matters,
transactions and accounts therein recorded, unless by order of a Judge made for
special cause.
67
7.(1) On the application of any party to a legal proceeding a court may order that such
party be at liberty to inspect and take copies of any entries in a banker's book for
any of the purposes of such proceedings.
(2) An order under this section may be made either with or without summoning the
bank or any other party, and shall be served on the bank, three clear days before
the same is to be obeyed, w1less the court otherwise directs.
8. ( 1) Where it is proved on oath to a judge or a magistrate that in fact, or according to
reasonable suspicion, the inspection of any banker's book is necessary or
desirable for the purpose of any investigation into the commission of an offence,
the Judge or magistrate may by warrant authorise a police officer or other person
named therein to investigate the account of any specified person in any banker's
book, and such warrant shall be sufficient authority for the production of any
such banker's book as may be required for scrutiny by the officer or person
named in the wmTant, and such officer or person may take copies of any relevant
entry or matter in such banker's book.
(2) Any person who fails to produce any such banker's book to the police officer or
other person executing a warrant issued under this section or to permit such police
officer or other person to scrutinize the same or to take copies of any relevant
entry or matter therein shall be guilty of an offence and liable to a fine not
exceeding two thousand penalty units or to imprisonment for a term not exceeding
one year, or both.
Public Interest
It may also be in the public's interest to disclose details of a customer's account e.g if an
account is being used to finance civil war to undermine national security.
Banker's own interest
This may be necessary in a situation e.g where the bank has to disclose in its own interest
to enforce a security for an overdraft e.g. foreclosure in the instance of a mortgage.
68
Customer's consent
If the customer consents to details of his account being released by the bank for example
in instance where the Bank is requested to provide a reference in respect of the
customer's account.

I . What duties does a Banker have to its Customers?
2. Under what circumstances can a Banker disclose confidential information
about its customer to another party?
Duties of a Customer
A customer is bound to exercise reasonable care in drawing cheques dra\Nll on his banker
so as to avoid alteration and forgeries. In the case of London Joint Sock Bank V
Macmillan & Arthur (1918) AC 777 "A confidential clerk employed by a firm of general
merchants named Macmillan & Arthur prepared a cheque for £2 payable to bearer. No
sum in words was then written on the cheque, but after it had been signed by his
employers, the clerk altered the figure to £120 and wrote the words "one hundred and
twenty pounds" in the space provided. The clerk presented the cheque and received
payment and later absconded.
Held; by the House of Lords, that the loss was caused by breach of the duty of care which
the customer owed to his banker and the banker was, therefore, entitled to debit the
customer's account with the full amount of the cheque.
69
Duty of disclose forgeries
If the customer discovers that cheques purporting to have been signed by him were
forged he has a duty to inform the bank. See Greenwood V Martins Bank Limited. 52 The
Plaintiff maintained an account with Martin's Bank. His wife kept the cheque book and
pass book and she gave him cheque forms from the cheque book when he asked for them.
Without his knowledge the wife withdrew some money from the account having forged
his signature. She confessed to him to having done so in order to help her sister in ce1iain
legal proceedings and pleaded with him not to inform the bank of the forgeries and he
agreed not to do so. He later discovered that no legal proceedings had in fact been
instituted by his wife's sister and that his wife had deceived him. Infuriated by this
discovery, he told his wife that he would go at once to the bank and report the forgery.
On his return home that evening without having gone to the bank his wife shot herself.
A few months later he brought an action against the bank for a declaration that he was
entitled to be credited by the bank with the amount of the forged cheques.
Held; that the husband as a customer of the bank, had a duty to disclose forgeries and he
was estopped from setting up the forgeries.
Promissory Note
Section 83( 1) of the Act defines a Promissory Note which is: "A promissory note is an
unconditional promise 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, to, or to the order of, a specified person or bearer".
Section 84 states that a promissory note is inchoate (inchoate means underdeveloped or in

a half formed state) and incomplete until delivery thereof to the payee or bearer.
Delivery is necessary in order that the maker is liable.
52
(l 932) 1KB 371
70
Example of a Promissory Note
Kl, 000,000.00 Lusaka

th
30 September 2006
Ninety days after date I promise to pay Jane Zimba or order the sum of One Million Kwacha
Peter James
Example of Joint note
K2, 000,000.00 Lusaka

th
30 January 2007
Ninety days after date we promise to pay James Banda or order the sum of Two Million Kwacha
Jim Brown
Mary Phiri
John Chanda
Section 85 deals with joint and several notes

