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 to comply with cumbersome formalities The defences that can be raised against the person claiming payment should be kept to a minimum The title of a person who acquires them in good faith should be open to dispute in exceptional circumstances 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 Rights May sue on the cheque in their own name May present cheque for payment or negotiate it further May make certain additions to the cheque May obtain duplicate of a lost cheque Duties Holder has to present for payment within reasonable time To protest against dishonour To give notice of the cheque being dishonoured
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 Person entitled to possession 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) ie: person received it as payment