NEGOTIABLE INSTRUMENTS

(Bills of Exchange, Cheques and Promissory Notes)

9.1 BILLS OF EXCHANGE
The term "negotiable instrument" encompasses a wide variety of documents,
e.g. bank notes, promissory
notes, debentures and exchequer bills (treasury bills). Much of the law
relating to bills of exchange
applies equally to such instruments. Note that any document is capable of
being called a "negotiable
instrument" as long as the following conditions are met:
(a) The holder of the instrument may sue in his/her own name.
(b) Title to the instrument must pass on delivery, or on delivery and
endorsement.
(c) A "holder in due course" takes the instrument free from the defects in
title of his/her
predecessors.
Negotiable instruments are an essential part of a business-orientated society
because of the ease with
which they can be transferred from one person to another.
9.1.1 Definition
Section 3 of the Bills of Exchange Act defines a bill of exchange 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 following example of a bill of exchange will be useful to you.
K10 million Blantyre, 30 April 2014
ACCEPTED W. W. HAPUWANA
Sixty days after date, pay to the order of James Chipeta the sum of Ten
Million Kwacha for value received.
J Phiri
To: W. W. Hapuwana, Mulanje.
Note the various parties:
(a) J Phiri is the drawer of the bill.
(b) W. W. Hapuwana is the drawee of the bill, and he has also become the
acceptor by writing his
name across it.
(c) James Chipeta is the payee of the bill.
Endorsement of Bills Of Exchange
Bills of exchange can be endorsed in blank, restrictively, specially,
conditionally and with qualification:
(a) Endorsement in blank refers to the situation where a segment of the
bill is

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left unfilled e.g. on the amount or payee section. Such bills are normally
made
payable to bearer e.g. pay cash. A use for this type of endorsement can be
where an
accountant signatory has left the office for say a holiday but payments still
need to be
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made in his absence. He just signs the cheques and they will be filled by his
assistant
to the amount of present needs.
(b) Restrictive endorsement refers to situations where a bill has been
barred from
further negotiation once it has been negotiated over to the payee e.g. pay
James only.
A use for this can be where a parent is sending pocket money to a
spendthrift child and
wants to make sure the money from the bill gets in his hand instead of being
pledged
over to say a gambling debt.
(c) Special endorsement is similar to restrictive endorsement in that the
payee is
specified. However the payee has the liberty to negotiate the bill to a person
of his
choice e.g. pay James. This can be used in normal salary payments at work.
It allows
for the employees payment to be secured to his use alone while giving him
room to
deal with his pay as he wishes.
(d) Conditional endorsement is where a condition is attached to the
payment of a bill
e.g. pay James if he tenders in the shipping documents. This can be useful
where
parties are contracting from far off places. The drawee can be used as an
agent for the
payor to ensure that the payee receives his payment only upon proof that he
has
fulfilled his part of a contract e.g. like in Banker’s Commercial Credits.
(e) Qualified endorsement is where payment is qualified to be made either
at a
specific place, to specific people, at a specific time etc e.g. pay James on 20
December. This type of endorsement can be used where you are paying off
installments on a hire purchase contract. Several bills can be written
qualified to
different dates in future months on which each installment falls due.
9.1.2 Important Terms

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(a) The order to pay must be unconditional. For example, if the drawer
stipulates "provided the
balance in my account amounts to K100,000", this is not a bill of exchange
since there is a condition
imposed. If the bill orders payment to be made out of a particular fund, this
is invalid as it is
conditional on the fund being adequate to meet the bill, but if the drawee
says "pay the bill and
debit" a particular fund, this is in order since the acceptor can allow an
overdraft.
(b) The instrument must be in the form of an order. To say "I shall be
pleased if you will pay ..." is not
an order but a mere request, but the expression "please pay ..." is a polite
order.
(c) The instrument must be in writing. This includes print and typewriting.
(d) The instrument must be signed by the drawer, i.e. the person who
makes out the bill of exchange.
(e) The instrument must be an order to pay. If the instrument orders any
act to be done in addition to
the payment of money, it is not a bill of exchange.
(f) It must be to pay a sum certain in money. An order to pay "all moneys
due" is not a bill of
exchange, but if the bill is drawn for a certain amount "plus interest" this will
be a valid bill. If the
rate of interest is not otherwise stated, it will be taken as 5%.
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(g) Payments may be expressed to be made on demand. This means that
the bill must be met when the
holder presents it for payment, whenever that might be. Note that, where no
time for payment is
expressed in the bill, it will be treated as payable on demand.
(h) Instead of being payable on demand, it may be payable at a fixed or
determinable future time,
e.g. "three months after date”.
(i) Payment may be expressed to be made to bearer, which means that the
acceptor must pay the sum
stated to whoever is the holder of the bill when it is duly presented for
payment, i.e. the bill specifies
no particular payee.
(j) It may be payable to, or to the order of, a named payee, in which
case the drawer will have named
the payee in the bill; but she can pass on the bill to someone else if she
endorses it to this effect.
9.1.2.1 Note the following points concerning payees:
(a) A bill not payable to "bearer" must indicate the payee with reasonable
certainty or it will

