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Chapter 12 FinancingChapter 12 FinancingChapter 12
FinancingChapter 12 FinancingA. FINANCING FOREIGN TRADEB. BILLS OF
LADINGC BILLS OF EXCHANGE
The Law Governing Bills of ExchangeTypes of Bills of
Exchange
D. PROMISSORY NOTES
E. NEGOTIABILITY OF BILLS AND NOTESUnconditional Promise or
Order to PayDefinite Sum of Money or Monetary Unit of
AccountPayable on Demand or at a Definite TimeSigned by the Maker
01 Drawer
F. THE NEGOTIATION AND TRANSFER OF BILLS AND
NOTESAssignmentNegotiationForged EndorsementsLimitations on the
Excuses That Drawers and Makers Can Use to Avoid Paying Off a
Bill or Note
Liabilities of Makers, Drawers, Drawees, Endorsers, and
Accommodation PartiesThe Role of Banks in Collecting and Paying
Negotiable Instruments
G. LETTERS OF CREDITGoverning LawApplying for a Letter of
CreditDocumentary FormalitiesAdvising and Confirming Letters of
CreditThe Obligations of BanksRights and Responsibilities of the
Account PartyRights and Responsibilities of Beneficiaries
H. FINANCING FOREIGN OPERATIONS
Private Sources of CapitalGovernmental Sources of
CapitalRegional and International Development AgenciesCHAPTER
QUESTIONSREVIEW PROBLEM
International financing encompasses two kinds of activities: the
financing of foreign
trade and the underwriting of investments in foreign countries.
The first of these,
foreign trade financing, involves the underwriting, paying, and
collecting of money
for the purchase of goods and services. The second, the
capitalization of foreign
investments, involves the acquisition of debt and equity
financing to establish or
expand overseas business operations.
A. FINANCING FOREIGN TRADEA. FINANCING FOREIGN TRADEA. FINANCING
FOREIGN TRADEA. FINANCING FOREIGN TRADE
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International traders need to be familiar with the kinds of
documents, trade terms,
and financing arrangements used in international sales.
The documents used in international sales are also used in
domestic sales, but then'
use domestically is much less common. Most domestic sales are
financed through open-
account credit arrangements. That is, the buyer does not sign a
formal debt
instrument. Formalities are not needed because sellers only
enter into sales after
investigating the buyer's credit worthiness. By comparison, in
international sales,
buyers and sellers are separated both by distance and by the
differing financial
practices of their home countries. This means that it is
difficult for the seller to
determine the credit standing of a foreign buyer, and equally
difficult for the buyer
to reliably establish the foreign seller's integrity and
reputation. To compensate for
this, foreign traders use formal documents that serve to assure
the parties that their
sale will go forward as agreed. The most important of these
documents are (a) the bill
of lading, which is the transportation document and document of
title described inchapter 11; (b) bills o exchange and promissory
notes, which are, respectively, orders
to pay money and promises to pay money; and (c) the letter of
credit, which is a third
party's guarantee of a buyer's credit worthiness.
B. BILLS OF LADINGB. BILLS OF LADINGB. BILLS OF LADINGB. BILLS
OF LADING
The essential document for all international sales is the bill
of lading.bill of lading.bill of lading.bill of lading. As
described
in chapter 11, the bill of lading is a document of title. That
is,
it represents the goods.
In international trade, goods shipped from one country to
another may well be in the possession of a carrier or
warehouseman
for several weeks: from the time they are shipped to the time
they
are delivered. The bill of lading is important, therefore,
because
it lets the buyer and the seller (or their banks) exchange
control
over the goods while the goods are in the possession of the
warehouseman or carrier. As one British judge once described it,
the bill o: lading is
the "key" that permits its holder "to unlock the door of the
warehouse, fixed or
floating, in which the goods may chance to be."1
This ability to transfer title by the transfer of a bill of
lading is central to the
use of bill; of exchange and letters of credit, the two basic
financing and payment
instruments used in international trade.
C. BILLS OF EXCHANGEC. BILLS OF EXCHANGEC. BILLS OF EXCHANGEC.
BILLS OF EXCHANGE
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A bill ofbill ofbill ofbill of exchange (or draft as it is
sometimes called) is a written, dated, and
signed instrument that contains an unconditional order from the
drawer that directs
the drawee to pay a definite sum of money to a payee on demand
or at a specified
future date. It is a useful instrument because it allows one
party (the drawer) to
direct another (the drawee) to pay money either to himself, to
his agent, or to a
third party. Of course, the order is valid only if the drawee
has an underlying
obligation to pay money to the drawer. This can arise in
situations where the drawee
is holding money on account for the drawer (i.e., the drawee is
a bank), where the
drawer lent money to a drawee (i.e., the drawee is a borrower),
or where the drawer
has sold goods to the drawee and the drawee owes the sale price
to the drawer (i.e.,
the drawee is a buyer).
In the first of these situations (where the drawee is a bank),
the bill involved is
known as a check. In the second situation (where the drawee is a
borrower), the bill
is called a note. The bills referred to in the third situation
(where the drawee is a
buyer) are called trade acceptances.
Bills of exchange are important devices for facilitating
international trade because
they are negotiable instruments. A person properly holding a
negotiable instrument
takes it free of most claims or defenses that the drawer might
have that the
underlying contract was improperly performed or that the
instrument was improperly
made. This freedom from the so-called "equities" or "personal
defenses" of the drawer
makes bills of exchange more readily salable, and therefore
useful financial tools for
raising money.
The Law Governing Bills of ExchangeThe Law Governing Bills of
ExchangeThe Law Governing Bills of ExchangeThe Law Governing Bills
of Exchange
Until the middle of the seventeenth century, bills of exchange
were governed by a
single international law, the lex mercatoria.2This law defined
the bill of exchange
as an instrument that allowed apermutatio pecuniae presentis cum
absenti (an exchange
of money by one who is present with one who is absent). Because
the bill applied
specifically to an exchange between loci distantia (distant
places), it was exempt
from the medieval Christian Church's prohibition against
interest on loans. Because of
this exemption, it rapidly became the key instrument of medieval
banking.
______
1Saunders v. Maclean, Law Reports, Queen's Bench Division, vol.
11, p. 341 (1883).
2Latin: "law merchant." Common commercial rules and procedures
used throughout Europe during the Renaissance.
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In the seventeenth century, however, the rise of national laws
brought about
differences in the rules governing bills of exchange. The French
bill of exchange came
to be governed by the Savory Code of 1673, the Perfect
Tradesman, and the works of
Jousse. In Germany, the applicable law was the Wechselrecht. In
England, the courtscreated a case law that reflected the practice
in English banks.
At the end of the nineteenth century, the lex mercatoria was
codified in England in the Bills of Exchange ActBills of
Exchange ActBills of Exchange ActBills of Exchange Act (BEA) of
1882.
Today, the BEA continues in force in the United Kingdom and
in
virtually all of Britain's former colonies.
In 1896, in the United States, the National Conference on
Commissioners of Uniform Laws drafted a Uniform Negotiable
Instruments Law (UNIL), which was largely based on the BEA. By
1920,
all of the American states had adopted the UNIL. Then, in the
1940s, the UNIL was
modernized and integrated into the more comprehensive Uniform
Commercial CodeUniform Commercial CodeUniform Commercial
CodeUniform Commercial Code (UCC),
which by 1950 had been adopted in all states except
Louisiana.3
On the European continent, there were calls throughout the
latter half of the
nineteenth century for the creation of an international
negotiable instruments law.
Finally, in 1907, a conference convened at The Hague to draw up
a convention. A draft
was agreed to in 1912, but World War I interrupted ratification.
The League of Nations
then organized a series of conferences to update the 1912 draft.
In 1930, three GenevaGenevaGenevaGeneva
Conventions on the Unification of the Law Relating to Bills of
ExchangeConventions on the Unification of the Law Relating to Bills
of ExchangeConventions on the Unification of the Law Relating to
Bills of ExchangeConventions on the Unification of the Law Relating
to Bills of Exchange (ULB) were
signed.4The following year, two additional Geneva Conventions on
Unification of the
Law Relating Lo Checks (ULC) were also signed.5Within 15 years,
the ULB and ULC had
been ratified by most continental European countries, and today
they serve as the
standard laws governing bills of exchange and checks in
virtually every nation,6with
the exception of the Anglo-American common law countries.7
Although there are currently no uniform worldwide rules
governing bills of exchangeand promissory notes, there is a widely
followed set of international rules governing
the collection of checks;" the International Chamber of
Commerce's Uniform Rules for
Colleclions.9Most domestic laws allow banks to incorporate the
ICC's Rules into their
collection instructions, and this is the common practice for
international collections
worldwide.10
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3The lext of the Uniform Commercial Code is posted on the Legal
Information Institute's Web site at
http:/www.law.cornell.edu/ucc.table.html.
