Bills of Exchange
Bills of ExchangeConcept of NegotiationThe essence of a negotiable instrument is that the debt which is represented by the instrument should be easily, cheaply and freely transferable. It is of the essence that the instrument should be freely transferable and that the person who is entitled to the instrument for the time being, the ‘holder’, should be able to obtain payment of it. Essential features of NegotiabilityLondon and River Plate Bank v Bank of Liverpool [1896] 1 QB 7 - There are three characteristics that seem to be essential:The instrument must be transferable by delivery or by delivery and endorsementThe person entitled to the instrument may sue in their own name without adding any other party to the action; andA person who takes for value and in good faith takes ‘free of equities’.Transfer by endorsement/deliveryEndorsement – signifies the writing on the instrument, usually on the back, of the name of the person who is transferor. The process of transfer by endorsement and delivery is called ‘negotiation’.Transferee able to sue in own nameThe person who is entitled to the instrument, called the holder, may use in his or her own name. It is not necessary to sue the person from whom the holder took the instrumentThe holder may choose to sue any one or all of the parties who are liable on the instrumentThe procedure for suing on a bill is simple – the plaintiff only needs to produce the bill which will show on its face and back that the plaintiff is the presumed holder.Defences are limited and the plaintiff holder will usually be entitled to summary judgement.Transfer free of equitiesIt is possible in the ordinary course of transferring rights in a negotiable instrument to pass a better title to the transferee than is held by the transferor.Formal RequirementsBills Exchange Act 1909 (Cth) (BEA)S8(1) – ‘A bill of exchange is 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’.A bill of exchange involves three parties:A person who makes an order, called the drawer;The person to whom the order is addressed, called the drawee; andA person who is to receive the sum specified, called the payee.One person can fulfil the role of drawer and drawee. That is, a bill may be drawn ‘To X, Pay Y the sum of $100 (signed) Y’.Unconditional orderAn instrument which does not contain an ‘unconditional order’ is not a bill of exchange. Little v Slackford (1828) 1 Mood & M171 – an instrument bearing the words ‘please let the bearer have $7 and place it to my account and you will much oblige me’ was held not to be an order WHILE ‘[the drawee] will much oblige [the drawer] by paying to the order of [the payee]’ was considered acceptable Ruff v Webb (1974) 1 Esp 129The reasons that the order must be ‘unconditional’ was explained in Carlos v Fancourt [1794) 5 TR - ‘it would perplex the commercial transactions of mankind, if paper securities of this kind were issued out into the world encumbered with conditions and contingencies, and if the person to whom they were offered in negotiation were obliged to enquire when these uncertain events would probably be reduced to certainty’ S8(2) – An instrument which orders any act to be done in addition to the payment of money, is not a bill of exchange.S16 also implies that a document which order payments ‘on the event of X occurring’ is not a bill of exchange and it does not matter whether ‘X’ actually occurs.Sum CertainS14 provides an expanded meaning of what most people would consider to be a sum certain. Since the drawee must be prepared to pay on demand, it is clear that the amount to be paid should be stated accurately and clearly. S14 provides an expanded meaning of what most people would consider to be a sum certain. S14(1) says that the amount is a sum certain even though the bill specifies that the amount is to be paid:with interest or bank charges;in stated instalments;in instalments with a provision that then entire sum becomes due if there is a default;an indicated rate of currency exchange or a specified means of ascertaining a rate of exchange.On DemandA bill is payable on demand if it is expressed to be so payable or if it has no indication of when payment is to be made: s15(1). A bill is payable at a determinable future time if it is expressed to be payable:at a fixed period after date or sight: s16(a); oron or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of happening may be uncertain: s16(b).Promissory NotesA bill of exchange requires at least three parties, the drawer, the payee and the drawee. The promissory note requires only two s89(1) provides: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 a bearer.Bills or Bearer Billss13(4) - A bill is a payable order if it is expressed to be payable to a persons order or one which is expressed to be payable to a person and does not contain any words prohibiting transfer.Transfer/negotiationBecause the rights enjoyed by a holder in due course and because of the limited number of defences open to an indorser or a drawer, resisting a claim on a bill often involves arguments over technicalities. HoldersThe ‘holder’ of a negotiable instrument is the person who is given certain rights by the BEA. A holder is the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof.A ‘bearer’ is the person in possession of a bill or note which is payable to the bearer.A person in possession of an order bill is NOT a ‘bearer’.S43(1)(a) - The ‘holder’ of a bill has one very valuable right, namely that they may sue on the bill in there own name. This gives the holder of negotiable bill substantial advantages over an equitable assign of a debt.A ‘holder in due course’ is a holder that:taken the billthe bill is complete and regular on the face of itthe bill was not overduethe holder had no notice that the bill has been dishonoured the holder took in good faith and for value; andthe holder had no notice of any defect of title of the person who negotiated it.Jones (RE) Ltd v Waring & Gillow Ltd [1926] AC 670 – The