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be inoperative.
(b) Where the payee is a fictitious or non-existent person, the bill may be
treated as payable to
bearer; (later).
(c) A bill may be drawn payable to two or more payees jointly, or it may be
drawn payable
to one of two (or several) payees in the alternative.
(d) A bill drawn in favour of the drawer himself will be a valid bill, e.g.
making a cheque out to
"Cash" or "Self".
(e) A bill may be drawn payable to the holder for the time being of a
particular office e.g. the
president of Malawi.
(f) A bill drawn for "Cash" (usually a cheque) will generally be treated as
payable to bearer.
9.1.2.2 The following points about drawees should be noted also:
(a) Where the drawer is a fictitious person, or a holder not having the
capacity to contract, the holder
may treat it there and then as dishonoured.
(b) Where the drawer and drawee are the same person, again the bill may be
treated as either a bill of
exchange or a promissory note.
(c) Where the drawee is not indicated with reasonable certainty, but
someone "accepts" it, the
instrument may be treated as a promissory note.
(d) A bill may be addressed to two or more drawees jointly, but an order to
alternative drawees will
not constitute a valid bill and will be of no effect
9.1.3 Acceptance (section 17)
The term "acceptance" used in relation to bills of exchange has a special
meaning. In common parlance, a
person to whom something is given takes or accepts that thing, but you
should be careful to avoid this use
of the word when talking about bills of exchange. Acceptance of a bill of
exchange is the signification by
the drawee that he accepts the order of the drawer to pay over the
sum stated to the payee. A bill of
exchange is used by a debtor to settle his account with a creditor, but, it
being an order to someone else
to pay the sum stated (as opposed to a promise by the drawer to pay), the
creditor is not normally going
to take the bill of exchange in settlement unless the drawee acknowledges
that he will meet the bill (and,
in addition, is a person of substance); until he does make such
acknowledgement, the drawee is under no
liability on the bill.

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In practice, the bill is normally handed to the payee to present it to the
drawee for acceptance. If the
drawee agrees to pay the bill, he will sign his name across it, and by that act
he accepts the liability to
meet the bill when it is duly presented for payment. You may, at this stage,
ask why a third party should
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undertake to pay a bill of exchange drawn by a debtor to settle an account
with a creditor. The answer is
simply that the person drawing the bill will have an arrangement with the
drawee to reimburse the cost of
any bills met. This, of course, leads one to the question, why go through this
procedure of drawing a bill
of exchange instead of the creditor just waiting for the debtor to pay? The
answer to this is that, by using
a bill of exchange, the supplier can send the debtor goods on credit even if
he is not sure of the latter's
credit status, because before he releases the goods he receives this
document, accepted by a person on
whose credit he knows he can rely.
Nowadays, bills of exchange are most commonly used in international trade
and are drawn on bankers.
You will appreciate how useful an arrangement that allows goods to be sold
on credit to someone whom
the seller has never heard of, and against whom he would have great
difficulty in bringing an action for
recovery of the debt.
9.1.4 Presentment for acceptance
Although a bill must be presented for acceptance and accepted by the
drawee in order to render the latter
liable on the bill, it is not in fact necessary, as a general rule, for the holder
of a bill to present it for
acceptance. He can hold on to it, unaccepted, until maturity, or negotiate it
to a third party, although a bill
that has not been accepted will in practice be much harder to pass on for
value.
9.1.5 Requirements of valid presentment
The Act lays down the following requirements for a valid presentment for
acceptance:
(a) The presentment must be made by or on behalf of the holder to the
drawee or some person
authorised to accept or refuse acceptance on his behalf.
(b) Presentment must be at reasonable hour, on a business day, and
before the bill is overdue.
(c) Where the bill is addressed to two or more drawees, who are not
partners, presentment must be