4The three arc the Convention. Providing a Uniform Law for Bills
of Exchange and Promissory Notes, the Convention
for the Settlement of Certain Conflicts with Billy of Exchange
and Promissory Notes, and the Convention on the
Stamp Laws inininin Connection with Bills of Exchange and
Promissory Notes.
5They are the Convention Providing a Uniform Law for Checks and
the Convention for the Settlement of Certain
Conflicts of Laws in Connection with Checks.
6For a brief history of negotiable instrument law in Europe, as
well as the text of the ULB, seeseeseesee Frederick Wal-
lace, Introduction to European Commercial Law, pp. 92-123
(1953),
7The differences between the Anglo-American rules and the Geneva
conventions (which are fairly substantial) led lo
calls in the 1950s for the drafting of a new international
convention with true international appeal. The call was
taken up belatedly by the UN Commission on International Trade
Law (UNCITRAL), which produced a final text in May
1988, in December of 1988, the UN General Assembly approved a
resolution adopting the text and opened the
conventioncalled the Convention on International Bills of
Exchange and Inter national Promissory Notes (CIBN)
for ratification. Although only 10 stales must ratify the
Convention before it will come into effect, as of 1999
only Guinea and Mexico had ratified the CIBN, and it seems
unlikely that it will come into effect anytime soon. See
Multilateral Treaties Deposited with the Secretary-General:
Status as at 30 April 1999, posted on the Internet at
http://www.un.org/Depts/Tremy/finaUls2/neivfiks/part_boo/x_boo/
x_12.html.
For a brief history and description of the CIBN, as well as the
text, see "United Nations Convention on
International Bills of Exchange and International Promissory
Notes,'" International Legal Material, vol. 28, pp.
170-211 (1989), with John Spagnoles "Introductory Note."
8Both the common law countries and the countries that follow the
continental European practice have distinct rules
governing bank deposits and the collection of checks. See, e.g.,
Article 4 of the UCC, entitled "Bank Deposits and
Collections"; and the ULC.
Types of Bills ofTypes of Bills ofTypes of Bills ofTypes of
Bills ofExchangeExchangeExchangeExchange
A bill of exchange
is an unconditional
written order. The
party creating the bill (the drawee) orders another party (the
drawee) to pay money,
usually to a third party (a payee).
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The form that a bill of exchange must take depends on the
governing law. The common
law requires only that a bill (or draft) be in writing and be
payable either to order
or to bearer.11The ULB adds to this the requirements that a bill
(a) contain the term
"bill of exchange" in the body and language of the check,12(b)
state the place where
the bill is drawn, (c) state the place where payment is to be
made, and (d) be dated.
These requirements are summarized in Exhibit 12-1.
Time and Sight BillsTime and Sight BillsTime and Sight BillsTime
and Sight Bills
Bills may be either "time bills" or "sight bills." A time
billtime billtime billtime bill is payable at a
definite future time. A sight billsight billsight billsight bill
(or demand bill) is payable when the holder
presents it for payment or at a stated time after presentment.
Exhibit 12-2 shows an
example of a time bill.
Trade AcceptancesTrade AcceptancesTrade AcceptancesTrade
Acceptances
A trade acceptancetrade acceptancetrade acceptancetrade
acceptance is the bill of exchange most commonly used in the sale
of goods.
On this bill, the seller of the goods is both the drawer and the
payee. The bill
orders the buyer the drawee to pay a specified sum of money.
The use of trade acceptance is best illustrated with an example.
SunnySales, Inc. in
California has traditionally sold raisins to GuttenTag, GmBH, in
Germany on terms that
require GuttenTag to make payment in 90 days. This year,
however, SunnySales needs
cash. To get cash, it draws trade acceptance that orders
GuttenTag to pay $ 100,000to
the order of SunnySales 90 days later. SunnySales then presents
the bill to GuttenTag.GuttenTag accepts by signing the bill on its
face and returning the bill to
SunnySales. GuttenTags acceptance creates an enforceable promise
to pay the bill
when it comes due in 90 days.
______
9ICC Publication No. 522 (1996), The Uniform Rules for
Collection was first published in 1956. The 1996 edition
was the second revision. Seethe ICC Internet Web site
athttp://www.iccwbo.org/iccpub/default.asp fur information
on this and other ICC publications.
10For example. UCC, 4-102(3), slates that the provisions in
Article 4 (Bank Deposits and Collections) of the
UCC may be varied by agreement, except that "no agreement tan
disclaim a bank's responsibility for its own lack of
good faith or failure to exercise ordinary care."
11UCC, g 3-1(14(2), provides: "A writingis (a) a draft ('bill of
exchange') if it is an order; (b) a 'check'
if it is drawn on a bank and payable on demand; (c) a
'certificate of deposit' if it is an acknowledgement by a
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bunk of receipt of money with an engagement to repay it; (d) a
'note' if it is a promise other than a certificate
of deposit."
12In the case of a promissory note, the term would be
"promissory note," and. according to the ULC, a check
requires the term "check."
The advantage
to SunnySales of
having a trade
acceptance is
that it can sell
the bill of
exchange in the
money market
more easily thanit can assign a
$100,000 account
receivable. A trade acceptance is shown in Exhibit 12-3.
When the drawee of a bill of exchange is a bank, the bill is
known as a check.check.check.check.
Unlike other bills of exchange, checks are always payable on
demand.13See Exhibit 12-
4.
______
13ULC, Article28; UCC,
3-104 (2)(b)
D. PROMISSORY NOTESD. PROMISSORY NOTESD. PROMISSORY NOTESD.
PROMISSORY NOTES
A written promise
to
pay
a
determinate
sum of money made between two parties is a promissory
note,promissory note,promissory note,promissory note, or
simply a note. The party who promises to pay is called the
maker;
the party who is to be paid is the payee. Exhibit 12-5 defines
the
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different parties to bills Of exchange and promissory notes.
The only difference between a promissory note and a bill of
exchange is that the maker
of
a
note
promises
to
personally
pay
the
payee,
rather
than
orderinga
third
party
to
do
so.
Exhibit
12
-
6
shows examples of typical promissory notes.
The rules governing bills of exchange apply to promissory notes
as well. The forms
of both instruments are also alike. Thus, whereas the common law
does not require that
a note contain the wordspromissory note, the LILB does.
Notes are used in a variety of credit transactions and are
commonly given the name of the transaction involved. For
example, a"collateral note" is one secured by personal property; a
"mortgage
note" is secured by real property; an '"installment note" is
payable in installments.
When a bank is the maker promising to repay money it has
received, plus interest,
the promissory note is called a certificate of
depositcertificate of depositcertificate of depositcertificate of
deposit (CD). CDs in amounts up to
$100,000 are customarily called "small CDs"; those for $100,000
or more, "large CDs."
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Most large CDs, and some small CDs, are negotiable. Exhibit 12-7
shows a negotiable
CD.
E.E.E.E.
NEGOTIABILITYNEGOTIABILITYNEGOTIABILITYNEGOTIABILITY
OFOFOFOFBILLSBILLSBILLSBILLS
ANDANDANDAND
NOTESNOTESNOTESNOTES
Bills of
exchange
and
promissory
notesmay be
either
negotiable
or
nonnegotiable.
For
trade to run smoothly, especially international trade, these
instruments need to be
negotiablethat is (generally speaking), as freely exchangeable
as money. Indeed, so
long as the form and content of the instruments are proper, the
law guarantees the
full transferability of the right to receive payment. If there
is any limitation on
this right, an instrument is said to be nonnegotiable.
To be negotiable, a bill or note must (a) be in the proper form
and (b) contain a
promise by the maker or drawer to make payment. The requirements
for form were
discussed earlier (see Exhibit 12-l).Tomuet the promissory
requirements, a bill or
note must do the following:
1. State an unconditional promise or order to pay
2. Stale a definite sum of money or a monetary unit of
account
3.
Be
payable
on
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demand or at a definite time
4. Be signed by the maker or drawer
Unconditional Promise or Order to PayUnconditional Promise or
Order to PayUnconditional Promise or Order to PayUnconditional
Promise or Order to Pay
A bill of note must contain a promise or an order to pay that is
unconditional.
