Commercial Law 4 March 2014
Bills of Exchange There is legislation called a Bills Bills of exchange Act. A bill of exchange is an order by one person (the drawer) to another person called the drawee to some person who may be named (the payee) or to the the bearer of the bill. The payee maybe a third person or he may be the drawer. When the drawee accepts the bill he becomes the acceptor. The drawer of the bill is liable on it as soon as it is put into circulation. The drawer is the one who is paying money to the payee. Drawee only becomes liable under the bill if it is presented to him for acceptance and he accepts it. The drawee becomes liable if he accepts. If he does not accept the bill, it means the bill the bill is dishonoured, the drawee doesn‟t doesn‟t have to be a bank it can be a regular person. The primary source of law relating to Bills of exchange is Bills Bills of exchange Act. The act extends to bills of exchange, promissory notes and cheques. Some bills are presented for acceptance if it is payable at sight or on demand it is payable immediately on presentation to the drawee d rawee without any prior acceptance, at this point it it would be paid or dishonoured. A cheque is a bill of exchange payable on demand, drawn drawn by a bank presented for payment not for acceptance. Payee need not present it but can can transfer it to third party to cancel debt. Bill can be discounted to pay a debt. The person in lawful possession of a bill is called a holder, holder, can be a holder of value and a holder holder in due course. There must be a payment obligation which is unconditional and this makes it attractive in commerce (comes without restrictions). r estrictions). Obligation is substantially independent of the contract that is used to support. The obligation is largely independent of the underline transaction in which it is drawn; the bill can be enforced regardless of a breach in the underline contract. The buyer cannot refuse to honour the Bill on the grounds that goods are late or defective.
F ielding & Platt v Najjar 1969 1 WLR 357, pg 361
The plaintiff company had contracted to make and export to the defendant an aluminum extrusion press. The defendant re-assured the plaintiff that it would be lawful for him to import the plant, but asked that the plant be described falsely on the invoice as „parts for rolling mill‟. Payment was made by promissory notes. After the first two promissory notes had not been met, the plaintiff ceased production, and sued on the notes and succeeded summarily. The defendant appealed. Held: The plaintiff was entitled to payment under the first note, because it had performed its obligations under the contract, and there was no failure of consideration. However there was no such completed consideration for the second promissory note, and the defendant should be allowed to defend. The request to mis-invoice the goods, if illegal, was severable, and did not undermine the contract as a whole. To succeed in their defence of illegality, the defendant had to show that the plaintiff was aware that performance by importing the plant would be illegal, and had agreed to go ahead notwithstanding that illegality. That had not been demonstrated in this case. An inn ocent party who is ignor ant of th e f acts or ci r cumstances that woul d make per form ance of a contr act il l egal may be al lowed to r ecover money paid by him u nder the il l egal contr act.
Only in exceptional circumstances should a court deprive a claimant of judgment on a claim based on a promissory note. Lord Denning MR said: „The plaintiffs, Fielding and Platt Ltd are manufacturers of machinery. Their business is in Gloucester. In the middle of 1965 they entered into a contract with a Lebanese company called SCIALE Aluminum of Lebanon. They agreed to make and sell to the Lebanese company an aluminum extrusion press for a total sum of £235,000. The plant and equipment was to be delivered free on board at a British port. The time for
delivery was 10 1/2 months from 19 June 1965. Payment was to be made by six promissory notes given by the defendant, the managing director of the Lebanese company, Mr. Selim Najjar, personally; and he deposited shares, of his own, as security for the due payment of the promissory notes. The promissory notes were payable at intervals during the progress of the work. The first four were payable whilst the plaintiffs were making the machinery in England. Thus the first note was payable on 4 October 1965, for £23,500; the second on 4 December 1965, for £47,000, the third on 4 February 1966, for £47,000; and the fourth on 4 April 1966, for another £47,000. The fifth note was payable on 4 June 1966, for £47,000, which was just about the time when the machinery was to be delivered to the port. The sixth note, the final one, for £23,500, was payable on 4 August 1966. On 4 October 1965, the first promissory note, for £23,500, fell due. It was not paid. The defendant apologized for not paying it. He asked for a few days‟ grace. He said that had been agreed. So be it. He was given a few days Nova (Jersey) Knit v Kammgran Spinneri 1977 2 ALL ER 463 477, the
seller has the assurance of payment. English and German companies traded in partnership. They agreed that all disputes between them should be arbitrated in Germany. The English company sold machinery to the German company and by way of payment received some 24 bills of exchange. After the first six bills of exchange had been paid, the German company refused further payment on the ground that the English company had mismanaged the affairs of the partnership and that the machinery which it supplied was defective. The English company then began in England an action on the bills. The German company sought to stay the action under the provisions of the Arbitration Act. Bristow J at first instance refused the stay but his decision was reversed by the Court of Appeal.