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made to them all, unless one has authority to accept for all, in which case
presentment may be
made to him alone.
(d) Where the drawee is dead, presentment may be made to his personal
representative.
(e) Where the drawee is bankrupt, presentment may be made to him or to
his trustee.
(f) Where authorised by agreement or usage, a presentment through the
post office is sufficient.
9.1.6 Requirements of Valid Acceptance
For an acceptance to be valid, it must:
(a) Be written on the bill and be signed by the drawee.
(b) Not express that the drawee will perform his promise by any other means
than the payment of
money.
(c) Acceptance is incomplete and revocable and does not bind the acceptor
until the bill has been
delivered – that is to say, handed back to the person presenting it, with the
signature of acceptance
on it.
9.1.7 Dishonour by Non-acceptance
If the drawee is not prepared to meet the bill, he will return it to the holder
with a note to this effect, and
the bill is then said to be dishonoured by non-acceptance. The holder
then knows that the debtor has
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given him a valueless scrap of paper, and will commence proceedings
against him (the debtor, the drawer
of the bill, not the drawee) to recover his debt. (The position of the holder of
a dishonoured bill is dealt
with later). In certain circumstances, the bill can be treated as dishonoured
by non-acceptance without
ever having been presented for acceptance; these circumstances are where:
(a) The drawee is dead or bankrupt
(b) The drawee is a fictitious person
(c) The drawee is a person not having the capacity to contract.
Qualified Acceptance- Any acceptance that varies the effect of a bill as
originally drawn is termed a
qualified acceptance. A qualified acceptance may be any of the following:
(i) Partial-- An acceptance to pay only part of a bill, e.g. a bill drawn for the
amount of K10 Million may
be accepted for K8 million only.
(ii)Local-- An acceptance to pay the bill only at a certain place; the acceptor
stipulates that
he will pay the bill at this place only, and nowhere else.

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(iii) Conditional-- An acceptance to pay the bill only on fulfilment of a
certain condition (e.g. an
acceptance to pay the bill on delivery of the bills of lading).
(iv) Qualified as to Time-- An acceptance say to pay a bill drawn payable
after one month, only after six
months.
If the holder of the bill takes such a qualified acceptance, this has the effect
in most cases of
discharging from liability all prior parties to the bill except in so far as any
prior party consents to the
holder taking such qualified acceptance. The holder of a bill who is offered
only a qualified acceptance is
entitled to reject it and to treat the bill as dishonoured by non-acceptance.
9.1.8 Manner of Transfer of a Bill of Exchange
One of the features of bills of exchange is that where A gives B a bill
accepted by X in settlement of her
debt, this same instrument may be passed on by B to C in settlement of a
debt between them – both B and
C relying on the credit of X. A number of formalities are laid down for the
legal assignment of rights
under a contract for example, transfer of land can only be effected by a
written contract BUT in the case
of bills of exchange and other negotiable instruments, no such formalities
are necessary and the debtor
need not even be informed. The transfer of a negotiable instrument is
termed "negotiation", and S.31 of
the Act provides as follows.
(a) A bill is negotiated when it is transferred from one person to another in
such a manner as to make
the transferee the holder of the bill.
(b) A bill payable to bearer is negotiated by delivery.
(c) A bill payable to order is negotiated by the endorsement of the holder
completed by delivery.
Transfer of the instrument in this way is enough to vest the property
represented thereby in the transferee,
and no further formality is required.
9.1.9 Transferee's Title: "Holder in Due Course" (section 29)
Section 29 defines a Holder in Due Course as “a holder who has taken a
bill, complete and regular on
the face of it, under the following conditions, namely: (i) That he became the
holder of it before it was
overdue and without notice that it had been previously dishonoured, if such
was the fact. (ii) That he took
the bill in good faith and for value and that at the time the bill was
negotiated to him, he had no notice of
any defect in the title of the person who negotiated it."

