Negotiable Instruments

Business has long needed a way to pay and to give credit without handing over cash. The answer is a piece of paper that carries a promise or an order to pay, and that can be passed from hand to hand as money would be.

The law gives such paper special rules: its holder can sue in his own name, and a person who takes it honestly and for value can get a better title than the person who gave it to him. That is the idea of a negotiable instrument. The cheque is the best-known example, and the bill of exchange is the model from which the rules are drawn.

This topic covers the meaning and attributes of negotiable instruments, their types, the definition and requirements of a bill of exchange, its parties, order and bearer bills, acceptance and presentation, the types of bill, endorsement and negotiation, capacity and liability, signatures and forgery, the holder, holder for value and holder in due course, discharge, dishonour, and noting and protest. Cheques and promissory notes are in the next topic.

Negotiable instruments: meaning and attributes

A negotiable instrument is a financial instrument whose full title is transferable by mere delivery, if it is a bearer instrument, or by endorsement completed by delivery, if it is an order instrument, with the result that complete ownership and legal property passes free from equities to the transferee, provided he takes it complete and regular on its face, before it is overdue, in good faith and for value.

November 2020 asked for the definition (5 marks), and May 2015 asked for three characteristics (6 marks).

• It is usually in writing, and works as a substitute for money and a medium of exchange.
• It is a chose in action: the rights in it can be enforced only by court action.
• It is an exception to the rule nemo dat quod non habet. A thief who holds a negotiable instrument can pass good title to a person who takes it in good faith, without notice and for value.

Types

1. bills of exchange;
2. cheques;
3. promissory notes;
4. bearer bonds;
5. treasury bills; and
6. dividend warrants.

March/July 2020 Section A asked which of a list is a type of negotiable instrument. A bill of lading, a postage stamp and a credit note are not, and a treasury bill is.

Attributes of a negotiable instrument

1. Title passes by mere delivery if it is a bearer instrument.
2. If it is an order instrument, title passes by endorsement and delivery. A bearer instrument is drawn and payable to bearer and needs no endorsement. An order instrument is drawn or endorsed to a named person or his order.
3. No notice of the transfer needs to be given to the persons liable before the transferee establishes his title.
4. A transferee in good faith, without notice and for value can acquire a better title than his transferor and is not affected by prior equities. Under section 92 of the Bills of Exchange Act, a thing is done in good faith where it is done honestly, whether negligently or not.
5. The transfer must take place before the instrument is overdue. An instrument is overdue after maturity.
6. A holder can sue in his own name.
7. There must be no indication on its face that makes negotiability impossible. A cheque marked “Not Negotiable” is not a negotiable instrument.
8. A restriction on transferability, such as “Account Payee Only” or “Pay B only”, takes away negotiability.

The bill of exchange

Section 3 of the Bills of Exchange Act defines a bill as an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person, or to bearer.

The requirements

May 2018 asked the examiners to comment on three bills (2 marks each), and they held:

• “Please pay Kwame ₦1,000,000” is valid. The word “please” is a word of courtesy, and the instruction is a command.
• “Pay James ₦5,000 provided the receipt at the foot is signed” is invalid, because the order is conditional.
• “Pay Jossy ₦10,000 ten days after the death of his father” is invalid, because the time of payment is not determinable.

Parties to a bill

1. The drawer: draws and signs the bill, giving the order to the drawee to pay.
2. The drawee: the person ordered to pay, who is liable to pay the face value on maturity once he has accepted.
3. The payee: the person entitled to receive the face value.

May 2016 asked for these three (3 marks).

Order bills and bearer bills

Acceptance and presentation

Acceptance is the drawee’s signification of his assent to the order of the drawer (section 17(1)). It is also a promise by the acceptor to the payee and every later holder to pay the face value according to its terms. It may be made by writing “accepted” on the face and signing, or by just signing across the bill. Until acceptance the drawee is not liable.

If he refuses, the drawer and endorsers become liable, and the holder must give notice of dishonour.

Presentation for acceptance (sections 39 and 40)

A bill must be presented for acceptance where:

• (a) the bill expressly says it must be
• (b) it is payable after sight, so that maturity can be fixed
• (c) it is payable elsewhere than at the drawee’s place of business or residence

A bill payable after sight must be presented within a reasonable time, or the drawer and prior parties are discharged.

It is generally wise to present without delay, since maturity runs from acceptance.