payee of a bill, who may be a holder, cannot be a holder in due course since the bill is not negotiated to a payeeS43(1)(b) – The holder in due course holds the bill free from any defect of title of prior parties, as well as from mere personal defences available to prior parties among themselves, and may enforce payment against all parties liable on the bill. The method of NegotiationHow does a person become a holder of a bill or note?The bill must be ‘negotiated’ to that person. S36(1) – An instrument is ‘negotiated’ when it is transferred from one person to another in such a way as to make the transferee a holder of the instrument.Bearer InstrumentsS36(2) – A bearer bill is negotiated by delivery. Therefore, there is no requirement that the transferor be a person who is entitled to the instrument.S(4) – A person in possession of a bearer instrument is the holder.Bearer bills are VERY INSECURE. If a bearer bill comes into the possession of a thief, the thief is a holder of the instrument. If the thief delivers the bill to some third party, that party becomes a holder and, if certain requirements are satisfied, may become a holder in due course who is entitled to enforce the bill against all parties liable to it.Order Instrumentss40(3) - Order bills are much safer. An order bill may only be negotiated by indorsement of the holder and delivery. Indorsement must be made by the holder. The holder of an order bill is the payee or an indorsee who is in possession of the bill – s4.Order bills are VERY SECURE. If a order bill comes into the possession of a thief, the thief is NOT the holder of the instrument – being neither the payee nor an indorsee. If the thief delivers the bill to some third party, that party does not become a holder, this is so even if the thief forges the name of the true owner of the bill, for the bill has not been indorsed by the holder.Indorsement of bill servers two purposes. The first is that an indorsement is essential for the negotiation of an order bill. Second, the indorsement is essential to make the indorser liable on the bill. It is for the second reason that a bearer bill will often be indorsed even though the indorsement is not necessary for the bill to be transferred by negotiation.Becoming a holder in due courseS35(2) – Every holder of a bill is a holder in due course. THIS IS NOT ALWAYS TRUE!!s35(2) - If in an action or proceeding on a bill it is admitted or proved that the drawing, acceptance, issue or transfer of the bill is affect by fraud, duress or illegality, then the holder is not entitled to this presumption unless and until he or she proves that the value was given in good faith for the bill at a time after the alleged fraud, duress or illegality.These sections are misleading since it is possible for a holder to prove affirmatively that he or she is a holder in due course by showing that the value in good faith was given before the alleged fraud, duress or illegality. In other words, it is not necessary for the holder to rely on the presumption if he or she has the means of proving that the requirements of the definition of holder in due course are satisfied: Barclays Bank Ltd v Astley Industrial Trust Ltd [1970] 2 QB 527Good FaithS96 - A holder in due course must take the bill in good faith. An act or thing is done in good faith if the act or thing is done honestly, whether or not it is done negligently.Jones v Gordon (1877) 2 App Cas 616:‘[a person who is]…..honestly blundering and careless, and so took a bill of exchange or a bank-note when he ought not to have taken it, still he would be entitled to recover. But if the facts and circumstances are such at that a jury, or whoever has to try the question, came to the conclusion that he was not honestly blundering and careless, but that he must have had a suspicion that there was something wrong, and that he refrained from asking question, not because he was an honest blunderer or a stupid man, but because he thought in his own secret mind ‘I suspect there is something wrong, and if I ask questions and make further inquiry, it will no longer be my suspecting it, but my knowing it, and then I shall not be able to recover’, I think that is dishonesty.’Consideration/ValueA holder in due course must have taken the bill ‘for value’.‘Value’ means valuable consideration as defined in the Act in s(4) and s32(1).S32(1)(a) – Valuable consideration for a bill may be constituted by any consideration which sufficient to support a simple contract.Where the bill is given as payment of a debt, the consideration for the bill is the agreement to accept the bill in payment in lieu of the cash which it is the right of the creditor to demand: Spencer v Crowther [1986] BCL 422Belo Nominees Pty Ltd v Barellan Nominees Pty Ltd [1986] 3 WAR 1940S32(1)(b) provides that an antecedent debt or liability may also provide good consideration for a bill. This is so whether the bill is payable on demand or at a future time.A further extensions32(2) - Once a holder gives consideration for a bill, then every later holder is to be considered as having given consideration as against the drawer, the acceptor and any indorser who became an indorser before the time of consideration being given.Thus, if A draws a cheque in favour of B and gives it to B as a gift, if B indorses the cheque to C as a gift and C indorses the cheque to D for value, then D and every later holder of the cheque is deemed to have given value for the cheque as against A,B,C.S35(1) – The drawer and each indorser of a bill are presumed to have received value for the bill unless the contrary is proved; the presumption includes the acceptor. Complete and RegularIn order to become a holder in due course, the holder must have taken a bill that is ‘complete and regular on the face of it’. Arab Bank Ltd v Ross [1952] 2 QB 216 - ‘On the fact of it’ includes the back, with the consequence that the indorsements must be ‘regular’.Notice of defect in titleS34(2) – The title of the transferor is ‘defective’ if he or she obtained the bill or the acceptance of the bill by fraud, duress, or force and fear, or other unlawful means or for an illegal consideration, or when it is negotiated in breach of faith or under such circumstances as amount to a fraud. Requisites of valid acceptancesS22(1) – Acceptances of a bill is the signification by the drawee of his or her assent to the order of the drawer. Acceptance must be written on the bill itself and signed by the drawee. S22(a) – The Act provides that a simple signature written on the bill by the drawee is a valid acceptance.Requisites of invalid acceptancesS37(b) - In order to transfer a bill by negotiation, the indorsement must be written or placed on the bill itself and it must be an indorsement of the entire bill.Therefore it is impossible to ‘split’ the sum of the bill into parts, some of which are transferred and some of which are not.Transferor by deliveryS63(1) – A holder of a bill payable to bearer who transfers it by negotiation without indorsement is known as a transferor by delivery.S63(2)- The transferor by delivery is not liable on the bill since he or she has not indorsed it.Principles of LiabilitiesNo Liability without a signatureS28 – A person cannot be held liable as an indorser, drawer or acceptor unless the person has signed the bill in the appropriate category.Muirhead v Commonwealth Bank of Australia (1996) 139 ALR 561 – Disputed the bill on the grounds of s97(1) since the signature was not ‘written thereon by some other person’.Court noted that the section did not actually require that the signature be written, only that is was ‘sufficient’ if it was.In Australia, ‘signature’ does not preclude signature by agent, whether written in the name of the agent or the principal.By signing a name in the form on “For on and behalf”, regardless of whether there was an actual signature, the court deemed that this was authenticating enough and therefore deemed to be a “signature” in this regard.No Liability presentment for paymentPromises and liabilities are conditional.S60 – In the ordinary course of events, a drawer or indorser has no liability until the bill has been duly presented for payment.Chain of LiabilitiesEach person who becomes a party to the bill by drawing, accepting or by indorsing becomes responsible not only to any holder but also to any person who is further down the ‘chain’.In the event that the drawee/acceptor fails to pay the bill, the holder may have redress against any of the previous parties who have signed the bill. If one of these parties is forced to pay the holder, that party may in turn have recourse against any person who indorsed the bill prior to his or her own indorsement. The process only unless when the drawer is forced to pay, for the drawer is the person who is ultimately liable on the bill.The Acceptor (drawee)The acceptor of the bill is the person who is:Primarily liable on the billBy accepting, they have promised that they will pay the bill ‘according to the tenor of his acceptance’ – s59(a)They are estopped from denying to a holder in due course that the front of the bill is what it appears to be s59(b)The acceptor may not deny:The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the billIf payable to the drawers order ,the then capacity of the drawer to indorseIf payable to the order of a third person, the existence of the payee and his then capacity to indorse.By accepting, the acceptor takes responsibility that these parties are what they appear to be, and this responsibility extends only to a holder in due course.The DrawerThe drawer of a bill:Promises that on due presentment the bill will be accepted – s60(1)(a)Promises that on due presentment for payment the bill will be paid according to its tenor as drawn – s60(1)(a)Promises that if the bill is dishonoured they will compensate the holder or any indorser who is compelled to pay; andIs precluded from denying to a holder in due course the existence of the payee and the capacity of the payee to indorse at the time when the bill was drawn – s60(1)(b) S46 – Sets out the requirements which must be met in order that the bill be duly presented. The indorser/indorsee (payee)By indorsing a bill, an indorser:Promises that on due presentment the bill will be paid according to its tenor at the time of indorsement – s60(2)(a) Promises that on due presentment the bill will be accepted (if it requires acceptance);Promises to ‘compensate’ the holder or any subsequent indorser who has been compelled to pay;Is estopped from denying to any subsequent indorser or to the holder that the bill was a valid and discharged bill at the time of indorsement and that the indorser had a good title at that time – s60(2)Is estopped from denying to a holder in due course the genuineness and regularity in all respects, of the drawer’s signature and all previous indorsements – s60(2)(b)The indorser promises to pay the bill according to the ‘tenor’ as it was when he or she indorsed it.The promise of the indorser differs from that of the drawer in that the indorser promises only to compensate subsequent indorser' who have been compelled to pay. Thus, an indorser who is compelled to pay may have recourse to previous indorsers and/or drawers of the bill.Obligations of the HolderThere are two basic obligations which must be met if the holder is to claim payment. These are:Presentment for acceptance if the bill requires acceptancePresentment for payment at the required timeDuties to the drawee/acceptorThe position of the holder with respect to the drawee or, after the bill has been accepted, the acceptor is regulated by s57. s57(1) provides that, where there is a ‘general’ acceptance, the acceptor remains liable to the holder even if the bill is not presented for payment. Where a bill is presented for payment the holder must ‘exhibit’ the bill and, upon receiving payment, give the bill to the party paying s57(4). ................
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