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Let us now examine the definition in detail:
(a) Holder: the Act defines a holder as "the payee or endorsee of a bill who
is in possession of it, or
the bearer thereof".
(b) Complete bill: a person who takes an inchoate bill before it is completed
cannot be a holder in
due course.
(c) Regular bill: a bill must meet the requirements of the statutory
definition, and all endorsements
must be there.
(d) Before it is overdue: a person taking a bill of exchange after maturity
cannot be a holder in due
course.
(e) In good faith and without notice ... of dishonour ... or defects of
title. If there was any
suspicion when the holder took the bill, he will not be a holder in due course
unless he took
reasonable steps to allay these suspicions.
(f) For value: to be a holder in due course, the holder must have given
consideration for the bill.
(g) Subsequent to a forged endorsement being put to a bill, no one taking
the bill thereafter can be a
holder in due course.
(h) If a restrictive endorsement is put to a bill, no one taking the bill
subsequent thereto can be a
holder in due course.
(i) The original payee of a bill cannot be a holder in due course as the bill
has not been negotiated to
him.
9.1.10 Three Rights of a Holder in Due Course
(a) Right to Hold Free of Prior Defect- the general rule of English law is
expressed in the maxim
nemo dat quod non habet (no one may give that which he does not have)-
See notes on sale of
goods. However, bills of exchange (and in fact, all negotiable instruments)
constitute an
exception to this rule, provided the circumstances of the transfer are such
that the transferee
qualifies as a holder in due course, in which case he holds the bills free from
prior defects of title
affecting the transferor. Note, however, that where an endorsement has
been forged, no one taking
the bill subsequently can be a holder in due course, so a perfect title cannot
be passed on.

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(b) Right to Pass on this Perfect Title- Once a bill of exchange has come
into the hands of a holder
in due course, not only does that person hold the bill free of prior defects of
title but any such
defects of title are in effect "wiped off" the instrument. Any subsequent
transferee will also hold
the bill free of equities, even if he himself did not give value or receive notice
of the defects of
title when taking the bill.
(c) Right to Sue in his own Name- In the event of a bill of exchange being
dishonoured, the holder
of the bill will seek redress. In taking action on the bill, the holder is entitled
to sue on the bill in
his own name.
9.1.11 Holder other than Holder in Due Course
The holder of a bill of exchange who does not come within the statutory
definition of a holder in due
course holds the bill subject to prior equities (rights), and his title may be
upset if the title of a prior
holder was defective. He does have remedies against intervening parties, but
the general rule of "nemo dat
quod non habet" applies.
Illustration
A draws a bearer cheque on B (bank) and gives it to C as part of a
transaction. The bill is stolen by D. D
then gives it to E as a birthday gift. E gives it to F as part of a transaction in
which F has provided
consideration. Analysis A- Drawer, B- Drawee, C- Holder for value, D-
Holder (bearer cheque), EHolder,
F- Holder in due course.
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C was holder for value because he provided value. D became holder because
the bill was a bearer bill (no
payee specified), C is however the true owner of the cheque. E is not a
holder in due course because he
did not provide value (consideration is one of the conditions for one to be a
holder in due course). E
therefore takes the bill with prior defects and subject to C claiming it back. F
has satisfied all the
conditions of a holder in due course and therefore C cannot claim the cheque
from F. C can sue D, the
thief, if available!
9.1.12 In land and foreign bills (section 4)
An inland bill is a bill which is or on the face of it purports to be both drawn
and payable within Malawi,

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or drawn within Malawi upon some person resident therein. Any other bill is a
foreign bill. Unless the
contrary appear on the face of the bill the holder may treat it as an inland
bill.
Thus a bill drawn in Blantyre on a person resident abroad, but payable at a
bank in Malawi, will be an
inland bill, as too a bill drawn in Blantyre on a person resident in Malawi,
wherever the bill may be
payable. But a bill drawn in Blantyre on a person resident abroad and
payable at a foreign bank, or a bill
drawn abroad though payable in Malawi to a person resident in Malawi, will
be foreign. Where an inland
bill is dishonored, noting must follow whereas dishonor of a foreign bill must
be followed by protesting.
9.1.13 Methods of Discharge
A bill will be discharged as follows:
(a) By payment in due course.
To be "in due course", payment must be:
(i) To the holder.
(ii) Bona fide, and without notice of any defect in the title of the holder.
(iii)On, or after, maturity.
(b) By the acceptor becoming the holder thereof, provided he does so
after maturity and in his own
right.
(c) By waiver by the holder of his rights against the acceptor,
provided such waiver is absolute and
unconditional, made on, or after, maturity, and made in writing or else
accompanied by delivery of the
bill to the acceptor. Note that no consideration is required for such waiver.
(d) By cancellation of the bill by the holder, such cancellation being
intentional and apparent on the
face of the bill.
(v) By no notice of dishonour (below) - upon dishonour, notice of
dishonour must be given to the
drawer, otherwise he is discharged.
9.1.13 .1 Liability of parties on the bill
Statutory Responsibilities - Every person who has put his name to a bill
of exchange, whether as drawer,
acceptor or endorser, is a "party" to the bill, and as such will be liable on the
bill in the event of its being
dishonoured. The holder of the bill in whose hands the bill is dishonoured,
can claim on the bill against
any prior party, who in turn can sue any other prior party.
(f) Capacity- to incur liability under a bill of exchange is the same as
capacity under
the law of contract such that for instance minors can never be liable on a bill.

