BANKING LAW GROUP

8
 NEGOTIABLE
INSTRUMENTS
GROUP MEMBERS
 KIARIE CHARLES MUIRURI G34/144946/2022
 TERENCE MUGUBI MAGALO G34/139187/2020
 JOHN PETER OMONDI G34/142281/2021
 MOGOHA DIANA KERUBO G34/142093/2021
 ROSE MBURA NJUKI G34/143175/2021
 HOWARD ONYINO OLUME G34/37212/2013
 OJALL RICHARD ODAWA G34/142184/2021
 INGIDA PATIENCE IRAVUHA G34/141501/2021
 Negotiable instruments
 Overview of Property Rights -Law recognizes rights over both real and personal property.
 Personal property is divided into two categories:
 Choses in Possession: Tangible property with physical existence
 Choses in Action: Intangible property rights that can be enforced through legal action.
 Negotiable Instruments
 Documents representing property rights over incorporeal things (choses in action).
 Freely used in commercial transactions and recognized by law as a means of payment.
 No clear definition in Kenyan legislation.
 Principal Legislation
Key Legislation:
Bills of Exchange Act: Kenya’s main legislation on negotiable instruments, modeled after the UK’s Bills of
Exchange Act 1882.

Core Instruments:
Bills of Exchange
Cheques
Promissory Notes
Other Recognized Negotiable Instruments

 Additional Instruments:  Non-Negotiable but Transferable:

 Treasury Bills  Bills of Landing
 Banker’s Drafts  Delivery Orders
 Bank Notes  Postal or Money Orders
 Certificates of Deposit  Insurance Policies
 Share Warrants
 Dividend Warrants
 Features of Negotiable Instruments
 Transfer of Rights : Rights can be transferred with the instrument; the holder can transfer rights to
another party
 Enforceability: Rights in negotiable instruments are unenforceable unless the holder possesses the
instrument.
 Issuance Based on Contracts:
Negotiable instruments often arise from prior contracts (e.g., sales, leases, loans).
General contract rules apply unless excluded by specific laws governing the instrument.
 Nemo Dat Quod Non Habet Rule
 The rule states that no one can transfer a better title than they possess.
 However, holders in due course can acquire rights free from prior claims if obtained in good
faith.
 Bills of exchange

A bill of exchange is an unconditional written order directing a specific person or entity to pay a
specified amount to another party (the payee) upon demand or at a specified future date.
Essential for handling payments in business dealings.
Facilitates trade by allowing parties to postpone payments while maintaining trust in credit
agreements.
Role in Trade
 Global Trade:
 Provides a safe and reliable method for cross-border transactions.
 Domestic Trade:
 Useful in large-scale transactions or situations involving late payments.
 Electronic Payment Impact:
 While electronic methods have gained traction, bills of exchange remain significant in
various contexts
Kenya's Bills of Exchange Act:

•Modeled after the English Bills of Exchange Act of 1882.

•Ensures alignment with common law principles for consistency in cross-border transactions.

Significance of Uniformity:
•Facilitates international trade by providing a coherent legal framewo rk.
Key Components of a Bill of
Exchange
Unconditional Order:
 Must be clear and without any conditions.
 Sum Certain:
 Must explicitly state the amount to be paid in specific monetary figures.
 Payment in Cash:
 Payments must be made in legal tender recognized by the issuing authority.
 Payment Schedule:
 Must indicate whether payment is due on demand or at a specific future date.
 Place of Payment:
 Must specify where the payment is to be made.
Types of Bills of Exchange
 Types of Bills of Exchange
1. Time Bills: Payable at a certain future date, with a grace period between issuance and
payment.
2. Demand Bills: Payable at any time after issuance; payment can be demanded immediately.
 Legal Obligations
Acceptance and Obligation:
 A legally binding obligation arises when the drawee accepts the bill.
 The drawee must honor the bill, creating a right for the holder to demand payment.
 Rights upon Dishonor:
 The holder can protest for dishonor if the drawee refuses to accept or pay.
 Current Challenges
 Impact of Digital Transactions:
Traditional bills of exchange face challenges due to the rise of online banking and digital
payments.
 Adaptation in Sectors:
Still relevant in exports and agriculture, but there’s a gradual shift towards computerized payment
methods.
 Issues of Fraud:
Concerns over misuse and fraud continue to pose challenges
 Promissory notes
 A formal financial instrument where one party (the maker) commits in writing to pay
another party (the payee) a specified amount.
 Commonly used as proof of debt, especially in loan agreements.
 Governed in Kenya by the Bills of Exchange Act (Cap 27 of the Laws of Kenya).
 Comparison with Bills of Exchange:Promissory notes don’t require acceptors, unlike
bills of exchange.
 Both are negotiable instruments, allowing transfer of debt.
Characteristics of a Promissory Note