A bill or note must contain an affirmative promise by the maker,
or an order to a
drawee, to be negotiable. The promise is inadequate if it is
only implied.
For example, an "I.O.U." only acknowledges an obligation of
indebtedness. Although
it may imply an obligation to pay, it does not contain an
affirmative undertaking to
do so. It is not, therefore, a negotiable instrument.
The promissory notes shown in Exhibit 12-6 are different because
they clearly state
that the makers promise to pay the payees. Similarly, the bills
of exchange shown in
Exhibits 12-2, 12-3, and 12-4 each order a drawee to pay a
payee.
UnconditionalityUnconditionalityUnconditionalityUnconditionality
The promise or order to pay made in a bill or note cannot be
conditioned upon the per-
formance
of
some
other
obligation.
The
reason
for
this
isbasic
to the
concept of negotiability. If the holder of a bill or note had to
determine whether a
collateral promise had or had not been fulfilled, the utility of
these instruments
would be greatly reduced.
To illustrate, if Ivan promises to pay Pierre only if Pierre
delivers goods to Ivan
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before July 4, anyone who might be interested in purchasing this
promissory note
would have to determine whether delivery was actually made. This
would be both
expensive and, if an error were made, risky. Thus, both the law
and the pragmatic
requirements of trade dictate that a bill or note containing a
promise or order to pay
that is conditioned on the performance of a collateral
obligation is nonnegotiable.
Mere reference to some other agreement, however, does not make a
bill or note non-
negotiable. It is common practice, in fact, to mention the
underlying contract that
caused the drawer or maker to issue the bill or note, either for
record keeping or for
informational purposes. Thus, statements that the bill or note
arises out of a
separate agreement, or that it is drawn under a letter of
credit, or that the ability
of the drawer or maker to perform is secured by a mortgage or a
security interest do
not affect negotiability.14
Definite Sum of Money or Monetary Unit of AccountDefinite Sum of
Money or Monetary Unit of AccountDefinite Sum of Money or Monetary
Unit of AccountDefinite Sum of Money or Monetary Unit of
Account
A bill or note must be payable in money, which must be for a
definite sum.
Both the common law and the ULB specify that the sum paid must
be money.money.money.money.15151515 The com-
mon law defines money as "a medium of exchange authorized or
adopted by a domestic or
foreign government and includes a monetary unit of account
established by an
intergovernmental organization or by agreement between two or
more nations."
10
The ULBprovides that the "usages of the place of payment"
determine the meaning and the value
of money.17
In international practice, or usage, the parties to
international bills and notes
routinely define their monetary obligations by referring to
monetary units of account
(such as the International Monetary Fund's Special Drawing Right
or the European
Union's euro) or to an ad hoc basket of several foreign
currencies (see chapter 6).
Both the common law and the ULB, accordingly, allow bills and
notes to be payable in
the currency of one country or several countries, or in a
monetary unit of accountdefined by an IGO.
Definite SumDefinite SumDefinite SumDefinite Sum
The sum to be paid must be "certain" or "determinate."18In other
words, the amount
to be paid must be ascertainable from the bill or note itself
without reference to an
outside source. For example, a promissory note that provides for
the payment of 1,000
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plus interest of 10 percent per annum until the time it is
cashed states a definite
sum because the parties can figure out the amount that is due
from the information
provided on the face of the note.
Both of the principal negotiable instruments laws set out
exceptions to this basic
rule. Both allow the parties to define the sum to be paid in one
currency (the moneyof account) while requiring payment to be made
in another (the money of payment), even
though this requires the parties to refer to exchange rates that
are not embodied in
the bill or note.19In addition, the common law allows for
payments to be made in
installments (the ULB does not).20Neither, however, permits the
use of variable
interest rates.21
______
15
UCC, 3-104(a); ULB, Article 1. Article 1 of the ULC contains the
same provision for checks.
16UCC, 1-201(24).
17ULB, Article 41.
18UCC, 3-106(1), uses the phrase "sum certain"; ULB, Article
1(1); uses "determinate sum."
19UCC, 3-107(2);ULB, Article 41.
20UCC, 3-106(l)(a); ULB, Article 5.
21UCC, 3-106(l)(a);ULB, Article 5.
For a bill or note to function reliably in commerce, the time
when it is payable has
to be ascertainable from its face.22The time requirement
actually serves several
functions. It tells the maker, drawee, accommodation maker, or
acceptor when he is
required to pay. It allows secondary parties, such as drawers,
endorsers, and
accommodation endorsers, to determine the date when their
obligations arise. Itestablishes when the statute of limitations
will run. And finally, with interest-
bearing bills or notes, it defines the period for calculating
the present value of the
instrument.
Signed by the Maker or DrawerSigned by the Maker or DrawerSigned
by the Maker or DrawerSigned by the Maker or Drawer
Bills of exchange must be signed by the drawer, and promissory
notes by their maker.
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For this purpose, a signature can be "any symbol executed or
adopted
by a party with present intention to authenticate a
writing."23Signatures do not have
to be put on bills or notes at any particular time. Bills and
notes lacking a drawer's
or maker's signature are simply incomplete, as Case 12-1
illustrates.
_______
22So long as a final definite date for payment can be
ascertained from the face of the instrument, this require-
ment is satisfied. The common law makes exceptions to this rule
for acceleration clauses (which push forward the
date when an instrument is payable in the event that an
installment payment is missed), and the common law also
allows for extension clauses (which let a maker or drawer
postpone payment for a fixed time period). UCC, 3-109
(l)(c).
23UCC, 1-201(39). No definition is given in the ULB, but
commercial practice in Europe follows the common law
usage.
_____________________________________________________________________
Case 12Case 12Case 12Case 12----1 Constantaras v.
Anagnostopoulos1 Constantaras v. Anagnostopoulos1 Constantaras v.
Anagnostopoulos1 Constantaras v. Anagnostopoulos
South Africa, Witwatersrand Local Division, 1987.
South African Law Reports, vol. 1988, pt. 3, p. 769 (1988)
The defendant, Mr.Anagnostopoutlos, signed several checks as an
accommodation maker,
or aval (that is, as surety and coprincipal). A Mr. Evangelous
Souloutas had drawn the
checks, but Mr. Ervangelous Souloutas had drawn the checks, but
Mr. Souloutas had not
signed them at the time that the defendant put his signature on
them. When the bank on
which the checks were drawn refused to pay on two of the checks,
each in the amount of
4,200 rand, the holder, Mr. Constantaras, sought to obtain
payment from Mr.
Anagnostopoulos. When Mr.Anagnostopoulos refused to pay, Mr.
Constantaras brought this
suit.
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Judge Kriegler:Judge Kriegler:Judge Kriegler:Judge Kriegler:
I turn then to consider the defense which wasthat no liability
qua aval arose
because of the alleged sequence in which the defendant and
Souloutas put their
respective signatures on the check. Souloutas had allegedly not
yet signed the checks
as drawer when defendant, by his signture over the appropriate
stamp, signified to the
world at large and in particular to subsequent holders of the
check, that he bound
himself as surety and co-principal debtor for the obligations
reflected on the face
thereof. Therefore, so it was contended, defendant's signature
was legally
ineffectual.
Of course the argument was not as bluntly put as that. Its steps
were the following.
First, a contract of aval is unique in that it is a real
undertaking of suretyship
signified on and in respect of the obligation evidenced by a
bill of exchange. That
then entails, secondly, that the document on which it is
recorded must be a bill of
exchange. Thirdly, one than goes to the definition in the Bills
of Exchange Act, 34
of 1964 to ascertain what a bill of exchange is. Reference is
then made to the
definitions in 1 of the Act of the terms "bill" and "check,"
which in turn direct
one to 2. Subsections (1) and (2) of 2 of the Act read as
follows:
(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 at a determinate
future time, a sum
certain in money to a specified person or his order, or to
bearer.
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(2), (the defendant] argues that an unsigned check is
not a bill. Therefore, so the argument concludes, the signature
of an aval put
on a check before the drawer has signed it is a nullity.
The argument then focuses on the fifth characteristic of the
bill as defined, namely
that it is to be signed by the person giving it and, drawing
support from subsection
In my view the atgument is fallacious. In the first instance
it... [gives too much
importance to] the heading to 5 2. which reads "Definition of
and requirements for a
bill of exchange."24It is clear to me that the Legislature, in
one and the same
breath, defined a bill and listed the prerequisites for its
validity. [It does not
follow] . .. that an instrument, complete and regular in every
other respect hut
lacking a signature, is some innominatel25! piece of paper, as
Mr. Roos, for the
defendant, would have it. It is simply a bill which, for lack of
a signature, is
inchoate,[26]e.g.,an unsigned check.