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(g) Consideration- The liability of a party to a bill is contractual in nature
and this
depends on whether a party has provided consideration or not.
(h) Release from liability- As we have said, any person who has put his
name to a
bill, in whatever capacity, will be liable to any subsequent holder in whose
hands it is
dishonoured or who has had to meet the bill. In certain circumstances,
however, a
person who has put his name to a bill may be released from liability.
Cancellation of Endorsement -Where the holder of a bill intentionally
cancels the
endorsement of any prior party, provided such cancellation is apparent on
the face of a
bill, that party and all intervening parties will be absolutely discharged from
liability. It
is not necessary that consideration should be given for such cancellation for
it to be
effective.
Failure to Present Bill for Acceptance or Payment - Where the holder
of a bill
payable after sight fails either to present it for acceptance or to negotiate it
within a
reasonable time, the drawer and any prior endorsers are discharged from
liability.
Where the holder of a bill fails to present it for payment on the date it falls
due, the
drawer and any prior endorsers are discharged from liability.
Holder Taking Qualified Acceptance - Where the holder of a bill takes a
qualified
acceptance, any prior party who does not assent thereto is discharged from
liability on
the bill.
Failure to Give Notice of Dishonour - Where a bill is dishonoured, either
by nonacceptance
or non-payment, any person (other than the acceptor) to whom notice is not
given will be discharged from liability. An exception is that, in the case of
dishonour
by non-acceptance, the rights of a subsequent holder in due course (and any
person
claiming through him) will not be affected.
Renunciation of Rights by Holder - The holder of the bill may, absolutely
and in
writing, renounce his rights against any party to the bill. Such renunciation
will be

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effective, but the party in question will remain liable on the bill to any
subsequent
holder in due course without notice of the renunciation.
Alteration of Bill - Where a bill or acceptance is materially altered without
the assent
of all parties liable on the bill, the bill is discharged except as against
(i) the party who has himself made, authorised, or assented to the alteration;
and
(ii) subsequent endorsers.
The alteration must be intentional and not accidental.
9.1.14 Effect of Forged Signature
Where an endorsement on a bill of exchange has been forged, no person
taking the bill thereafter can
acquire a good title to it. Thus there can be no holder in due course after a
forged endorsement and the bill
cannot be discharged (Section .24). The person holding the bill, including the
acceptor if he has "met" the
bill, must surrender it to the person whose endorsement was forged. The
person who took the bill
immediately after the forgery will be left with no redress, except against the
person responsible for the
forgery, if he can be found.
9.1.15 Dishonour of a bill
A bill may be dishonoured either by non-acceptance or by non-payment. We
have already examined the
question of acceptance and have seen that if the holder of a bill presents it
to the drawee for acceptance
and is refused, then he may treat the bill there and then as dishonoured.
9.1.16 Requirements for Valid Presentment
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(a) The presentment must be made by the holder or by some person
authorised to receive payment on
his behalf.
(b) Presentment must be at a reasonable hour, on a business day, and
before the bill is overdue.
(c) Presentment must be made to the person designated by the bill as
payer, or to some person
authorised to pay or refuse payment on his behalf.
(d) Presentment must be made at the place specified or at the address of
the acceptor.
(e) Where the acceptor is dead, and no place of payment is specified,
presentment should be made to
the acceptor's personal representative.
9.1.17 Excuses for Non-presentment for Payment
In certain circumstances, the bill can be treated as dishonoured by non-
payment;