Held: The appeal succeeded. The arbitration agreement did not extend to disputes on bills of exchange upon which, in any event, their Lordships pointed out, there was no dispute. Lord Wilberforce said: “I take it to be clear law that unliquidated cross-claims cannot be relied upon by way of extinguishing set-off against a claim on a bill of exchange. As between the immediate parties, a partial failure of consideration may be relied upon as a pro tanto defence, but only when the amount involved is ascertained and liquidated. The amount claimed here in respect of the machines is certainly neither ascertained nor liquidated, and the claim in respect of the mismanagement is one for a wholly unrelated tort, so that there would seem to be no basis for denying the appellant‟s claim that, as regards the bills, there is no dispute.” Lord Salmon (dissenting but on a different point) said: “I agree that there is no defence to the bills, since the only possible defence (which is not relied upon by the respondents) could be that their acceptance had been procured by fraud, duress or for a consideration which had failed and because the damages claimed in the arbitration are unliquidated damages and such damages cannot be set off against a claim on the bills of exchange.” Lord Russell of Killowen said: “It is in my opinion well established that a claim for unliquidated damages under a contract for sale is no defence to a claim under a bill of exchange accepted by the purchaser: nor is it available as a setoff or counterclaim. This is a deep rooted concept of English commercial law. A vendor and purchaser who agree upon payment by acceptance of bills of exchange do so not simply upon the basis that credit is given to the purchaser so that the vendor must in due course sue for the price under the contract of sale. The bill is itself a contract separate from the contract of sale. Its purpose is not merely to serve as a negotiable instrument; it is also to avoid postponement of the purchaser‟s liability to the vendor himself, a postponement grounded upon
some allegation of failure in some respect by the vendor under the underlying contract, unless it is total or quantified partial failure of consideration.” There is an exception, where breach gives rise to total failure or consideration or partial failure in a quantified amount. A bill of exchange is autonomous for two reasons: -
The bill maybe negotiated and fall into the hands of an innocent third party who is unaware of disputes within contract. In consumer transactions cheques are used, cheques are not usually negotiated.
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The bill is treated as good as cash, the payee should not be in worst a position than if he had received money
A bill of exchange is an order by one person to pay another. A promissory note is merely a promise to pay money given by one person to another. Paper money is form of a promissory note- promise by BOJ to pay banks. Definition and requirement
Section 3 of the Bill of Exchange Act defines what a bill of exchange is. Section 73says a cheque is a bill of exchange drawn on a banker payable on demand. A document that does not is not a bill of exchange. -
Unconditional order- the bill must order payment, must not be contingent, it is not a request. Cannot say give Mary if money is in a particular fund?
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The order must be in writing, it may be in print. No requirement that states where it must be printed
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Must be addressed from one person to another
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Section 5, drawer and drawee must be different
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Bill must be signed by the drawer. Drawer can sign through an agent. If signature if forged, the drawer is not liable. Person signing is liable unless
they state they are signing in a representative capacity section 26. Forged signature renders the bill inoperative see section 25. -
Where a person signs a bill as drawer, endorser acceptor, and adds words to his signature indicating that agent or in the signs for or on behalf of a principal, or in a representative character, he is not personally liable thereon; but the mere addition to his signature of words describing him as an agent, or as filling a representative character, does not exempt him from personal liability. In determining whether a signature on a bill is that of the principal or that of the agent by whose hand it is written, the construction most favourable to the validity of the instrument shall be adopted
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. Elliott v Bax Ironside 1925 2 KB 301 Directors had accepted a bill on behalf of the company. The drawer required the directors to indorse the bill personally, and they did so, signing the name of the company as well as their own names. They were held personally liable on the indorsement, on the basis that the company was already liable on the bill by virtue of the acceptance.