The use of the term "an unsigned check" is common, not only in
laymen's language but
in a legal context. There are many examples of which this case
is but one. The
defendant admitted in paragraph 2 of his opposing affidavit that
he signed ''the
checks, annexes A and B to the summons" and in paragraph 3.3
alleged that "not one of
the checkshad been signed." To my mind there is nothing
anomalous in that choice of
language.
They were, indeed, unsigned checks. If one looks at the Bills of
Exchange Act
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itself, there arc several examples of similar use of language.
Thus 16(1)
provides:
A bill may be accepted(a) before it has been signed by the
drawer
Clearly the notional lawgiver (in fact, the draftsman of 18 of
the United Kingdom
progenitor of our 16, namely in the Bills of Exchange Act 1882)"
realized that a
bill before it has been signed by the drawer, is a bill capable
of being accepted. So,
too, the opening words of & 24(1) ("If a person signs a bill
as drawer ..,") indicate
that before the drawer has signed the instrument, it is a bill.
The subtlety
necessarily involved in regarding the document as something
unknown and unnamed until
the moment the drawer has put the last dot of his signature on
it, is unrealistic, not
consonant with commercial or legal parlance and inconsistent
with the very language of
the Act.
Furthermore, the defendant unequivocally undertook specific
obligations in the
knowledge that the checks were as yet unsigned and, obviously,
before they had been
delivered he knew they had to be signed by the drawer and would
be signed by him
before they were delivered. Until delivery they would be in
(inchoate) (see 88 of
the Act), but once delivered the contract of the drawer would be
concluded. See Denis
V. Cowen, The Law of Negotiable Instruments in South Africa.2*
The learned author
points out that:
[t]here is no authority on the question whether the contract of
aval is incomplete
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and revocable until delivery.
That question does not arise in the present case. Here the
checks were delivered, as
defendant intended them to be. In my opinion the defendant's
obligations qua aval
arose at the latest when the checks were delivered. They were
delivered, bearing his
signature, recording an obligation
which he undertook to secure through his personal suretyship.
The checks were
delivered precisely as the defendant intended them to be. They
signify to the payee
and to any further holders of the checks that defendant stood
surety for the
obligations of the drawer. In my view he is bound by that
indication. It matters not
that the drawer's signature had not yet been affixed when the
aval signed on the
reverse of the checks.
The defendant was ordered to pay the plaintiff 8,400 rand, plus
interest.
______
24Omskrywing van en vereistes virn wissel in the Afrikaans text.
As to the propriety of referring to the
heading of a section as an aid in interpretation, see L.C.
Steyn, Uitleg van Wette, pp.147, 148 (5th ed., 1974)
25From Latin innominatus:unnamedoranonymous. ]
26From Latin inchoatus:has begun.It means in its early stages of
development or incipient.]
27Victoria, Anno 45-46, Chap. 16.
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no more rights in the I.O.U. than Anna had. As a consequence,
Chekhov can use Anna's
failure to make delivery of the widgets as an excuse (or
"defense") for not paying
Vanya. Vanya's only recourse is to return to Annaif Anna can be
foundand get back
whatever money he may have paid for the I.O.U.
Bankers and merchants, who are well aware of the problems that
arise in taking
instruments by assignment, are not anxious to do so. They prefer
to be paid in cash,
or by a negotiable instrumentthat is, by an instrument that is,
for most purposes,
the same as cash.
NegotiationNegotiationNegotiationNegotiation
NegotiationNegotiationNegotiationNegotiation is the transfer of
a bill or note in such a way that the recipient becomes
a holder. Unlike an assignee (who acquires only the rights of
the
assignor), a holder can acquire more rights from the transferor
than
the transferor possessed. Trie rights that a holder acquires
depend
on the manner in which the instrument was negotiated and the
governing law.
Negotiating Order PaperNegotiating Order PaperNegotiating Order
PaperNegotiating Order Paper
Order paperOrder paperOrder paperOrder paper is a
billbillbillbill or note that either (a) contains the name of
a payee capable of endorsing it, such as "pay to the order
of
Francisco Madero," or (b) contains as its last endorsement a
so-
called special endorsementthat is, for example, "pay to Otto
Bismarck." (See Exhibit
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12-8.) Order paper is negotiated by delivery and endorsement.
That is, a bill
payable to the order of Giulio Romano would be negotiated when
Giulio signed the back
and delivered it to a holder.
Negotiating Bearer PaperNegotiating Bearer PaperNegotiating
Bearer PaperNegotiating Bearer Paper
Bearer paperBearer paperBearer paperBearer paper is an
instrument that either (a) contains on its face an order to pay
the bearer or to pay in cash or (b) contains as its last
endorsement a so-called blank
endorsement, that is, the signature of the payee or the
signature of the last endorsee
named in a special endorsement. (See Exhibit 12-9.) Bearer paper
is negotiated by
delivery alone.
The use of bearer paper is riskier than the use of order paper.
If it is lost or
stolen it must still be paid, as the next case points out.
________________________________________________________________________
Case 12Case 12Case 12Case 12----2 Miller v. Race2 Miller v.
Race2 Miller v. Race2 Miller v. Race
England, Court of King's Bench, 1758.
English Reports, vol. 97, p. 398.
William Finney owed 21 pounds and 10 shillings
to Bernard Odenhany. Finney purchased a note in
that amount from the Bank of England that was
drawn upon the bank itself and that was made
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ayable, to bearer, Finney then sent the bunk's
note to Odenhany in the mail on December 11,1756. That night the
mail was robbed, and
the note in question, and several other notes, were carried off
by the robber. On
December 12, the note came into the possession of an innkeeper
by the name of Miller.
On December 13, having learned of the robbery, Finney applied to
the Bank of Englan
to stop payment on the note. The bank agreed to do so.
Shortly thereafter. Miller presented the note to the Bank of
England for payment.
The bank's clerk, who was named Race, refused either to pay the
note or return it to
Miller. Miller thereupon brought suit against Race to compel him
to make payment.
At issue was the following question: "Whether, under the
circumstances of this case,
the plaintiff had a sufficient property in
this bank note, to entitle him to recover in
the present action."
Lord Mansfield:Lord Mansfield:Lord Mansfield:Lord Mansfield:
* * *
[This case] has been very ingeniously argued by Sir Richard
Lloyd for the defendant.
But the whole fallacy of the argument turns upon comparing bank
notes to what they do
not resemble, viz. to goods, or to securities, or documents for
debts.
Now they are not goods, not securities, nor documents for debts,
nor they so
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esteemedbut are treated as money, as cash, in the ordinary
course and transaction
of business, by the general consent of mankind; which gives them
the credit and
currency of money, to all intents and purposes. They are as much
money as guineas
themselves are; or any other current coin, that is used in
common payments, as money
or cash.
... Here, an innkeeper took it, bona fide, in his business from
a person who made an
appearance of a gentleman. Here is no pretense or suspicion of
collusion with the
robberfor this matter was strictly inquired and examined into at
the trialand it
is so stated in the case, "that he took it for full and
valuable consideration, in the usual course of
business." Indeed, if there had been any collusion, or
any circumstances of unfair dealing, the case had been
much otherwise. If it had been a note for l,000 it
might have been suspicious, but this was a small note
for 21 10s only, and money was given in exchange for
it.
... A bank note is constantly and universally, both at home and
abroad, treated as
money, as cash; and paid and received, as cash; and it is
necessary, for the purposes
of commerce, that their currency should be established and
secured.
... No dispute ought to be made with the bearer of a cash notein
regard to
commerce, and for the sake of creditthough it may be both
reasonable and customary,
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to stay the payment, till inquiry can be made, whether the
bearer of the note came
by it fairly, or not.
Judgment for the plaintiff
_____________________________________________________________________
Converting Order to Bearer Paper and Bearer to Order
PaperConverting Order to Bearer Paper and Bearer to Order
PaperConverting Order to Bearer Paper and Bearer to Order
PaperConverting Order to Bearer Paper and Bearer to Order Paper
Order paper can be converted to bearer paper by an endorsement
in blank or by an
endorsement to pay to the bearer. Bearer paper can be converted
to order paper through
the use of a special endorsement, such as "Pay to John
Adams."