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(a) Where, after the exercise of reasonable diligence, presentment cannot
be effected.
(b) Where the drawee is a fictitious person.
9.1.18 Notice of Dishonour
On a bill being dishonoured, either by non-acceptance or by non-payment,
the holder must at once give
notice of the dishonour to all prior parties if he is to have any rights against
them.
Consequences of dishonour
Noting and Protesting- (section 51)"Noting" and "protesting" of a bill
occur in the event of a bill of
exchange being dishonoured. Noting (usually applicable to in land bills) of
the bill is the making of a
minute by a Notary Public who has to present the bill either at the acceptor's
office, if it is made payable
there, or, if made payable at a bank, to that bank, and obtains the answer
given for non-payment of the
bill. Then she affixes to the bill a slip of paper which has briefly typed (or
written) on it the fact that she
presented this bill to "...” and that it was dishonoured by non-payment with
answer (specified). She then
appends her signature and affixes a stamp, this being the stamp required on
a notarial document.
1.9.19 Protest (usually applicable to foreign bills)
Is more formal than noting; in fact, it is a more elaborate execution of noting
procedure. A protest must
contain the following:
(a) An exact copy of the bill.
(b) A statement of the parties for whom and against whom the bill is
protested.
(c) The date and place of the protest.
(d) A statement that acceptance of payment was demanded by the
notary, the terms, if any, of the
answer, or a statement that no answer was given or that the drawee or
acceptor could not be
found.
(e) A reservation of rights against parties liable
(f) The subscription and seal of the notary.
The process of noting or protesting preserves recourse against the drawer
and endorsers. The bill must be
noted on the actual day of dishonour, but the protest may be completed
subsequently.
1.1.20 Measure of Damages
In the event of a bill being dishonoured, the holders and, in turn, every other
party to the bill who is

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compelled to pay it, may recover from any preceding party liable: the
amount of the bill, interest, the
expenses of noting or protesting the bill.
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1.1.21 Incomplete (Inchoate) Bills
It is possible for a bill to be drawn incomplete, leaving the holder to fill in the
amount payable. So long as
he does so within the terms agreed, there is no problem, but the holder may
fraudulently complete the bill
by inserting an excessive amount. In such a case, the holder will not be able
to enforce the bill in any
amount against anyone who became a party to it prior to its completion,
except that if the bill is
negotiated to a holder in due course after completion he can enforce the bill
in the full amount shown
against any prior party (Section 20). A blank, stamped piece of paper may be
signed and given to
someone for it to be completed as a bill. So long as the intention is there, the
holder can fill in all the
particulars of the complete bill and the position is as described above. Where
a bill expressed to be
payable a fixed period after date is issued undated, or where the acceptance
of a bill payable a fixed
period after sight is undated, the bill is similarly incomplete. The bill is not,
however, invalid and the
holder has authority to insert the true date of issue or acceptance himself.
Where the sum payable is
expressed both in words and in figures and there is a discrepancy between
the two, the sum denoted by
the words is the amount payable.
1.1.22 Altered Bills
When a bill is materially altered, all prior parties are at once discharged from
any liability whatsoever on
the bill (even the original amount) unless they assent to the alteration.
However, exception is made where
the alteration is not apparent on the face of it and the bill is in the hands of a
holder in due course, who
may enforce it against those persons who became parties to the bill before
the alteration, according to the
original tenor of the bill. An example of this would be where a bill is
altered in a non-apparent manner
from K50 to K500 and then comes into the hands of a holder in due course;
the latter would be able to
enforce payment of the original amount of K50. Persons who become parties
to the bill after the alteration
will be liable for the full amount of the bill.

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9.2 CHEQUES
Section 73 of the Bills of Exchange Act, defines a cheque as: "A bill of
exchange drawn on a banker,
payable on demand." (Recall the all important section 3 of the Bills of
Exchange Act on definition of a
bill of exchange)
Note the two special requirements for a cheque:
(a) It must be drawn on a banker.
(b) It must be payable on demand.
9.2.1 Differences between bills of exchange and cheques
(a) Because of the contractual relationship between banker and customer,
there are a number of special
obligations on these parties.
(b) The rules relating to acceptance do not apply to cheques; the
banker on whom the cheque is drawn
never "accepts" it, so that the drawer is the party primarily liable on the
instrument.
(c) There are special provisions for the crossing of cheques which do not
apply to ordinary bills of
exchange.
(d) Special statutory protection is given to bankers in relation to forged
endorsements.
(e) In practice the vast majority of cheques are presented for payment by the
person to whom they are
initially given, and negotiation of a cheque is comparatively rare.
Illustration
If A draws a cheque in favour of B, B may either take it to A's bank and
obtain payment, or he can pay it
into his own bank who will, on his behalf, collect payment from A's bank. A's
bank (the paying bank) will
100
debit A's account as they meet the cheque and B's bank (the collecting bank)
will credit B's account with
the money collected.
9.2.2 Post-dated Cheques
The Bills of Exchange Act allows bills to be dated as at a date subsequent
to that on which they are
actually drawn. In the case of cheques such a practice should strictly
invalidate the instruments as they
cannot be said really to be payable on demand, but in fact such cheques are
held to be valid as payable on
demand as from the date entered.
If a cheque is post-dated and a bank pays it, the customer’s mandate is not
being followed, i.e the bank
will have breached its duty. The bank may suffer the following dangers:
(a) The customer may refuse to be debited with the cheque;