I) A Promissory note may be made by two or more makers, and they may be liable
thereon jointly, or jointly and severally according to its tenor.
2) Where a note runs "I promise to pay" and is signed by two or more persons it is
deemed to be their joint and several note.
Section 86(1) states that where a note payable on demand has been indorsed, it must be
presented for payment within a reasonable time of the indorsement. If it is not so
presented the indorser is discharged. Subsections (2) and (3) deals with what is
reasonable time and notes payable on demand negotiable.
Section 87 deals with presentment of note for payment.
Subsection (1) states that where a promissory note is in the body of it made payable at a
particular place it must be presented for payment at that place in order to render the
71
maker liable. In any other case, presentment for payment is not necessary in order to
render the maker liable.
A Promissory note is a promise to pay and not an order to pay as in a Bill of Exchange.
Section 89 provides for the applicability of the rules to promissory notes and also the
provisions as to bills which does not apply to promissory notes.

1. What is a promissory note? Discuss
2. What are the implications of a promissory note made by two persons?
Lombard Banking Ltd. v Vithaldas Gorhandas & Another53 The defendants were maker
and endorser, respectively, of two promissory notes drawn in the plaintiff's favour. The
first note read; 'at 120 days after date I pay to ... ' and the corresponding part of the
second note was identical save that the word 'pay was omitted. The defendant averred
that the two documents were not promissory notes as defined under the Bills of Exchange
Ordinance, but were merely receipts for goods supplied.
Held; (a) A document can only be titled a promissory note if it contains an undertaking to
pay. No particular form of words is essential to the validity of the note, provided the
requirements of S. 81 (1) be fulfilled. It must be such as to show an intention to create a
note. Therefore; (b) Since the words 'I pay' in the first note could fairly be construed as
saying colloquially; I promise to pay' it was a valid promissory note. The omission of
the word "pay" from the second note was fatal, so that it could not be valid.
53
(1960) EALR 345.
72
SECURITIES
Introduction
Mortgages and Debentures are mentioned briefly as securities play a role in commercial
transactions. Mortgages may be dealt with in Land Law but it also touches on
Commercial Law in that e.g. a property may be mortgaged to a Bank for the purpose of
obtaining a loan to finance the operation of a commercial business.
Mortgage
Nature of a Mortgage
When one person lends money to another, he may be satisfied to make the loan without
security, or he may ask for security for the payment of the money. In the latter case even
if the borrower becomes insolvent the lender is protected as the lender has a claim to the
security which take precedence over creditors.
The most important kind of security is the mortgage. The essential nature of a mortgage
is that it is a conveyance of a legal or equitable interest in property, with a provision for
redemption, i.e that upon repayment of a loan or the performance of some other
obligation the conveyance shall become void or the interest shall be reconveyed. The
borrower is known as the "mortgagor" the lender as the "mortgagee".
The mortgagor has the protection of equity in that although the date for repayment has
passed the mortgagor is entitled to recover the property at any time after the stated date
on repayment of the loan and interest until the mortgagee obtains an order for foreclosure
from the court.
Further Charge
Where the mortgagor obtains a farther loan from the same mortgagee using the same
property as further security.
73
Second Mortgage
This is where the mortgagor obtains a loan from another mortgagee using the same
property a:; security.
Debenture
The word Debenture is of very ancient origin and appears to have been in use five
centuries ago. It is derived from debentur ("they (moneys) are due")
A debenture is an instrument issued by a company or a public body as security for a loan

or money. It contains a promise to pay the amount mentioned in it, and almost invariably
creates a charge on the whole or part of the property of the company or public body.
A Debenture is a type of security which is normally secured by a charge on property of

the compa:iy.
A Debenture is an equitable charge on some or all the present and future property of the
company. A business concern can therefore raise money without'removing any of its
property from the business
The charge remains floating and the property liquid until there is a default and the
debenture holder takes step to enforce his security. When this occurs the charge
"crystallizes" and becomes a fixed charge on the assets of the company at the time of
crystallization.
ACTIVITY 26: Questionsfor discussion
1. Give examples of instances when a manufacturing company may mortgagee~-~tsj

property to a Commercial Bank.
2. What are the advantages of a Debenture? Discuss
IL_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ · - - - - - - - - - - - ·
74

