Methods of Payment (Law of negotiable instruments) Commercial Law
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Methods of Payment(Law of negotiable instruments)
Commercial Law
Outcomes
Define a cheque and discuss the parties to a Cheque.
Discuss the essential elements of a negotiable instrument.
Define a bill of exchange.
Differentiate between a holder and a holder in due course.
Discuss the rights and duties of a holder.
Define the terms endorsement and crossing.
Differentiate between a cheque marked not transferable and one
marked not negotiable.
Discuss the effect of Section 22, 58, 79, 80 & 81 Of the Bills of Exchange
Act.
Some methods of payment
Cash
EFT & internet banking
Bills of exchange
Cheques
Promissory notes
Credit cards
Travellers’ cheques
Stop orders and debit orders
Snap scan etc
Negotiable Instruments
Cheque
Bill of exchange
Promissory note
Characteristics of a negotiable instrument
They have to be transferable without the need tocomply with cumbersome formalities
The defences that can be raised against theperson claiming payment should be kept to aminimum
The title of a person who acquires them in goodfaith should be open to dispute in exceptionalcircumstances only
Bill of exchange
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 time, a sum in money to a specified
person, or to that person’s order or to bearer
What is a cheque?
According to the Bills of Exchange Act, a cheque
is an unconditional order in writing addressed by
one person to a bank, signed by the person giving
it, requiring the bank to whom it is addressed to
pay on demand a sum certain in money to a
specified person or his order, or to bearer.
Who are the parties to a cheque?
The person who gives the order
Drawer
The bank to whom the order is addressed
Drawee bank
The person to whom payment must be made
Payee
Elements of a cheque
Order
Unconditional
In writing
Addressed by one person to a bank
Signed by the drawer
A sum certain in money
Payable on demand
To the payee or his or her order, or to bearer
Transfer by negotiation
Bearer cheque – transfer by delivery
Order cheque – transfer by endorsement and
delivery
Holder
The holder of a bearer cheque is the person in possession
The holder of an order cheque is the payee or last endorsee
Holder in due course
A holder, who has taken a cheque, complete and regular
on the face of it, become the holder before it was
overdue, and, if it was previously dishonoured, did not
have notice of it being dishonoured.
The holder in due course must also have taken the
cheque in good faith and for value and at the time the
cheque was negotiated to him/her must have had no
notice of any defect in title of the person who negotiated
it.
Rights and duties of a holder
May sue on the cheque intheir own name
May present cheque forpayment or negotiate itfurther
May make certainadditions to the cheque
May obtain duplicate of alost cheque
Holder has to present for
payment within reasonable
time
To protest against dishonour
To give notice of the cheque
being dishonoured
Rights
Duties
The special position of a holder in due
course
A holder in due course holds the cheque “free
from equities”
This means a holder in due course is not affected
by any defect in title of persons holding before him
A holder in due course may enforce payment
against all parties liable on it previously
Only absolute defences based on the cheque
can be raised against a holder in due course
Endorsement & Crossing
Only a order cheque can
be endorsed
Endorse by signing the
back of the cheque
Three types of
endorsement:
Blank
Special
Restrictive
General crossing – two
parallel lines without words
or with & Co, and
company, not negotiable
between lines
Special crossing – two
parallel lines with name of
specific bank between or
just name of bank
Marking a cheque
There are five “markings” that can be made to a cheque to restrict or exclude negotiation
“Account payee only” – means payee must be paid but can still negotiate
“Only” – makes cheque not transferable
“Not negotiable” – if uncrossed then not transferable but if crossed then can be
transferred
“Not transferable” – cheque cannot be transferred – only payee or immediate endorsee
of payee may become holder
“For collection” – makes cheque not transferable
Section 22
A forged signature is wholly inoperative and a
bank may not pay out on a cheque with a forged
signature
Section 58
Relieves drawee bank of liability if it pays out on a
cheque “in good faith and in the ordinary course
of business” if signature of endorser forged or
unauthorised
Section 79
If bank on whom crossed cheque is drawn, in
good faith & without negligence pays it (to a
bank) the paying bank (and if the cheque has
come into the hands of the payee, also the
drawer) will be entitled to same rights and be
placed in same position as if payment had been
made to the true owner
Section 80
Person taking a crossed cheque marked “ not
negotiable” cannot give better title to the cheque
than the title of the person from whom he/she took
it
Section 81
Gives the true owner of a lost or stolen cheque
(marked “ not negotiable”)a right of action
against a subsequent possessor (even if possessor
acted in good faith)
Person entitled
to possession
ie: person
received it as
payment
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