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(b) The customer may stop payment of the cheque before its due date;
(c) If the cheque is held by the bank pending its due date, the customer may
die, or go insane or
become bankrupt in the meantime.
9.2.3 Overdue Cheques
A bill payable on demand must be presented for payment within a
reasonable time of the bill's date and if
this is not done the drawer and prior endorsers are discharged from liability.
In the case of cheques,
however, the drawer cannot escape liability in this way and he will remain
liable on the cheque for the
normal limitation period of six years. In practice, a cheque presented more
than six months after date
will be returned as "stale", but the holder can obtain a fresh cheque from the
drawer.
9.2.4 Banker/Customer Relationship
The relationship between banker and customer is a contractual one whereby
the customer deposits money
with the bank on the understanding that the bank will meet cheques drawn
by the customer on the account
up to the amount of the balance standing therein or of any agreed overdraft.
9.2.5 Bank's Duties
The duties of the banker under this contract are two-sided:
(a) to honour cheques duly drawn up to the amount available, and not to pay
without proper authority.
(b) to credit a customer's account with dividends received on the customer's
behalf and it owes a duty
to take care in doing so.
9.2.6 Liability of the bank
(a) If the bank fails to meet a cheque that is duly drawn where there are
funds available to meet it, it
will be liable for damages to the drawer. Where the drawer is a trader,
damages will be awarded
without proof of actual loss, but in other cases loss must be established.
(b) On the other hand, the bank will be liable if it pays a cheque on which
the drawer's signature is
forged, or if it pays a cheque not properly drawn (e.g. if a company's
cheques require the signature
of two directors and only one signature is present).
(c) The bank will also be liable if it meets a cheque after the customer has
countermanded payment.
(d) The bank's authority to meet cheques will also be terminated in the
following circumstances:
eceipt of a garnishee order (an order awarded to a judgment creditor which
"freezes" the
balance then standing in the customer's account).

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101
9.2.7 Customer's Duties- The customer owes the bank a duty of care in
the way a cheque is drawn.
Where the amount of a cheque is altered and the cheque is met by the bank,
the position will be as
follows:
(a) If the alteration was apparent, the bank must bear the loss.
(b) If the alteration was not apparent but was not facilitated by negligence
on the part of the customer in
drawing the cheque, then the customer will be chargeable with the original
amount but the bank must bear
the excess.
(c) If the alteration was not apparent and was made possible through the
careless way in which the
customer drew the cheque, then the loss will fall on the customer. In
London Joint Stock Bank v.
Macmillan & Arthur [1918] AC 777, a bearer cheque was drawn for £2 in
figures, but with sufficient
space for this to be changed to £120 without the alteration being apparent,
and without the amount being
written in words at all, so that a fraudulent clerk was able to write in "one
hundred and twenty pounds". It
was held that the customer had to accept the full charge of £120 when the
cheque was met. Greenwood v.
Martins Bank Ltd [1933] AC 51 illustrates how the bank will be protected in
the event of the customer's
negligence. Greenwood's wife had been drawing money from his account by
forging his signature on his
cheques. In order to protect his wife, he did not inform the bank. The wife
later committed suicide and he
then decided to sue the bank for the return of the money. It was held that
the husband was under a duty
to disclose what had happened, and as he had failed to do so his conduct
precluded him from alleging the
forgery.
9.2.8 Crossing a Cheque
The Bills of Exchange Act (Section 80) makes provision for the "crossing"
of cheques, and this provision
does not apply to any other type of bill of exchange. The effect of a crossing
is that the cheque may be
met only by payment to a banker, and cannot be cashed over the counter of
the paying bank. There are
basically two reasons for this
(a) Since a crossed cheque can only be paid through a bank account, it is
thus possible for the drawer
of the cheque to trace it after it has been paid to a known holder.