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SCHOOL OF LAW AND SOCIAL SCIENCES

'fEXT BOOKS .............................................................................................................. 5

1. THE INSURANCE ACT, NO. 27 OF 1997

2. AN ACT TO AMEND THE INSURANCE ACT - ACT NO. 26 OF 2005

3. BILLS OF EXCHANGE ACT 1882

4. THE EVIDENCE (BANKER'S BOOKS)

5. THE CHEQUES ACT - CHAPTER 424 OF THE LAWS OF ZAMBIA

1. Commercial Law in Zambia: Cases and Materials by Mumba Malila. Published

2. Commercial Law in Zambia: Essential Text by Mumba Malila

4. Bird, Modern Insurance Law, London, Sweet and Maxwell

5. D. Richardson, A Guide to Negotiable Instruments, London, Butterworths

6. G.H.L. Fricdmand 1976, The Law of Agency, 4 th edition, London, Butterworth

At the end of this unit you should be able to :

1. Demonstrate the ability to give advise on the legal requirements of insurance

A number of events in Europe that happened acted as a catalyst in the growth of

1. What is an Insurance Contract?

Definition - a Life insurance may be defined as a Contract to pay a certain sum of

Specific Types of Insurance

SCRUTTON, LJ ............... It is clearly contrary to public policy to insure against the

c) Another clause that may be found in a policy is a user clause.

In Wood v General Accident, Fire and Life Assurance Corporation 9 a policy on a

In Lucena V Craufurd11 The Crown Commissioners insured a number of enemy

The Topic of insurable interest is looked at in detail in Topic 3

Offer and acceptance

ACTIVITY 3: Questions for discussion

ACTIVITY 4: Questions/or discussion

A contract of insurance can be in any form but in practice it is embodied in a written

ACTIVITY 5: Questions for discussion

An insurable interest is essential in all insurance Contracts. It is the insured's interest in

For there to be insurable interest there must be:

The Doctrine of Uberrimae Fidei

An insurance Contract is a Contract Uberrimae Fidei. That is it is a Contract based on the

"In policies of insurance, whether Marine insurance or Life Insurance, there is an

ACTIVITY 7: Questions for discussion

ACTIVITY 8: Questions for discussion

b) Duty not to misrepresent material facts

a) the insurer may repudiate liability

IACTIVITY 9: Questions for discussion

A material statement in a claim is fraudulent if the insured either knew it to be false or

In the case of Darell v Tibbitts 27 a Landlord of property received

ACTIVITY JO: Questions/or discussion

Motor car Insurance

ACTIVITY 11: Questions for discussion

The Concept of Loss

ACTIVITY 12: Questions/or discussion

The doctrine of Proximate Cause

Warranties and conditions

A contract of insurance is avoidable if there is misrepresentation of material facts.

ACTIVITY 14: Questions for discussion

TOPIC 1: Nature of Negotiable Instruments

A chose in possession is moveable property in actual physical possession such as a herd

In Crounch V Credit Foncier of Englancf2 Blackbum J put it:

Negotiable Instruments are a small category of choses in action. Negotiable Instruments

ACTIVITY 15 : Questions for discussion

There are initially three parties to a bill as follows:

A C71VITY 16: Questions for discussion

TOPIC 2: Definition and Function of a Bill of Exchange

(4) A bill is not invalid by reason

To: George Banda

Bill payable after date

This bill is payable 30 days after 30 th April

Bill payable after sight

'Sight means the first 'sighting' of the bill by the drawee

ACTIVITY 17: Questions for discussion