The manner in which a bill or note must be negotiated depends on
its character at
the time of negotiation. If it is order paper, it must be
negotiated by delivery and
endorsement; if it is bearer paper, by delivery alone. To
illustrate: A note is made
payable to Mustafa Kemal, who endorses it by signing his name on
the back. The note
can now be negotiated by delivery alone, and whoever receives it
from Kemal can also
negotiate by delivery alone. Any subsequent holder can, of
course, add a special
endorsement to convert the note back to order paper. For
example, the note may come
into the possession of Ali Jinnah, who could add the statement
"pay Ahmad Khan," sign
the note himself, and deliver it to Khan. Khan would then have
to endorse it himself
before he could negotiate the note.
EndorsementsEndorsementsEndorsementsEndorsements
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collection process. In common law countries, only a bank can
become a holder once
this endorsement has been added to a bill or note, unless the
instrument is specially
endorsed by a bank to a person who is not a bank.31Under the
ULB, anyone can become a
holder, but they can only endorse the instrument for the purpose
of making
collection.32
An endorsement prohibiting further endorsementsendorsement
prohibiting further endorsementsendorsement prohibiting further
endorsementsendorsement prohibiting further endorsements states
that the instrument may be
paid only to a particular person. An example is "Pay to Henrik
Ibsen only." This
endorsement is treated differently by the two main commercial
law systems.
In common law countries, an endorsement prohibiting further
endorsements is treated
as if it were a special endorsementthat is, as though the
example
said, "Pay to Henrik Ibsen."33The ULB treats such an endorsement
as
if it were a qualified endorsement (e.g., "Pay to Henrik
Ibsen,
without recourse"); in other words, the endorser does not
guarantee
acceptance or payment.34
An agency endorsementagency endorsementagency endorsementagency
endorsement requires the endorsee to pay the proceeds
from the negotiation of a bill or note to the endorser or to
some
third party. In common law countries, such an endorsement is
phrased as "Pay to Alexander Leslie, agent for Oliver Cromwell
[signed] Oliver
Cromwell" or "Pay to Alexander Leslie in Trust for Charles Tudor
[signed] Oliver
Cromwell." In civil law countries, the wording is "Pay to
Maximilien Robespierre, for
value in security [signed] Napoleon Bonaparte" or "Pay
Maximilien Robespierre, for
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value in pledge to Louis Bourbon [signed] Napoleon
Bonaparte."
______
30UCC, 3-206(1); ULB, Article 15.
31UCC, 4-201(2).
32ULB, Article 18.
33UCC, 3-206(1).
34ULB, Article 15.
Under the common
law and the ULB,
an agency
endorsee may
properly
negotiate the
instrument only as directed. This restriction on rights,
however, applies only to the
immediate endorsee and not to any subsequent holder.35
Forged EndorsementsForged EndorsementsForged EndorsementsForged
Endorsements
When an endorsement is forged,forged,forged,forged, the question
arises as lo who should have to sue the
forger; or, if the forger cannot be found, who has to assume
the
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loss. There are several possible ways to answer this question.
The
one that makes most sense commercially (that is, the one that is
most likely to
encourage the free transfer and exchange of bills and notes} is
lo make the drawer or
maker liable. This is the rule adopted by the ULB. The ULB makes
a forgedforgedforgedforged endorsement
fully effective, and both the person taking an instrument with
such an endorsement as
well as all subsequent holders are entitled to payment.36
Another possibility is to impose
liabilityliabilityliabilityliability on the person who was best
able to
prevent the forgery from happening. This is possibly the fairest
rule, but it also
encourages excessive and expensive litigation. It is the rule
followed in most common
law countries. As a general rule, the common law makes a forged
endorsement
ineffective, placing the burden for determining the validity of
an endorsement on the
endorsee taking an instrument from a forger. The next case
illustrates this rule.
______
35UCC, 3-206(1); ULB, Article 19.
36ULB, Article 7.
_____________________________________________________________________
Case 12Case 12Case 12Case 12----3 Mair v. Bank of Nova Scotia3
Mair v. Bank of Nova Scotia3 Mair v. Bank of Nova Scotia3 Mair v.
Bank of Nova Scotia
Court of Appeal of Eastern Caribbean Stales, Civil Division,
1983.
West Indian Reports, vol. 31, p. 186 (1983).
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Appellate Judge Berridge:Appellate Judge Berridge:Appellate
Judge Berridge:Appellate Judge Berridge:
This is an appeal from a decision of Judge Robotham dated June
18,1980 in which
judgment was given for the respondent bank in respect of a claim
by the appellant
alleging negligence and breach of duty in the sum of $6,000 and
interest, together
with costs.
The brief facts of the case are that sometime in 1974 the
appellant, an architect by
profession, engaged one Barbara Hill of Barbados, herself an
architect, to assist him
in Antigua by doing specific architectural work. Hill took up
her assignment with the
appellant who gave her an advance of $6,000 payable by check
drawn on the St John's,
Antigua, branch of the Bank of Nova Scotia for work already done
and to be done in the
future. Shortly thereafter Hill returned to Barbados following
differences which arose
between her and the appellant and in respect of which there is
litigation which is not
before the court.
The check was dated January 16, 1974 and made
payable to "Barbara Hill"; but it was altered on
the face of it by the addition of the word
"Associates" as payee, endorsed "Barbara Hill"
and deposited at the branch of the respondent
bank at Worthing, Christchurch, Barbados, on
January 23,1974 to the credit of "Barbara Mill
Associates". On January 29, 1974, the check was
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returned to the Antigua branch of the bank who deducted $6,000
from the appellant's
account and in due course the canceled check was forwarded to
the appellant who, by
letter dateddateddateddated May 7, 1974, drew the bank's
attention to the alteration and demanded
reimbursement on the grounds that (i) it was negligent in not
observing the alteration
in which event it should not have paid, and (ii) it had not
carried out his
instructions. The bank refused to reimburse the appellant and as
a consequence
proceedings were instituted by the appellant.
In arguing the ... appeal, counsel submitted that the alteration
was a material
alteration on the face of the instrument which [made it void]
under Section 64 of the
Bills of Exchange Act (of Antigua and Barbuda] the provisions of
which are similar to,
if not identical with, comparable legislation throughout the
Commonwealth. Counsel
further contended that (i) the mandate of the drawer of the
check was not
substantially carried out, (ii) the alteration was apparent,
(iii) the bank was not a
holder in due course, and (iv) the damage suffered was the
debiting of the appellant's
account with a payment to someone other than the payee stated by
the appellant.
It is pertinent at this stage to set out the provisions of
Section 64 of the Bills
of Exchange Act, which reads as follows:
(1)Where a bill or acceptance is materially altered without the
assent of all
parties liable on the bill the bill is avoided except as against
a party who has
himself made, authorized, or assented to the alteration, and
subsequent
endorsers. Provided that, where a bill has been materially
altered, but the
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alteration is not apparent and the bill is in the hands of a
holder in due course,
such holder may avail himself of the bill as if it had not been
altered, and may
enforce payment of it according to its original tenor.
(2)In particular the following alterations are material, namely,
any alteration of
the date, the sum payable, the time of payment, the place of
payment, and where a
bill has been accepted generally, the addition of a place of
payment without the
acceptor's assent.
In Vance v. Lowther,37 where an alteration related to the date
of the check, it was
held that it was material and invalidated the check; and that
the circumstance that
the plaintiff had not been guilty of negligence in taking it was
immaterial. Baron[38]
Pollock said:39
Any material alteration of a bill or note invalidates it, and
the question is, what
is the true principle on which the materiality must be
determined. The county court
judge seems to have thought that it was necessary to consider
the surrounding
circumstances in each case. In that I think he was wrong, and
that we ought to look at
the question of materiality with reference to the contract
itself, and not with
reference lo the surrounding circumstances.
But it would be unreasonable if the alteration to an earlier
date debarred the
banker form debiting the customer, if paid after the original
date.
Similar in a number of respects to the facts in the instant case
are those in
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Slingsby v. District Bank, Ltd.40
_______
37Law Reports, Exchequer's Division, vol. 1, p. 176(1876).
[38 Baron is the title for the judges of the English Court of
Exchequer.]
39Id., at p. 178
40All England Law Reports, vol. 1931, p. 143 (King's Bench,
1931).
where words were inserted between the payee's name and the words
"or order" and
endorsed to conform with the designation of the payee as
altered. It was held that the
check had been materially altered within the body of Section 64
(1) of the Bills of
Exchange Act and therefore the check had been avoided.