 Requirements:  Parties Involved

 Must be in writing.  :Maker: Issues the payment promise.
 Signature of the maker.  Payee: Recipient of the payment.
 An unqualified commitment to pay a  Endorsee: A third party to whom the
specific sum. note can be transferred
 May specify the time and place of
payment.
Uses of Promissory Notes in Banking

 Loan Agreements
Serves as collateral in securing loans.
Borrowers sign to formalize repayment obligations.
 Credit Transactions
Used in commercial credit transactions as proof of payment promise.
 Trade Finance:
Often used in international trade to bridge finance across borders.
 Types of Promissory Notes
 Personal Promissory Notes:
Used in informal loans (e.g., among friends/family).
Less formal, generally lower risk due to trusted relationships.
 Commercial Promissory Notes:
Formalized loans to businesses with detailed terms.
Higher risk, often secured with collateral.
 Real Estate Promissory Notes:For financing property acquisition or development.
Property serves as collateral with specific foreclosure provisions.
 Investment Promissory Notes:
Used to raise funds for businesses or projects.
Higher risk, often with high-interest rates.
Default and Enforcement

 Enforcement:
If not honored, the payee can sue the maker.
Follows court procedures under the Bills of Exchange Act.
 Default
Allows the payee to initiate legal action to recover the owed amount.
May involve asset seizure or garnishment as part of enforcement.
 Legal Considerations and Issues
 Contractual Capacity:Maker must have the legal ability to enter a
contract.
 Consideration:Promise to pay must be supported by legitimate
consideration.
 Forgery and Fraud:Concerns about validity if fraud or forgery is
involved.
 Defenses:Maker can argue incapacity, undue influence, coercion, or
lack of consideration.
 Considerations for Promissory Notes
Legal Compliance: Adherence to relevant laws to avoid disputes . Reforms &
Amendments: Stay updated on any legal changes affecting the Bills of Exchange Act. Risk
of Non-Payment: Importance of due diligence on maker’s creditworthiness to mitigate
default risk.
Case Law Examples
Ali Mohamed v. Charles Muturi Kigera (2014): Court held promissory notes as
enforceable debt obligations.
Officer in Charge Nairobi Remand & Allocation Prison v. Sanghani Investment Ltd.
(2007): Established promissory notes as legally enforceable and transferable instruments.
Patel v. Dhanji (1972) Confirmed that dishonoring a promissory note entitles the payee to
recover the stated amount.
 Negotiability of Promissory Notes

 Negotiable Instrument: Promissory notes can be transferred from one party to

[Link]:Banks may discount notes, providing early cash access to the payee.
 Collateral Use: Banks may use promissory notes as collateral for loans.
Documentary credits

Documentary credits, commonly known as letters of credit (LCs), serve as vital

instruments in international trade and finance. They facilitate secure payment mechanisms,
thus promoting smooth transactions across borders.

By balancing the interests and obligations of buyers, sellers, and banks, LCs enhance trust
in international commerce. This security is crucial, as it mitigates the risks associated with
cross-border transactions.

When a bank issues an LC, it commits to pay the seller (the beneficiary) upon the
presentation of compliant documents. This commitment holds regardless of the buyer’s
financial condition or willingness to pay, fostering confidence among trading partners.
 Legal Framework of Documentary
Credits
Key Principles
The legal framework governing documentary credits is rooted in several key principles:
 Autonomy
 Strict Compliance
 Exceptions to Autonomy
 Principle of Autonomy

Definition and Importance:

The autonomy principle posits that the LC stands separate from the transaction between the buyer and seller. Banks
are tasked with assessing only the documentary compliance, not the transaction's legitimacy.
Key Case :Bavins Jnr. & Sims v. London and South Western Bank Ltd.
This landmark case established the legal precedent that banks must honor LCs based on documentary compliance,
irrespective of any disputes between the buyer and seller regarding the underlying goods or services.
House Property Co. of London Ltd. v. London County and Westminster Bank [Link], the court held the bank
liable for refusing to honor an LC, reinforcing that banks must focus solely on compliant documents.
Fraud as an Exception to Autonomy

