UBUNTU LEGAL NOTES
COMMERCIAL LAW II
TOPIC: NEGOTIABLE INSTRUMENT
NEGOTIABLE INSTRUMENT
An instrument is a document which physically embodies a payment obligation so that the
possessor of the instrument is presumed to be entitled to claim payment of the money it
represents. It has been described by Professor Goode as 'a document of title to money and must
be distinguished from a document of title to goods, such as a bill of lading. To be a document of
title to money an instrument must contain an undertaking to pay a sum of money or an order to
another to pay a sum of money to the person giving the order or a third person.
If an instrument is made payable to bearer, or if it is made payable to a specified person or his
order and it has been indorsed by or with the authority of that person, it is described as being 'in a
deliverable state'.
In the case of Crouch v Credit Foncier of England (1873) LR 8 QB 374, negotiable
instrument is defined as “An instrument is by the custom of trade transferable, like cash, by
delivery, and is also capable of being sued upon by the person holding it pro tempore, and then it
is entitled to the name of a negotiable instrument, and the property in passes to a bona fide
transferee though the transfer may not have taken place in market overt”.
Negotiable instruments include the following documents: (1) bills of exchange; (2) cheques; (3)
promissory notes; (4) banknotes; (5) treasury bills; (6) banker's drafts; (7) dividend warrants; (8)
share warrants; (9) bearer scrip; (10) bearer debentures; (11) bearer bonds; (12) floating rate
notes; (13) certificates of deposit.
The following documents are not negotiable instruments: (1) bills of lading; (2) dock warrants;
(3) delivery orders; (4) postal or money orders; (5) registered share certificates; (6) registered
debentures; (7) insurance policies. The list is not exhaustive.
KNOW THE MEANING OF THE FOLLOWING TERMS
BEARER: One who is the holder or possessor of an instrument that is negotiable—
for example, a check, a draft, or a note—and upon which a specific payee is not designated.
Drawer: This is the individual or entity (company) that issues the bill and gives order to pay the
sum of money. Name and address must be mentioned.
Drawee / Payor of the Bill of exchange: This is the person upon whom the bill of exchange is
drawn and who accepts and pays the bill. Name and address are generally requested.
Payee: This is the person to whom the payment is made. Name and address are generally
requested. The Drawer and the Payee is usually the same person.
UBUNTU LEGAL NOTES
Holder: The payee or an endorsee of a bill of who is in possession of it.
Endoser: an endoser is a person who is authorized to sign a negotiable instrument in order to
transfer ownership from one party to another party. The endorsement is done by the payee.
Endosee: the person receiving the instrument from the endoser.
BILLS OF EXCHANGE
The law governing the Bill of Exchange in Ghana today is the Bill of Exchange Act, 1961
(Act55). Section 1(1) of the Bill of Exchange Act, 1961 (Act55) defines a bill of exchange as 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 of money to or to the order of a specified person or to bearer.
COMPOSITION OF BILLS OF EXCHANGE
Unconditional order
The unconditional order given by the drawer to the drawee must be unconditional. An order to
pay provided funds are available', or out of a particular fund, would not be a bill. There must not
be conditions attached to the bill of exchange.
In writing
The order to pay must be in writing, which includes print. The order must not be given orally.
The bill does not have to be drawn on any particular material. However, it is doubtful whether an
electronic communication, such as an email or electronic data interchange (EDI) message, can
satisfy the statutory requirement of writing. The writing may be in any language and in any form
of words. In Standard Chartered Bank Ghana Ltd v Victoria Island Properties & Anz Grinlays
Bank Ltd [2007-2008] SCGLR 721, the court held that Electronically conveyed messages did not
fit this definition of a bill of exchange in section 1 of the Bill of Exchange Act, 1961 (Act55).
Such messages were not unconditional orders.
Addressed by one person to another
The bill of exchange must be addressed by the drawer to the drawee. Section 4(4) of the Bill of
Exchange Act, 1961 (Act55) provides that the drawee shall be named or otherwise indicated in a
bill with reasonable certainty.
Signed by the person giving it
The drawer must sign the bill personally or through an agent. Until the bill is signed, the drawer
cannot be liable on a document as a bill. Under section 21 of the Bill of Exchange Act, 1961
UBUNTU LEGAL NOTES
(Act55), the validity of a bill of exchange or liability on a bill of exchange as drawer, endorser,
or acceptor is premised on signing the Bill. According to section 22 Act55, no right to retain the
bill or to give a discharge therefor or to enforce payment thereof against any party thereto can be
acquired through or under a forged signature.