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(b) It gives more time to countermand payment (stop payment).
9.2.9 General and Special Crossings
There are two types of crossing – "special" and "general".
(a) Special Crossing- the name of a particular bank is written between the
lines of the crossing, e.g.
Barclays; a cheque bearing a special crossing must be met only by payment
to that particular bank,
i.e. Barclays. In short the cheque is payable to a bank named on it.
(b) General Crossing- is made by drawing across the face of the cheque
two parallel lines with or
without the words "and company", or any abbreviation thereof, e.g. "& Co.".
The original
intention was that the payee could insert the name of his bank, making it a
special crossing, but
the bank usually does this by stamping its name on the crossing. In short
the cheque is payable
to any bank.
9.2.10 "Not Negotiable"
The Act also provides for the addition of the words "Not negotiable" to the
crossing. The effect of these
words is to take away the attributes of negotiability from the instrument, so
that no person taking a cheque
bearing such a crossing can obtain a better title than that of the transferor.
Let us consider a cheque which
has been crossed "not negotiable" and which has been stolen. Obviously, the
thief's title to the cheque is a
bad one and henceforth all successive holders of that cheque, no matter how
innocently they may have
acted or how great has been their good faith, have defective titles to the
cheque. If the drawer has
succeeded in stopping the cheque, the holder with defective titles acquired
through the thief cannot
compel the drawer to remove his/her stop. Moreover, the holder with a
defective title who succeeds in
102
cashing such a cheque (paid in through his account) is liable to refund the
proceeds to the true owner.
This liability extends for the statutory period of six years.
9.2.11 "A/c Payee Only"
Where a cheque is crossed and bears across its face the words "account
payee" or "a/c payee", either with
or without the word "only", the cheque shall not be transferable, but shall
only be valid as between the
parties thereto i.e drawer and payee. This means that account payee
cheques are non-transferable, and

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it seems clear that a bank collecting such a cheque for a person other than
the payee will lose its statutory
defence (see below).
Let us now consider the position of the paying bank in relation to crossed
cheques. Quite simply, it is
bound to pay in accordance with the crossing. The Bills of Exchange Act
provides that a banker who
pays a crossed cheque otherwise than in accordance with the crossing will
be liable to the true owner of
the cheque for any loss the latter may incur by reason of the banker's
default.
Where, however, a crossing has been obliterated or altered without this
being apparent, a banker who
pays in good faith and without negligence within the apparent terms of
the cheque will not incur any
liability (this is referred to as the bankers statutory defence).
9.2.12 Special protection of paying banker
The general rule is that the bank will be liable for effecting a payment where
the cheque bears forged
endorsement. However section 60 of the Bills of Exchange Act, affords
special protection to bankers if
the cheque with a forged endorsement is paid by a banker in good faith
and in the ordinary course of
business. The cheque will be deemed to have been discharged,
notwithstanding the forgery.
9.2.13 Special protection of collecting banker
If the customer presenting the cheque has no title thereto, the collecting
banker would normally be liable
to the drawer for the tort of conversion (disposal of property [including
cheques] owned by someone else)
if the latter suffered loss. However, section 79 of the Bills of Exchange Act,
provides that the bank
collecting a cheque for a person who has no title thereto (including the
holder of a cheque that bears a
forged endorsement) will not itself incur any liability for this action when
acting in good faith and
without negligence.
9.3 PROMISSORY NOTES
Section 89 of the Bills of Exchange Act states that “A promissory note is
an unconditional promise in
writing made by one person to another, signed by the maker, engaging 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…”
A specimen of a promissory note (note that a bank note is a form of a
promissory note)

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Blantyre, 30 April 2014
K10 million
On demand I promise to pay at the Mzuzu Bank Limited, to
Mr A. Gondwe or order, the sum of Ten Million Kwacha for
value received.
Signed JJ Phiri
J Brown
103
9.4 PRACTICE QUESTIONS
1. Define a bill of exchange.
2. Compare and contrast a bill of exchange from a cheque and a promissory
note.
3. In terms of the Bills of Exchange Act, how is a cheque defined?
4. Describe the various types of acceptance that one can make on the bill.
5. What are the characteristics of a holder in due course?
6. What is an inchoate instrument?
7. Describe how a bill of exchange is discharged.
8. Mention three general duties of a holder of a bill of exchange.
9. How may a bill of exchange be used in practice?
10. Describe the types of endorsement that may be made on a bill of
exchange.
11. Who may have capacity to incur liability as a party to a bill?
12. Define the term ‘Bill of Exchange’ and outline its main characteristics.
13. Comment on the following types of Bills of Exchange:-
i. Accommodation Bill.
ii. An Inland Bill and a Foreign Bill.
14. Maggie signed a cheque without any crossings. She instructed her
accounts assistant to fill in a
sum of K100,000 on the cheque and fill in Osman’s name as payee. The
assistant owed a personal
debt to Paul in the sum of K200,000 and so filled in the sum of K200,000 and
made the cheque
payable to Paul. Paul cashed the said sum of K200,000 at Maggie’s Bank.
Required: - Advise Maggie on the liability of the parties, if any.
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