 Although the autonomy principle is fundamental, fraud represents a critical exception

that courts may invoke to prevent payment under an LC
 Key Case: United City Merchants (Investments) Ltd. v. Royal Bank of CanadaThis
case introduced the principle that “fraud unravels all,” emphasizing that evident fraud
known to the bank allows for judicial intervention to prevent payment.
 Orbil Mining & Trading Co. Ltd. v. Westminster Bank [Link] court in this
instance mandated substantial proof of fraud, establishing a high evidential threshold to
ensure that the autonomy principle is upheld unless clear fraud is demonstrated.
Compliance and Banking Duties

Strict Compliance Principle:

Strict compliance dictates that banks can only honor LCs if the documents precisely match the
stipulated terms, thereby reducing ambiguity and enhancing their role as impartial intermediaries.
Key Case: A. L Underwood Limited v. Bank of Liverpool
The court upheld the bank's refusal to pay due to minor discrepancies in the documents, illustrating
that even slight deviations can lead to non-compliance.
Gibsons v. Westminster Bank Ltd.
This case further confirmed that banks must adhere to exact compliance, underscoring their
responsibility to maintain payment reliability.
Procedural Nuances
 Bank Liability for Negligence
The procedural application of documentary credits has led to discussions about banks’
liabilities concerning negligence or oversight.
 Key Case
Great Western Railway v. London and County Banking Co. (1920) AC 683The court
held the bank accountable for failing to verify the authenticity of a document, establishing
that banks have a duty of due diligence to prevent fraud or misrepresentation. Marfani &
Co. Ltd v. Midland Bank Ltd. (1968)This case emphasized the necessity for banks to be
vigilant, particularly in situations where potential fraud is indicated by red flags. Although
banks are not obliged to investigate transactions, they must not ignore suspicious
circumstances.
 Kenyan Jurisprudence

Kenyan courts generally uphold the autonomy principle in documentary credits, mirroring English
common law practices.
Key Case: Gibson Ombonya Shiraku v. Commercial Bank of Africa
The court reaffirmed the obligation of banks to honor payments when documents comply with the LC,
irrespective of buyer-seller disputes.
Fraud Exceptions in Kenyan Law:
Nicholas R. O. Ombija v. Kenya Commercial Bank [Link] case illustrates judicial discretion,
where an injunction was granted to prevent the bank from honoring an LC due to evident fraud.
Compliance with UCP Guidelines

Overview of UCP:
The Uniform Customs and Practice for Documentary Credits (UCP) provide a framework
for international trade practices while being adapted to specific national contexts, including
Kenya.
 Manifest Fraud:
Kenyan courts recognize that while UCP lacks explicit guidelines on fraud, common law
precedents provide a solid foundation. Courts emphasize that manifest fraud can justify a
bank’s refusal to honor an LC, thereby maintaining the integrity of the credit system.
Cheques
 Cheques are essential negotiable instruments in banking and commerce.
 Allow payments via an order to a bank to pay a specified sum from the drawer's account
to the payee.
 Governed by the Bills of Exchange Act 1882.
 Key Parties to a Cheque
 Drawer: Issues the cheque, signs it
 Drawee: Bank on which the cheque is drawn
 Payee: Person or entity to be paid
 Instances where parties overlap : Drawer and payee can be the same person
 Drawer may direct payment to the drawee itself
 Negotiating a Cheque
Definition:
The transfer of a cheque to make the transferee the holder.
 Requirements for Negotiation:
Delivery of the cheque.
Endorsement by the previous holder for order cheques.
Conditions for transfers without endorsement.
Cheques vs. Other Contracts

 Better Title Acquisition: A transferee can acquire a better title than the transferor.
 Past Consideration: Valid in cheque transactions; not in contract law.
 Debt Discharge: Cheque for antecedent debt discharges the obligation.
 Demand Payment: Payable on demand when presented.
 Dishonor Notation: Reasons for dishonor must be indicated.
 Crossing Options: Cheques can be crossed.
 Nature of Payment: An unconditional order to pay.
 Types of Cheques
 Cheques are classified into various types, each serving distinct purposes and providing
different levels of security.
Bearer Cheque
A cheque that can be presented for payment by anyone holding it.
 Features
Contains "or bearer" in front of the payee's name.
Transferable without endorsement.
 Risk
Convenient but risky if lost or stolen
Order Cheque

A cheque that specifies payment to a named individual or entity.