Payable on demand or at a fixed or determinable future time
It is vital that the time of payment is certain according to the terms of the bill. This renders the
bill saleable. Where time of payment is not certain from the face of the instrument it will not be
treated as a bill of exchange. Section 9(1) of the Bill of Exchange Act, 1961 (Act55), a bill is
payable at a fixed or determinable future time if it is expressed to be payable at a fixed period
after date or sight; or on or at a fixed period after the occurrence of a specified event which is
certain to happen, though the time of the happening may be uncertain. An instrument expressed
to be payable on a contingency is not a bill, and the happening of the event does not cure the
defect.
To or to the order of a specified person or to bearer
The person being paid or the payee must be specified in the bill. Where the payee is a fictitious
or non-existent person the bill may be treated as payable to bearer. An instrument drawn payable
to 'cash or order' is not a bill of exchange, as it is not payable to a specified person or to bearer ––
Orbit Mining and Trading Co Ltd v Westminster Bank Ltd [1963] 1 QB 794, CA.
Transfer of bills of exchange
A bill is negotiated when it is transferred from one person to another in such a manner as to
constitute the transferee the holder of the bill. Negotiation as used in bills of exchange context
means transfer.
Section 29(1) of the Bill of Exchange Act, 1961 (Act55) provides that a bill is negotiated when it
is transferred from one person to another in such a manner as to constitute the transferee the
holder of the bill. Under Section 97 of the Bill of Exchange Act, 1961 (Act55) "holder" means
the payee or endorsee of a bill or note who is in possession of it, or the bearer thereto.
Requirements of negotiability
Consideration must be given for it––section 25
The holder of the instrument must have acted in good faith.
The instrument must be complete and regular
The instrument must be deliverable
UBUNTU LEGAL NOTES
Bearer bills
Section 29(2) of the Bill of Exchange Act, 1961 (Act55), a bearer bill is transferred by delivery.
This means that possession of the bill must pass from one party to another. Section 6(3) of the
Bill of Exchange Act, 1961 (Act55) provides that, a bill is payable to bearer which is expressed
to be so payable or on which the only or last endorsement is an endorsement in blank. Bearer
bills are transferred by delivery, ie through the transfer of possession, whether actual or
constructive, from one person to another. Bank of England v Vagliano Brothers [1891] AC 107,
–– The House of Lords held that either would amount to a fictitious person and so the bill would
be a bearer bill, although in the circumstances of the case the ‘bills’ were not enforceable, as the
drawer had not signed them.
Order bills
A bill payable to the order of a specific payee is transferred by indorsement of the payee, or the
holder to whom the bill has been specially indorsed, and delivery of it. section 29 (3) of the Bill
of Exchange Act, 1961 (Act55), a bill made payable to a named payee cannot just be transferred.
It must be indorsed which must then be delivered. Endorsements can be either special or general.
Section 6(4) of the Bill of Exchange Act, 1961 (Act55) provides that a bill is payable to order
which is expressed to be so payable, or which is expressed to be payable to a particular person,
and does not contain words prohibiting transfer or indicating an intention that it should not be
transferable.
The difference, between a bearer bill and an order bill is that: A bill payable to bearer is
negotiable by delivery, whereas a bill payable to order is negotiated by the endorsement of the
holder coupled with delivery.
Holder
The holder is the person who has the right to enforce the promise of payment under the bill of
exchange. A holder is defined in section 97 of the Bill of Exchange Act, 1961 (Act55) as the
payee or indorsee of a bill or note who is in possession of it, or the bearer thereof.’ A mere
holder is a holder otherwise than for value, who does not claim title to the bill through a holder in
due course.
Rights of the holder According to section 36 of the Bill of Exchange Act, 1961 (Act55) a holder
has the following rights: i. The holder has right to negotiate an order bill ii. The holder may
present the bill for acceptance or payment iii. The holder can retain possession on the bill and sue
on it in his own name iv. The holder can give good discharge to the acceptor/drawee when
payment is otherwise made in due course v. Where the date of issue/acceptance has been omitted
the holder may insert it.
Holder for value
UBUNTU LEGAL NOTES
A holder for value is a person who has given consideration for it. One who has given a legal
consideration for a negotiable instrument is a holder for value. The holder of a negotiable note
taken as collateral security for a preexisting debt is a holder for value in due course of business.
Similarly, an endorsee of a negotiable note taken as collateral security for a preexisting debt,
there being no extension of time of payment or other new consideration except such as may be
deemed to arise from the acceptance of the paper, is a holder for value. Birket v. Elward, 68 Kan.
295 (Kan. 1904)].