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Must be payable on demand or on a fixed or determinable date. See section 10
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A bill must have a date, or there must be an event providing that the date is not contingent, the date must be served. Hong Kong & Shanghai Banking Trade Corp v GB trade co 1988 CLC 238
Bills had been drawn using a printed form which provided that they were payable „at….sight‟. The drawer had inserted the words ‟90 days after acceptance‟ between the words „at‟ and „sight‟ was partially overtyped. It was argued that the documents were not bills within the statutory definition because they were payable ‟90 days after acceptance‟ and therefore payment depended on a contingent event. The Court of Appeal explained that the ruling requiring payment to be due on a determinable
date is required because it is necessary for a number of purposes to determine the maturity date of the bill. See pg 626
A similar approach was taken in Novaknit Hellas SA v Kumar Bros International Ltd 1998 CLC A series of bills drawn under a sale contract were stated to be payable either ‟60 days from shipment‟ or „60 days from presentation of documents‟. Under the sale contract the bills were to be presented for acceptance with shipping documents relating to the goods. On this basis the Court of Appeal held that bills payable ‟60 days from presentation of documents‟ had the same effect as if they had been made payable ‟60 days from sight‟, since the bills would be presented for acceptance at the same time as the shipping documents.
Additional Notes A promissory is payable on or before date is not valuable. This may also apply to a bill. 1. A bill must order payment to or to the order of a specific person so it can be payable to a named payee or his order this is transferable. If it says to a payee only it is not transferable. If it is payable to bearer it is transferred by delivery and any person to who transferred can enforce it. 2. The order must be to pay “a certain sum of money”.
Sec 9 to amount to be paid must be certain though payment could be by installments or in another currency. An order to pay and do something else is not valid (conditional)
Read incomplete Bill and Transfer of a bill
Types of holders of a Bill
Holder is the person entitled to enforce it by him presenting it for payment to the drawee and if it is dishonored he can take steps to institute proceedings to enforce it. Act defines a holder as a bearer of a bill or payee‟s endorsement of an order. 1. Mere holder: is a holder otherwise than for value who does not claim title through a holder in due course. His rights are limited a. Can Transfer it by delivery/endorsement. b. Can insert the date c. Can present it for payment
2. Holder for value who can enforce payment by showing he provided consideration and so qualified as a holder for value… a. Any consideration sufficient to support a simple contract b. An antecedent debt…, maker or negotiator of the bill and not that of a rd
3 party. The debt must be paid by the person liable on the bill. Oli ver v Davi es 1949 2KB 727 Di amond v Gr aham 1968 1WLR 1061
c. A holder is taken to provide consideration for a bill if the consideration had been at any time after for if so he can rely on consideration given by a previous party.
1991 1Bank LR, 74 M K I nternational v Housing Bank
3. The holder in due course is in a privilege and protected position. Sec 29. He holds the bill free from any defect by prior parties and free from personal defenses available to previous pries e.g. partial or total consideration
Qualified he must have taken a bill complete and regular on the face of it and he becomes a holder. a. Before it was overdue and without notice of it previously
being
dishonored b. He took the bill in good faith for value and at the time the bill was negotiated to him he had no notice of any defect in title of the person who negotiated. A person seeking to enforce a bill must satisfy each of the following 1. Must be holder of the bill; a stronger the holder to better to enforce it. 1926 670 HL Re Jones v War ing Jade I ntern ation al Steel v Rober t N i cols Steel 1978 3All ER 104
2. The bill must be regular and complete on the face of it e.g. A missing endorsement makes the bill irregular thus the bill is incomplete. It is also incomplete if details are missing e.g. the payee and the amount missing except to the date as it can be inserted. 1752 2QB 106 Ar ab Bank L td v Russ 3. The bill must not have been overdue at the time of transfer e.g. check goods for six months. Bill in demand in circulation for a long time. Sec 36(3) 4. The holder must have been no notice of persons of dishonor.
5. The holder must take the bill with no notice of defect and in good faith. Sec 29(4) 1877 2App CAS Jon es v Gordon 6. The holder must take bill for value and to qualify as a holder for value must provide consideration; can rely on consideration of previous holder. 1992 2Bank LR 11 Cli ff ord Chance v Sil ver Bar clays Bank v Astley Tr ust 1970 2QB 527
Section 83 promisory note