The materiality of the alteration being dependent upon its
character and effect, it
necessarily follows that if the mandate of the customer has been
substantially com-
plied with then the banker can charge the customer, the
alteration notwithstanding.
Authority for the foregoing is to be found in Halsbury's Laws of
England.41
I am of the opinion that the check was materially altered
without the assent of the
appellant.
To constitute an apparent alteration within the meaning of the
Bills of Exchange Act
it should be apparent upon inspection of the bill that its text
has undergone a
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change. The document itself must show that some revision of the
text has taken place
and its appearance must be consistent with the revision having
occurred after
completion or issue, although it may also be consistent with the
revision having
occurred before completion.42
An inspection of the check reveals that the alteration is
obviously in a different
handwriting form that in which the rest of the document was
drawn and it should have
been observed that it had undergone a change.
In regard to the difference between the rights of a "holder in
due course" and a
"holder" I can do no better than quote from the words of Lord
Justice Denning in Arab
Bank, Ltd. v. Ross:43
The difference between the rights of a "holder in due course"
and those of a
"holder" is that a holder in due course may get a better title
than the person from
whom he took, whereas a holder gets no better title. In this
regard a person who takes
a bill, which is irregular on the face of it, is in the same
position as a person who
takes a bill which is overdue. He is a holder, but not a holder
in due course. He does
not receive the bill on its own intrinsic credit. He takes it on
the credit of the
person who gives it to him. He can sue in his own name but he
takes it subject to the
defects of title of prior parties: see Section 38 of the Act of
1882.
In the instant case the bank took the check which was irregular
on the face of it.
The bank was not a holder in due course and cannot [therefore]
avail itself of the
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proviso to Section 64(1) of the Bills of Exchange Act.
On the question of damages, the appellant's claim is in
contract. It is a well-
established principle that whenever a party proves a breach of
contract but no actual
damage (as was contended by learned counsel for the bank) he
recovers as a rule
nominal damages only.
In the instant case the appellant claims that the damage
suffered by him is the
debiting of his bank account with an amount payable by check
drawn by him to "Barbara
Hill" and not "Barbara Hill Associates"; but, I am unable to
perceive what damage the
appellant has suffered on account of the alteration of the
check.
... In the circumstances, I would allow the appeal and vary the
order of the trial
judge by entering judgment for the appellant in the sum of $5
nominal damages....
______
41Vol. 2, p. 205, para. 380 (3rd ed).
42Automobile Finance Co. of Australia, Ltd. v. Law, Commonwealth
Law Reports, vol. 49, p. 1 (Australia, High Court,
1933) refers.
43All England Law Reports, vol. 1952, pt. 1, p. 709 at p. 717
(Court of Appeal, 1952).
There are two major exceptions to the general common law rule
that
a forged endorsement is ineffective. One is the imposter
rule.imposter rule.imposter rule.imposter rule. This
says that when a drawer, maker, or endorser draws, makes, or
endorses
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an instrument to an imposter, the imposter's subsequent
endorsement
is effective. For example, a man walks into a shop, says that he
is John Lender, a
creditor of the shop owner, Pete Gullible, and asks to be paid.
Gullible, believing
the man to be his creditor, writes a check made out in favor of
John Lender. The man
then cashes the check at a nearby supermarket and disappears.
Because the man was an
imposter, the forged signature he put on the check is effective.
Gullible cannot stop
payment and his bank must negotiate the check when the
supermarket presents it.
The second common law exception to the rule that a forged
signature is ineffective
is the fictitiousfictitiousfictitiousfictitious payee rule.payee
rule.payee rule.payee rule. This says that when the instrument is
issued in the name
of a fictitious payee, the person purporting to be that payee
can make an effective
endorsement. To illustrate: A disgruntled employee, Ann Sly,
tells her employer that
he needs to sign a check that she has made out so that she can
pay a supplier. He does
so. Ann then forges the supplier's endorsement and cashes the
check herself. In
reality, the supplier (whether or not it really exists or was a
fiction) has no claim
against Sly's employer. The supplier's forged endorsement,
however, is effective, and
the employer must honor the check when an innocent holder
presents it for payment.
EXHIBIT 12EXHIBIT 12EXHIBIT 12EXHIBIT 12----13 Liability When a
Negotiable Instrument Is Forged13 Liability When a Negotiable
Instrument Is Forged13 Liability When a Negotiable Instrument Is
Forged13 Liability When a Negotiable Instrument Is Forged
Situation CommonSituation CommonSituation CommonSituation
Common
Law ULBLaw ULBLaw ULBLaw ULB
A stolen instrument is forged. Immediate
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endorsee Drawer
The forger is an imposter. Drawer
Drawer
The forger endorses for a fictitious payee. Drawer
Drawer
The liabilities of endorsers and drawers for forged
instruments
under the common law and the ULB are compared in Exhibit
12-13.
Limitations on the Excuses That Drawers and Makers Can Use
toLimitations on the Excuses That Drawers and Makers Can Use
toLimitations on the Excuses That Drawers and Makers Can Use
toLimitations on the Excuses That Drawers and Makers Can Use to
Avoid Paying Off a Bill or NoteAvoid Paying Off a Bill or
NoteAvoid Paying Off a Bill or NoteAvoid Paying Off a Bill or
Note
The major disadvantage of taking a bill, note, or other
contractual
obligation by assignment is that the maker or drawer can raise
a
wide range of excuses for not having to pay off the instrument.
The
advantage of taking an instrument by negotiation is that many of
these excuses are
limited.44
The most extensive limitations imposed on the excuses of makers
and drawers are
those contained in the ULB. Anyone who acquires a bill or note
by negotiation is a
holderholderholderholder who is entitled to payment from the
maker or drawer. There are only three
excuses available to these parties. One is that the possessor is
not a holder because
he did not acquire title through an uninterrupted series of
endorsements. For example,
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someone possessing an instrument that is payable on its face to
one person but
endorsed on the back by another could not be a holder.
The second excuse is that the holder acquired the instrument in
bad faith. Bad faithBad faithBad faithBad faith
includes such things as the actual theft of the instrument;
having actual knowledge
that the instrument is stolen, lost, or misplaced; or having
actual knowledge that the
payee, or some prior holder, is not properly entitled to
payment.
The third excuse is that the holder acquired the instrument
through gross
negligence.negligence.negligence.negligence. This is essentially
the same as bad faith, except that the holder does not
have to have actual knowledge. He must, however, have acted in a
truly careless manner
in failing to detect some defect in the instrument or in the
rights of the maker,
drawer, or a prior holder.45These excuses are summarized in
Exhibit 12-14.
In contrast to the ULB, the common law imposes very few
limitations on the excuses
that makers and drawers can use to get out of their obligation
to pay off a bill or
note. To cut short
EXHIBIT 12EXHIBIT 12EXHIBIT 12EXHIBIT 12----14 ULB Excuses That
Drawers and Makers Can Use to Avoid Paying Bill of14 ULB Excuses
That Drawers and Makers Can Use to Avoid Paying Bill of14 ULB
Excuses That Drawers and Makers Can Use to Avoid Paying Bill of14
ULB Excuses That Drawers and Makers Can Use to Avoid Paying Bill
of
Exchange and Promissory NotesExchange and Promissory
NotesExchange and Promissory NotesExchange and Promissory Notes
Person in possession ExcusePerson in possession ExcusePerson in
possession ExcusePerson in possession Excuse
Not a holder 1. Not a holder
Holder 1. Acquired instrument in bad faith
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2. Acquired instrument through gross
negligence
______
44In the United States, the courts and statutory materials refer
to "defenses" rather than excuses. In the United
Kingdom, the phrase is "failure of equities." In the civil law
countries, the terms "defenses," "justifications,"
and "excuses" are all used. Excuses will generally be used
here.
45
ULB, Article 16.