Section 25(1) of the Bill of Exchange Act, 1961 (Act55) sets out that: Valuable consideration for
a bill may be constituted by — a) Any consideration sufficient to support a simple contract; 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.
Holder is due course
Holder in Due Course is a legal term to describe the person who has received a negotiable
instrument in good faith and is unaware of any prior claim, or that there is a defect in the title of
the person who negotiated it. Section 27(1) of the Bill of Exchange Act, 1961 (Act55) which
defines holder in due course, A holder in due course is a holder who has taken a bill, complete
and regular on the face of it, under the followings, namely (a) that he became the holder of it
before it was overdue, and without notice that is had been previously dishonoured if such was the
fact; and (b) that he took the bill in good faith and for value, and 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. The
following makes a bill defective: (i) Fraud (ii) Duress (iii)Force and fear (iv)Other Unlawful
means (v) Or for an illegal consideration (vi)Or when he negotiates it in breach of faith (vii) Or
such circumstance that amounts to fraud etc
ACCEPTANCE
Section 15(1) of the bill of exchange Act, 1961 (Act55) acceptance is the signification by the
drawee of his assent to the order of the drawer. Section 15(2) of the bill of exchange Act, 1961
(Act55) provides that an acceptance is invalid unless it complies with the following conditions,
namely (a) It must be written on the bill and be signed by the drawee. The mere signature of the
drawee without additional words is sufficient. (b)It must not express that the drawee will perform
his promise by any other means than the payment of money. There are two types of acceptance:
general and specialized acceptance.
Endorsement
An endorsement may be a signature authorizing the legal transfer of a negotiable
instrument between parties.
Section 31 of the Bill of Exchange Act, 1961 (Act55) provides that Where a bill purports to be
endorsed conditionally the condition may be disregarded by the payer, and payment to the
endorsee is valid whether the condition has been fulfilled or not.
UBUNTU LEGAL NOTES
For endorsement to be effective it must satisfy certain conditions. These conditions as laid down
in Section 30 of the Bill of Exchange Act, 1961 (Act55).
(a) It must be written on the bill itself and signed by the endorser. The simple signature of the
endorser on the bill without additional words is sufficient.
(b)It must be an endorsement of the entire bill. A partial endorsement does not operate as a
negotiation of a bill.
(c) Where a bill is payable by two or more payees or endorsees who are not partners, all must
endorse, unless the one endorsing has authority to endorse for the others. (d) Where, in a bill
payable to order, the payee or endorsee is wrongly designated or his name is misspelt, he may
endorse the bill as therein described, adding, if he thinks fit, his proper signature.
(e) Where there are two or more endorsements on a bill, each endorsement is deemed to have
been made in the order in which it appears on the bill, until the contrary is proved.
Types of Endorsement
Blank Endorsement
Section 32(1) of the Bill of Exchange Act, 1961 (Act55) provides that an endorsement in blank
specifies no endorsee, and a bill so endorsed becomes payable to bearer.
Special endorsement
Section 32(2) of the Bill of Exchange Act, 1961 (Act55) provides that a special endorsement
specifies the person to whom, or to whose order, the bill is to be payable.
Restrictive Endorsement
According to section 33 of the Bill of Exchange Act, 1961 (Act55), an endorsement is restrictive
if it prohibits the further negotiation of the bill; or expresses that it is a mere authority to deal
with the bill as thereby directed, and not a transfer of the ownership thereof.
Conditional endorsement
Section 31 of the Bill of Exchange Act, 1961 (Act55) provides that Where a bill purports to be
endorsed conditionally the condition may be disregarded by the payer, and payment to the
endorsee is valid whether the condition has been fulfilled or not.
CHEQUES
A cheque is a bill of exchange in which one party orders the bank to transfer the money to the
bank account of another party. It is a negotiable instrument that is covered under Act 55. Section
72 of the Bill of Exchange Act, 1961 (Act55) defines a cheque as a bill of exchange drawn on a
UBUNTU LEGAL NOTES
banker payable on demand. All cheques are bills of exchange, and the definition of a cheque
must be read together with that of a bill of exchange. It has all the features bills of exchange
except that it drawn on a banker.
PROMISSORY NOTES
Section 83(1) of the Bill of Exchange Act, 1961 (Act55) defines a promissory note as 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 to bearer.
Section 83(2) of the Bill of Exchange Act, 1961 (Act55) provides that an instrument in the form
of a note payable to maker’s order is not a note within the meaning of subsection (1) unless it is
endorsed by the maker.
Section 84 of the Bill of Exchange Act, 1961 (Act55) provides that a promissory note is inchoate
and incomplete until delivery of the note to the payee or bearer.