Types of bill (May 2015, 5 marks)

• Inland bill: drawn or payable within Nigeria.
• Foreign bill: drawn outside Nigeria.
• Inchoate (incomplete) bill: lacking a material particular. The holder has prima facie authority to fill in the omission within a reasonable time.
• Accommodation bill: signed by an accommodation party who has not received value, for the purpose of lending his name.
• Order bill and bearer bill, as above.

Endorsement and negotiation

A bill is endorsed when the holder signs on the back. Endorsement transfers title from the endorser to the endorsee. Every signature on the back is an endorsement, even if placed there for identification or as a receipt, with animus indorsandi, the intention of endorsing.

Requisites of a valid endorsement (section 32)

1. It must be written on the bill and signed by the endorser. A simple signature is enough.
2. An endorsement on an allonge, or on a copy of a bill where copies are recognised, is treated as on the bill.
3. It must be of the entire bill. A partial endorsement does not operate as negotiation.
4. If the bill is payable to two or more payees who are not partners, all must endorse unless one has authority for the others.
5. It may be in blank, special, or restrictive.

Negotiation (section 31(1))

A bill is negotiated when it is transferred so as to make the transferee the holder: by delivery of a bearer bill, or by endorsement and delivery of an order bill. A bill ceases to be transferable if it contains words prohibiting transfer, such as “Pay B only” or “Not Transferable”.

It ceases to be negotiable if it bears evidence that destroys negotiability, such as a “Not Negotiable” crossing. But it may still be transferred, and the transferee gets no better title than the transferor.

Capacity, liability and signatures

• Capacity to incur liability on a bill is the same as capacity to contract (section 22(1)). A corporation is not liable as drawer, acceptor or endorser unless it is legally competent. If a bill is drawn or endorsed by an infant or an incompetent corporation, the holder can still enforce it against any other party, though not the infant or the corporation.
• The drawer promises that the bill will be accepted on due presentment and paid on due presentment. He is liable only after presentment and notice of dishonour.
• The acceptor undertakes to pay according to the tenor of his acceptance. He is liable as soon as the bill is due, whether presented or not.
• The endorser gives the same promises as the drawer and is liable only on due presentment and notice of dishonour. His position is like a guarantor’s, and one who pays a dishonoured bill may recover from the drawer or an earlier endorser.
• A person is not liable on a bill he has not signed or authorised another to sign. A person who signs in a trade name or assumed name is liable as if he had signed in his own name. The signature of a firm’s name is the signature of all persons liable as partners (section 23).
• A forged or unauthorised signature is wholly inoperative (section 24). No rights can be acquired or enforced through it.

The holder

A holder is the payee or endorsee of a bill who is in possession of it, or the bearer. A person holding under a forgery, or one who has stolen a bill payable to another’s order, is not a holder but a wrongful possessor. May 2019 asked who a holder is and two of his rights.

Rights of a holder

1. to sue on the bill in his own name;
2. to sue any party who signed before him; and
3. if he is a holder in due course, to hold the bill free from any defect of title of prior parties.

Holder for value

Under section 27 a holder for value is a holder of a bill for which value has at any time been given, as regards the acceptor and all parties who became parties before that time. The current holder need not have given value himself. Value is any consideration sufficient to support a simple contract, and an antecedent debt or liability is value.

A holder for value cannot acquire a better title than his transferor.

Holder in due course

A holder in due course holds the bill free from all defects and can enforce payment against all parties. He is a holder who has taken a bill:

1. complete and regular on its face;
2. before it was overdue;
3. without notice of previous dishonour;
4. in good faith;
5. for value; and
6. without notice of any defect in the transferor’s title.

There is no holder in due course where the bill is marked “Not Transferable” or “Pay Brown only”, or carries the forgery of an essential signature. A payee cannot be a holder in due course, because the bill is issued to him and not negotiated.

Discharge of a bill

A bill is discharged when all rights of action on it are extinguished. November 2022 asked for four circumstances. They are:

1. Payment in due course by or for the drawee or acceptor, at or after maturity, to the holder, in good faith and without notice that his title is defective (section 59(1)).
2. The acceptor becomes the holder of it in his own right, at or after maturity.
3. The holder renounces his rights against the acceptor absolutely and unconditionally, at or after maturity, in writing or by delivering the bill to the acceptor.
4. Intentional cancellation by the holder or his agent. An unintentional cancellation, or one made by mistake or without authority, is inoperative, and the burden of proof is on the party who alleges it.
5. Material alteration, such as a change of the date or amount, without the assent of all parties liable. All parties liable before the alteration are discharged, but not those who became liable by negotiation after it.