 Features:
The words "or bearer" are crossed out.
Payment is made only to the named payee.
Process:No need for the bank to verify the identity of the bearer.
Open Cheque
A cheque without any crossing, allowing cashing at any bank.
 Features:
Can be cashed at the payer's or payee's bank.
Payee can transfer to another person.
 Signature Requirement:
Both front and back must be signed by the drawer.
 Crossed Cheque
 A cheque that can only be cashed by the payee
Features
Marked with "a/c payee" and two parallel slanted lines.
Provides added security.
Banking:
Can only be cashed at the payee’s bank
Post-Dated Cheque
 A cheque dated for a future date.
 Usage:
Can be cashed only after the specified date.
 Processing:
Banks do not process before the date indicated.
Stale Cheque
 A cheque that is invalid after three months from the issue date.
 Implication
 Must be presented for payment within the specified timeframe.
Traveler's Cheque
 Pre-printed cheques designed for travelers.
 Advantages
Safer than cash and can be replaced if lost.
 Usage
Easily exchanged for local currency.
Self Cheque
A cheque drawn by an account holder in their own name.
 Purpose:
Allows the drawer to withdraw cash from their own account.
 Banker's Cheque
 Definition:
A cheque issued by a bank on behalf of a customer.
 Assurance:
Guarantees payment, typically used for substantial amounts.
 Purpose:
Ensures certainty of payment in transactions.
Crossing Cheques
 Crossing is a directive to the paying banker to pay the amount only to a particular
banker, not over the counter.
 secures payment and traces the recipient of the cheque .
 "Not negotiable" or "Account Payee only" restricts negotiability
Importance of Cheque Crossing
 Security and Protection
Crossing enhances the security of the cheque for the holder.
 Negotiability
Crossed bearer cheques can be negotiated by delivery; crossed order cheques require
endorsement and delivery.
Types of Cheque Crossing
 There are various types of cheque crossing that provide different levels of security and
restrictions.
General Cheque Crossing
 Features
Two parallel transverse lines and/or words 'and Co.' or 'not negotiable'.
 Implication
Payment through a bank account only, not over the counter.
 Significance of 'Not Negotiable'
Restricts negotiability; transferee cannot gain a better title than the transferor
Special Cheque Crossing

 Features the name of the banker on the cheque.

 Amount paid only to the specified banker or their collecting
agent.
 :No need for two transverse lines; the banker’s name is essential.
Restrictive Cheque Crossing
Restricts payment to the account of the payee or their agent.
 Banker’s Duty:Collecting banker must credit the cheque amount
to the correct account.
 Negligence Liability:Collecting banker risks negligence claims if
they fail to comply.
.
Not Negotiable Cheque Crossing

Not Negotiable Cheque Crossing

Indicates that the cheque is not negotiable, even if transferrable.
 Implication:Transferee cannot acquire better title than the transferor.
 Case example
 Wilson and Meeson v. Pickering (1946)
Clerk exceeded authority; cheque was crossed 'not negotiable'.
It was held that
Payee could not acquire better title; claim against the drawer failed.
 Consequences of Non- Compliance
 Non-compliance with crossing instructions occurs when banks fail to adhere to the
drawer’s directives regarding cheque crossing.
 If banks do not comply, they breach their contract with the drawer.
 May lead to liability for any losses suffered by the true owner of the cheque
Liability on Cheques
Liability is complex, especially in cases of fraud or negligence.
Banks and drawers both carry specific obligations
Key Aspects of Liability
 Drawer’s Liability
Drawer’s Responsibility
Ensure adequate balance on the cheque issue date.
Consequences of Insufficient Funds
If a cheque bounces due to insufficient funds, the drawer may face
penalties or legal action by the payee.
Bank’s Liability
 Bank’s Duty of Care
Banks must verify cheques for proper endorsement and authenticity.
 Risk of Paying on Forged Cheques
If a bank pays out on a forged or altered cheque without due diligence, it may be liable for
the loss incurred.
Forgeries
 Forged signatures place liability on the drawee bank.
 Bank’s Responsibility:
 Drawee banks must compare signatures to ensure authenticity; failure to do so can lead to
liability.
Negligence Defense
 Bank’s Right to Defend Against Claims:Banks can claim non-liability by proving they
acted without negligence.
 Example of Due Care:Implementation of robust cheque verification systems can
demonstrate non-negligence, protecting the bank from liability claims