EXHIBIT 12EXHIBIT 12EXHIBIT 12EXHIBIT 12----15 Common Law
Excuses That Drawers and Makers Can Use to Avoid Paying Bills15
Common Law Excuses That Drawers and Makers Can Use to Avoid Paying
Bills15 Common Law Excuses That Drawers and Makers Can Use to Avoid
Paying Bills15 Common Law Excuses That Drawers and Makers Can Use
to Avoid Paying Bills
of Exchange and Promissory Noteof Exchange and Promissory Noteof
Exchange and Promissory Noteof Exchange and Promissory Note
Person in Possession ExcusePerson in Possession ExcusePerson in
Possession ExcusePerson in Possession Excuse
Not a holderNot a holderNot a holderNot a holder Not a
holder
HolderHolderHolderHolder Breach of contract (including breach
of
contract warranties)
Lack or failure of consideration
Fraud in the inducement
Previous payment of the instrument
Unauthorized completion of an
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(HDC).46An HDC is a holder who acquires an instrument (1)
for
value, (2) in good faith, and (3) without notice that it is
overdue, that it has been
dishonored, or that the maker, drawer, or a prior endorser has a
valid excuse for not
paying it off.47The requirement that an HDC has to give value
for an instrument means
that someone who receives an instrument as a gift or by
inheritance can only be an
ordinary holder. Good faith means that the holder cannot have
knownor have
reasonably suspectedthat the instrument was defective.
Liabilities of Makers, Drawers, Drawees, Endorsers, and
Accommodation PartiesLiabilities of Makers, Drawers, Drawees,
Endorsers, and Accommodation PartiesLiabilities of Makers, Drawers,
Drawees, Endorsers, and Accommodation PartiesLiabilities of Makers,
Drawers, Drawees, Endorsers, and Accommodation Parties
Two kinds of liability are imposed on makers, drawers, and
endorsers of bills and
notes. One is liability "on the instrument"that is, liability
arising out of a
signature. The other is "warranty" liabilitythat is,
responsibility arising out of
the implied guarantees a person makes at the time he transfers
or presents a
negotiable instrument. In neither case, it is important to note,
is liability based on
the underlying contract.
Liability on the InstrumentLiability on the InstrumentLiability
on the InstrumentLiability on the Instrument
A person who signs an instrument has a contractual obligation to
make payment. For
makers, drawees, and accommodation parties, this obligation
is
"primary"; that is, they must make payment on
presentmentpresentmentpresentmentpresentment of the
instrument. If it is other than a demand instrument, it must
be
presented on the day it is due. If it is a demand instrument,
it
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must be presented within a reasonable time after it was
signed.
______
46A holder has the burden of proving that he is a holder in due
course. UCC, 3-307 (3).
47Id., 3-303.
______________________________________________________________________
Case 12Case 12Case 12Case 12----4 Far East Realty Investment,4
Far East Realty Investment,4 Far East Realty Investment,4 Far East
Realty Investment,
Inc. v. Court of Appeals et al.Inc. v. Court of Appeals et
al.Inc. v. Court of Appeals et al.Inc. v. Court of Appeals et
al.
The Philippines. Supreme Court, Second Division, 1988.
Supreme Court Reports Annotated, Second Series, vol. 166,p.256
(1988).
On September 13, I960, Dy Hian Tat, Siy Chee, and Gaw Suy An
went to the Manila office
of Far East Realty Investment, Inc. (Far East) and obtained a
loan in the sum of
P4,500.00 (Philippine currency), which they needed in their
business, and which they
romised to pay, jointly and severally, in 1 month's time
together with interest at
the rate of 14 percent per annum. To assure Far East that it
would be repaid, Dy Hian
Tat drew a check on his account with China Banking Corporation
(the bank), dated
September 13, 1960, for 1'4,500.UO, and Siy Chee and Gaw Suy An
signed the check on
its back as accommodation parties. The three men were to redeem
the check in 1 month's
time by paying cash to Far East in the sum of P4,500.00;
otherwise. Far East was to
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resent the check for payment at the bank.
Almost 4 years later, on March 5, 1964, Far East presented the
check to the bank for
ayment. The bank refused to pay as the account of Dy Hian Tat
had been closed for
wine time. Far East then made a demand on the Dy Hian Tut, Siy
Chee, and Gaw Suy An
for repayment of their loan. When they refused to pay, Far East
brought suit. The City
Court of Manila ruled in favor of Far East, so Dy Hian Tat, Siy
Chee, and Gaw Suy An
appealed. The Court of First Instance of Manila also ruled in
favor of Far East, but
the Court of Appeals reversed, holding that Fur East had not
presented the check for
ayment within a reasonable time. Far East (the petitioner) then
appealed to the
Philippine Supreme Court.
Justice Paras:Justice Paras:Justice Paras:Justice Paras:
The main, issue in this case is whether or not presentment for
payment and notice of
dishonor of the questioned check were made within reasonable
time.
Where the instrument is not payable on demand, presentment must
be made on the day
it falls due. Where it is payable on demand, presentment must be
made within a
reasonable time after issue, except that in the case of a bill
of exchange,
presentment for payment will be sufficient if made within a
reasonable lime after the
last negotiation thereof.48
Notice may be given as soon as the instrument is
dishonored, and, unless delay is excused, must be
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given within the time fixed by the law.49
No hard and fast demarcation line can be drawn between what may
be considered as a
reasonable or an unreasonable time, because "reasonable time"
depends upon the
peculiar facts and circumstances in each case.50
It is obvious in this case that presentment and notice of
dishonor were not made
within a reasonable time.
"'Reasonable time" has been defined as so much lime as is
necessary under the
circumstances for a reasonable prudent and diligent man to do,
conveniently, what the
contract or duty requires should be done, having a regard for
the rights and
possibility of loss, if any, to the other party.51
____
48Negotiable Instruments Law, 71.
49Id.,102.
50Arturo M. Tolentino, Commentaries and Jurisprudence on the
Commercial Laws of the Philippines, vol. 1, p. 327
(8th ed., 1986-1988).
In the instant case, the check in question was issued on
September 13,1960, but was
presented to the drawee bank only on March 5,1964, and
dishonored on the same date.
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to certify dishonor by the law of the place where the dishonor
occurs."52In the
United States, such a person is a notary public.53The
certification has to show (a)
who presented the instrument for payment, (b) the place where
this was done, and (c)
the reason given by the maker or drawee for refusing to make
payment.54
The third requirement is to give notice to the parties with
secondary liability.
This is done, initially, by notifying the drawer (if the
instrument is a bill) and the
last endorser. At the same time, any other endorser whose
address the holder is aware
of must also be notified. In turn, any endorser who receives
such a notice mustto
maintain his rights against his immediate endorsernotify that
person. In the United
States, notice has to be given within 3 business days;55in
Europe, the requirement is
2 business days.56Any form of notice is sufficient so long as it
identifies the
instrument and states that the instrument has been
dishonored.57
Warranty LiabilityWarranty LiabilityWarranty LiabilityWarranty
Liability
The most dramatic difference between negotiable instrument law
in the United States
and in Europe (including the United Kingdom) shows up in
connection with warranty
liability. In Europe, liability can arise only on the
instrument. That is, unless
someone signs an instrument, he will have no liability for its
payment. In sum, there
is no warranty liability.
In the United States, by comparison, any person who transfers an
instrument in
exchange for considerationwhich includes a transferor of bearer
paper who does not
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endorse the instrumentmakes five warranties, or implied
guarantees, to his
immediate transferee and to every subsequent holder who takes
the instrument in good
faith. These are as follows:
______
52UCC, 3-509(1).
53UCC, 3-509(1). In the United States, protest is required only
in connection with a bill of exchange (draft)
"which appears to be drawn or payable outside of... the United
States." UCC, 3-501(3).
54UCC, 3-509(2). If the maker or drawee could not be found, this
fact can be substituted for the statement of
the reason for refusal.
55anks must give notice within 1 day. UCC, 3-508(2).
56
ULB, Article 44.
57UCC, 3-508(3).
1. The transferor has good title to the instrument or is
otherwise authorized to
obtain payment or acceptance on behalf of one who does have good
title.
2. All signatures are genuine or authorized.
3. The instrument has not been materially altered.
4. No defense of any party is good against the transferor.
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5. The transferor has no knowledge of any insolvency proceedings
against the maker,
the acceptor, or the drawer of an unaccepted instrument.
The Role of Banks in Collecting and Paying Negotiable
InstrumentsThe Role of Banks in Collecting and Paying Negotiable
InstrumentsThe Role of Banks in Collecting and Paying Negotiable
InstrumentsThe Role of Banks in Collecting and Paying Negotiable
Instruments
Banks perform at least four functions in connection with the
negotiation of bills and
notes. First, they may issue instruments themselves, such as
certified checks or
certificates of deposit. Second, they may function as the drawee
on a bill of exchange
or as the acceptor of a bill or promissory note, assuming
primary liability for
payment. Third, they can act as an agent for a holder or
transferee to make
collection. Fourth, they can take an instrument as an endorsee,
paying the endorser,
and presenting the instrument for payment in their own
right.