Dishonour, notice, noting and protest

A bill is dishonoured:

• by non-acceptance, where the drawee refuses or fails to accept it when duly presented, or does not accept within the customary time. The holder has a right of recourse against the drawer and endorsers; or
• by non-payment, where the acceptor does not pay on the due date when duly presented. There is an immediate right of recourse against the drawer and endorsers (section 47(2)).

Notice of dishonour

The holder must give notice of dishonour to the drawer and to each endorser. A drawer or endorser who is not given notice is discharged (section 48). If the bill was dishonoured by non-acceptance and notices were given, notice of later non-payment is not needed unless the bill was accepted in the meantime.

Noting and protesting

Noting is a note made on a dishonoured bill, usually by a notary public or solicitor, recording that it was presented for acceptance or payment and refused, to obtain official evidence of dishonour. The holder applies to the notary, who presents the bill again and, if it is still refused, notes the date, his charges and his initials on the bill, on the day of dishonour.

A protest, with a copy of the noted bill, is then sent to those the holder wants to make liable. Noting and protest are required only for foreign bills and are optional for inland bills.

Working through the rules

Is it a valid bill?

Is the holder a holder in due course?

Qualified or general acceptance?

Notice of dishonour

A bill drawn by D, endorsed by E1 and then E2, is dishonoured by the acceptor on the due date. The holder gives notice to D and E1, but forgets E2. E2 is discharged. D and E1 remain liable. The holder should give notice to every party whom he wants to hold liable.

Worked problems

Problem 1: three bills

1. Kwame. Valid. “Please” is courtesy, and the instruction is a command to pay a sum certain.
2. James. Invalid. A valid bill is an unconditional order, and this is conditional on a signed receipt.
3. Jossy. Invalid. The time must be fixed or determinable, and the date of a person’s death is not.

Problem 2: the stolen bill

1. The rule. A negotiable instrument is an exception to nemo dat. A transferee who takes in good faith, without notice and for value can acquire a better title than his transferor.
2. The application. The bill is a bearer bill, so it passes by delivery. Bola took it complete and regular, before it was overdue, in good faith and for value.
3. Advice. Bola is a holder in due course and holds free from the defect in the thief’s title, so Ade cannot recover the bill from him. Ade must look to the thief.

Problem 3: the forged endorsement

1. The rule. A forged signature is wholly inoperative (section 24), and no rights can be acquired through it. There can be no holder in due course where an essential signature is forged.
2. Advice. Peter is not a holder in due course, because he is a wrongful possessor, not a holder. He may sue the thief.

Problem 4: the unnotified endorser

1. The rule. The holder must give notice of dishonour to the drawer and each endorser, and a drawer or endorser who is not told is discharged (section 48).
2. Advice. If no notice was given, the drawer is discharged and the holder may sue only the acceptor.

Questions that have been asked on this topic, and how to answer them

Common mistakes in the exam

• Calling a bill of lading or a postage stamp a negotiable instrument.
• Saying a bill is valid though it is conditional or has an indeterminate date.
• Saying the drawee is liable before accepting.
• Confusing general and qualified acceptance.
• Saying a payee can be a holder in due course.
• Forgetting that a forged signature is wholly inoperative.
• Saying notice of dishonour is optional. A party not given notice is discharged.
• Saying noting and protest are always required. They are required only for foreign bills.
• Confusing transferability and negotiability. “Not Negotiable” keeps transferability but not a better title.

Quick revision

• Negotiable instrument: bearer (delivery) or order (endorsement and delivery), free from equities, good faith and value, exception to nemo dat. Types: bills, cheques, promissory notes, bearer bonds, treasury bills, dividend warrants.
• Bill (s.3): unconditional order, in writing, signed, demand or determinable time, sum certain, to order or bearer. Parties: drawer, drawee, payee.
• Acceptance: general or qualified. Endorsement: blank, special, restrictive. Forged signature inoperative.
• Holder in due course: complete and regular, not overdue, no notice of dishonour, good faith, value, no notice of defect. Payee cannot be one.
• Discharge: payment in due course, acceptor holder, renunciation, cancellation, material alteration. Dishonour: notice to drawer and endorsers. Noting and protest: foreign bills.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Section A style: multiple choice

Section B style: written questions

Model answers

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