Protection Mechanisms
Types:
Crossing mechanisms
Positive Pay Systems
Fraud Detection Systems
Types of protection mechanisims
Crossing mechanisms
Crossing restricts how and where a cheque can be cashed.
Adds an extra layer of security for the holder.
Positive Pay Systems
System checks cheques against an issued list before payment.
Preempts fraud by verifying details before processing.
Fraud Detection Systems
Banks use technology to identify and prevent suspicious cheque activities.
Protects both the bank and customers by flagging potentially fraudulent transactions early.
 Negotiability and the Roles of Paying and Collecting Banks in
Kenya
Overview of the Bills of Exchange Act (Cap. 27)
Governs negotiable instruments such as cheques, promissory notes, and bills of exchange.
Provides statutory rights and duties for paying and collecting banks.
Ensures legal protection and sets responsibilities to avoid fraud, negligence, and liability.
 Paying Banks - Key Roles and Responsibilities
The paying bank, also known as the drawee bank, is responsible for the payment process
Section 59: Ensures valid endorsement and protects against [Link] 80: Mandates
banks to act in good faith and with due diligence.
 Rights of the Paying Bank
o Right to Demand Identification: Section 24: Allows verification of the presenter’s
identity.
o Right to Refuse Payment: Section 59: Enables refusal if there’s a concern over
endorsements or funds.
o Right of Recourse: Section 64: Allows recourse if forgery is detected post-payment.
 Duties of the Paying Bank
 Duty of Care and Diligence:Section 80: Requires careful examination to avoid paying on forged or
altered cheques.
 Duty to Pay on Demand:Section 35: Bank must honor valid instruments when funds are available.
 Duty to Avoid Negligence:Sections 59 & 80: Reinforces responsibility to prevent payment on
faulty instruments.
 Case Laws
 Barclays Bank Ltd v. Simiyu (1985):
 Paying bank liable if due diligence isn’t followed to detect forgeries or alterations.
 London Joint Stock Bank v. Macmillan and Arthur [1918]:
 Reinforces liability for unauthorized payments due to alterations.
 Orbit Mining & Trading Co. Ltd. v. Westminster Bank Ltd. [1963]:
 Emphasized duty of care to prevent payment on forged instruments.
 Great Western Railway v. London and County Banking Corporation [1920]:
 Bank’s right of recourse if payment made on undetected forgery.
Collecting Banks
 The collecting bank processes instruments for deposit or collection on behalf of the
customer.
 Section 82: Good faith and due diligence in handling instruments.
 Section 3: Conditions for holder in due course if the instrument is dishonored.
Rights of the Collecting Bank
 Right to Payment for Services:While implicit, collecting banks can charge for their
services as per banking practices.
 Right of Recourse:Section 3 & Section 74: Enables reimbursement rights if an
instrument is dishonored.
Duties of the Collecting Bank
 Duty to Act in Good Faith:Section 90: Collecting banks must act without fraudulent intent.
 Duty of Due Diligence:Section 82: Ensures instruments are endorsed and details are correct.
 Duty to Notify:Section 48: Requirement to inform the customer if an instrument is
dishonored.
 Collecting Bank Case Law
 Karim v. Standard Chartered Bank (K) Ltd (2002):
 Collecting bank’s duty of care includes validating all endorsements.
 Curtice v. London City and Midland Bank Ltd [1908]:
 Collecting banks held liable if endorsements are not accurate.
 Marfani and Co. Ltd. v. Midland Bank Ltd. [1968]:
 Obligation to verify account details to prevent fraud.
 Standard Chartered Bank v. Intercom Services Ltd & Others (2003):
 Kenyan case emphasizing good faith and diligence in fraud prevention.
Comparing Roles - Paying vs. Collecting Banks

 Paying Bank:Focuses on verifying validity and authenticity at payment stage.

 Ensures funds availability before honoring the instrument.
 Collecting Bank:Focuses on due diligence, endorsement verification, and notifying of
dishonor.
 Acts in good faith for customer deposits and collections.
Conclusion
 The law on negotiable instruments, particularly concerning bills of exchange,
promissory notes, documentary credits, and cheques, is integral to ensuring reliability
and efficiency in commercial transactions. Negotiability allows these instruments to
function as substitutes for cash, facilitating commerce by providing a streamlined
mechanism for transferring funds and obligations between parties.
 The cases explored, from Bavins Jnr. & Sims to Nicholas R.O. Ombija v. Kenya
Commercial Bank Ltd., illustrate the courts' interpretation of complex issues such as the
duties and liabilities of paying and collecting banks, cheque crossing, and protections
afforded under the law. They underscore the balance courts strive to maintain between
safeguarding the rights of parties and mitigating fraud risks inherent in the use of
cheques and other negotiable instruments.
 By analyzing these cases, we see that principles such as good faith, due care, and
liability for negligence are pivotal to upholding trust in the negotiability system. The
protections and liabilities established in the law not only reinforce the negotiable
instruments' role in the modern financial system but also adapt to technological and
regulatory shifts, supporting secure and reliable financial transactions.
 END

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