The significance of acting as an endorser rather than as an
agent for collection
especially in connection with international transactionsis
considered in the
following case.
_______________________________________________________________________
Case 12Case 12Case 12Case 12----5 Charles R. Allen, Inc.
v.Island Cooperative Services5 Charles R. Allen, Inc. v.Island
Cooperative Services5 Charles R. Allen, Inc. v.Island Cooperative
Services5 Charles R. Allen, Inc. v.Island Cooperative Services
United States, Supreme Court of South Carolina, 1959.
South Carolina Reports, vol. 234, p. 537 (1959).
island Cooperative Services Cooperative Association, Ltd.
("Island Coop"), a Canadian
corporation, sold some seed potatoes to the Charleston County
Wholesale Vegetable
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Market, Inc. ("Vegetable Market"), of Charleston, South
Carolina, for a purchase price
of $19,620. After the potatoes had been put aboard a ship in
Charlottetown, Prince
Edward Island, Canada, for shipment to Charleston, South
Carolina, Island Coop
repared a draft (or bill of exchange) in the amount of $19,620
on February 7, 1955.
Island Coop was the drawer, the Vegetable Market was the drawee,
and the Bank of Nova
Scotia's branch office at Charlottetown, Prince Edward Island,
was the payee.
Island Coop offered this and several other drafts to the Bank of
Nova Scotia at a
discount, and the bank agreed to take them. Island Coop
delivered the drafts to the
Bank of Nova Scotia on February 7,1955, accompanied by the
following agreement:
1. The above bills, which represent amounts due to us for goods
sold and delivered,
are offered for discount. Our claims against Drawee are hereby
transferred to you
in the event of nonacceptance of any draft. The relative goods
have already been
shipped.
2. Credit Proceeds to Current A/C Savings A/C No.
The Bank of Nova Scotia endorsed the draft drawn on the
Vegetable Market and forwarded it through its correspondent,
the Bank of New York, to the South Carolina National Bank of
Charleston for collection. The Vegetable Market paid the
South Carolina Bank the full $19,620 on February 14,1955.
At the same time that this transaction was going on between
Island Coop, the
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Vegetable Market, and the three banks, Charles R. Allen, Inc.
(''Allen"), a South
Carolina corporation, brought suit for breach of contract
against Island Coop, and
won. The judgment Allen received entitled it to attach Island
Coop's assets in South
Carolina. Allen thereupon attached the $19,620 held in the South
Carolina National
Bank, claiming it was an asset of Island Coop. The Bank of Nova
Scotia disagreed, and
it promptly served a claim on Allen, stating that the proceeds
of the draft belonged
to it.
The trial court held that the Bank of Nova Scotia had taken the
draft as an agent
for collection and not as a purchaser, and therefore Island Coop
had been the owner of
the proceeds of the draft. Accordingly, the trial court held
that Allen's attachment
was proper. The Bank of Nova Scotia appealed.
Justice Moss:Justice Moss:Justice Moss:Justice Moss:
The basic question for determination in this case is whether the
appellant, Bank of
Nova Scotia, was the absolute owner of the proceeds of the draft
at the time of the
attachment of the funds by the respondent. If the appellant was
the owner thereof, and
Island Coop had no interest therein, then this action must
fail....
The appellant, in its claim to the proceeds of the draft here
involved, asserted
that under the laws of Canada that it had full and complete
ownership and title to the
draft and the proceeds thereof at the time of the attachment.
The law of Canada has
been proved to the effect that under the facts of this case
surrounding the discount
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transaction as it took place in Canada, the Bank of Nova Scotia
acquired under
Canadian law an absolute title to and ownership of the draft in
Canada at the time the
draft was discounted on February 7,1955. A consideration of the
law of Canada and of
the law of South Carolina, as applicable to factual situation
here, leads us to the
conclusion that the laws of Canada and South Carolina are in
accord. The application
of the laws of Canada or South Carolina requires us to reach the
same conclusion. We
will, therefore, as is contended for by the respondent, apply
the law of South
Carolina in this case.
It is the contention of the respondent that because the
appellant had the right, in
the event of nonpayment of the draft in question, to charge the
dishonored draft back
to the account of the depositor, that such showed that the
appellant was a collecting
agent and not the owner of the draft in question. This
contention is contrary to the
rule in this State. Likewise, the collection of interest upon
the draft in question
did not prevent the bank from becoming the sole owner
thereof.
In the case of Campbell v. Noble-Trotter Rice Milling Co., Inc.
(Ex parte Calcasieu
Marine National Bank) this Court completely answered these
contentions when it said:58
According to the prevailing view, the rule as to the passing of
title to commercial
paper, deposited and credited as cash, applies, although the
bank has the right to
charge dishonored paper back to the depositor instead of
proceeding against the
maker.
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And it has been held that an interest arrangement will not
prevent a bank from
becoming the sole owner of a draft. Thus, where the bank
advances the full amount
of a draft, it becomes the unconditional owner, though jt is
understood it will
collect interest on the amount advanced, depending upon the time
it takes for
collection.
In the case of Lawton v. Lower Main Street Bank, it is said:
59
... where an item is endorsed without restriction by a
depositor, nothing
appearing to indicate that it was received for collection, and
it is at once
passed to his credit by the bank, and he is permitted to check
upon the account,
he becomes the creditor of the bank, which, as the owner of the
paper, is not the
agent of the depositor in collecting it but collects on its own
behalf....
We think that under the authority of the case of Campbell v.
Noble-Trotter Rice
Milling Co., Inc. ... the lower court must be reversed. The only
factual difference
between the present case and the Campbell case is that in the
latter case the bank
discounted a draft with a bill of lading attached, while here it
discounted the draft
only, This factual difference does not make the case
inapplicable to the present
situation.
In the Campbell case it appears that Noble-Trotter Rice Milling
Co., Inc., a
Louisiana corporation, drew a draft on Allen Bros. Milling Co.,
Columbia, South Car-
olina, which represented the purchase price of a shipment of
rice. Attached to the
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draft was a bill of lading covering the shipment, an invoice
thereof, and a
certificate of insurance. This draft was made payable directly
to the Cal-casieu-
Marine National Bank, located at Lake Charles, Louisiana, and
was deposited... by the
Rice Milling Company in that bank, where it maintained a regular
account, and where it
had been transacting business for years. The draft, according to
the contention of the
bank, was not entered for collection, but was treated as cash
and was immediately and
unconditionally placed to the credit of Rice Milling Co. and
made subject to its
check.
______
58South Carolina Reports, vol. 188, p. 212.
59South Carolina Reports, vol. 170, p. 334.
In due course, the draft, together with attached papers, was
forwarded by the bank
for collection to the First National Bank, Columbia, South
Carolina, where it was paid
by the drawee, Allen Bros. Milling Co. The day the draft was
paid to the First
National Bank of Columbia, South Carolina, the proceeds were
attached by one M. P.
Campbell for the satisfaction of an unliquidated demand against
Noble-Trotter Rice
Milling Co. The Louisiana bank intervened, claiming the proceeds
of the draft by rea-
son of its ownership thereof. Judgment was rendered in favor of
Campbell and the case
was appealed to this Court. The question for decision was
whether the bank took the
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number of years, and over this period of time the bills of
Island Coop had been
discounted. The draft in question was handled by the discount
department rather than
by the collection department of said bank. The bank upon
discounting the draft in
question, placed it without restriction and unconditionally to
the checking account of
Island Coop and accorded to it the right to draw upon the funds,
which said right was
exercised. There is no evidence contradictory of these
facts.
... We conclude, after a consideration of all the facts in this
case, that under the
applicable law thereto, that the title to the draft in question
passed to the Bank of
Nova Scotia, and that it is entitled to the proceeds now held in
the custody of the
South Carolina National Bank in Charleston, South Carolina.
Judgment reversed.
______________________________________________________________________
G. LETTERS OF CREDITG. LETTERS OF CREDITG. LETTERS OF CREDITG.
LETTERS OF CREDIT
Assume that a buyer purchases goods overseas. When must the
buyer make payment? The
seller, undoubtedly, would prefer to be paid in advance. The
buyer, on the other hand,
would like to make sure, before paying, that (a) the goods are
actually shipped and
that (b) the goods shipped meet his contractual specifications;
and, in actuality, he
would prefer (c) to take delivery before paying.
Depend