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Chapter 12 FinancingChapter 12 FinancingChapter 12 FinancingChapter 12 FinancingA. FINANCING FOREIGN TRADEB. BILLS OF LADINGC BILLS OF EXCHANGE

The Law Governing Bills of ExchangeTypes of Bills of Exchange

D. PROMISSORY NOTES

E. NEGOTIABILITY OF BILLS AND NOTESUnconditional Promise or Order to PayDefinite Sum of Money or Monetary Unit of AccountPayable on Demand or at a Definite TimeSigned by the Maker 01 Drawer

F. THE NEGOTIATION AND TRANSFER OF BILLS AND NOTESAssignmentNegotiationForged EndorsementsLimitations on the Excuses That Drawers and Makers Can Use to Avoid Paying Off a

Bill or Note

Liabilities of Makers, Drawers, Drawees, Endorsers, and Accommodation PartiesThe Role of Banks in Collecting and Paying Negotiable Instruments

G. LETTERS OF CREDITGoverning LawApplying for a Letter of CreditDocumentary FormalitiesAdvising and Confirming Letters of CreditThe Obligations of BanksRights and Responsibilities of the Account PartyRights and Responsibilities of Beneficiaries

H. FINANCING FOREIGN OPERATIONS

Private Sources of CapitalGovernmental Sources of CapitalRegional and International Development AgenciesCHAPTER QUESTIONSREVIEW PROBLEM

International financing encompasses two kinds of activities: the financing of foreign

trade and the underwriting of investments in foreign countries. The first of these,

foreign trade financing, involves the underwriting, paying, and collecting of money

for the purchase of goods and services. The second, the capitalization of foreign

investments, involves the acquisition of debt and equity financing to establish or

expand overseas business operations.

A. FINANCING FOREIGN TRADEA. FINANCING FOREIGN TRADEA. FINANCING FOREIGN TRADEA. FINANCING FOREIGN TRADE

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International traders need to be familiar with the kinds of documents, trade terms,

and financing arrangements used in international sales.

The documents used in international sales are also used in domestic sales, but then'

use domestically is much less common. Most domestic sales are financed through open-

account credit arrangements. That is, the buyer does not sign a formal debt

instrument. Formalities are not needed because sellers only enter into sales after

investigating the buyer's credit worthiness. By comparison, in international sales,

buyers and sellers are separated both by distance and by the differing financial

practices of their home countries. This means that it is difficult for the seller to

determine the credit standing of a foreign buyer, and equally difficult for the buyer

to reliably establish the foreign seller's integrity and reputation. To compensate for

this, foreign traders use formal documents that serve to assure the parties that their

sale will go forward as agreed. The most important of these documents are (a) the bill

of lading, which is the transportation document and document of title described inchapter 11; (b) bills o exchange and promissory notes, which are, respectively, orders

to pay money and promises to pay money; and (c) the letter of credit, which is a third

party's guarantee of a buyer's credit worthiness.

B. BILLS OF LADINGB. BILLS OF LADINGB. BILLS OF LADINGB. BILLS OF LADING

The essential document for all international sales is the bill of lading.bill of lading.bill of lading.bill of lading. As described

in chapter 11, the bill of lading is a document of title. That is,

it represents the goods.

In international trade, goods shipped from one country to

another may well be in the possession of a carrier or warehouseman

for several weeks: from the time they are shipped to the time they

are delivered. The bill of lading is important, therefore, because

it lets the buyer and the seller (or their banks) exchange control

over the goods while the goods are in the possession of the

warehouseman or carrier. As one British judge once described it, the bill o: lading is

the "key" that permits its holder "to unlock the door of the warehouse, fixed or

floating, in which the goods may chance to be."1

This ability to transfer title by the transfer of a bill of lading is central to the

use of bill; of exchange and letters of credit, the two basic financing and payment

instruments used in international trade.

C. BILLS OF EXCHANGEC. BILLS OF EXCHANGEC. BILLS OF EXCHANGEC. BILLS OF EXCHANGE

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A bill ofbill ofbill ofbill of exchange (or draft as it is sometimes called) is a written, dated, and

signed instrument that contains an unconditional order from the drawer that directs

the drawee to pay a definite sum of money to a payee on demand or at a specified

future date. It is a useful instrument because it allows one party (the drawer) to

direct another (the drawee) to pay money either to himself, to his agent, or to a

third party. Of course, the order is valid only if the drawee has an underlying

obligation to pay money to the drawer. This can arise in situations where the drawee

is holding money on account for the drawer (i.e., the drawee is a bank), where the

drawer lent money to a drawee (i.e., the drawee is a borrower), or where the drawer

has sold goods to the drawee and the drawee owes the sale price to the drawer (i.e.,

the drawee is a buyer).

In the first of these situations (where the drawee is a bank), the bill involved is

known as a check. In the second situation (where the drawee is a borrower), the bill

is called a note. The bills referred to in the third situation (where the drawee is a

buyer) are called trade acceptances.

Bills of exchange are important devices for facilitating international trade because

they are negotiable instruments. A person properly holding a negotiable instrument

takes it free of most claims or defenses that the drawer might have that the

underlying contract was improperly performed or that the instrument was improperly

made. This freedom from the so-called "equities" or "personal defenses" of the drawer

makes bills of exchange more readily salable, and therefore useful financial tools for

raising money.

The Law Governing Bills of ExchangeThe Law Governing Bills of ExchangeThe Law Governing Bills of ExchangeThe Law Governing Bills of Exchange

Until the middle of the seventeenth century, bills of exchange were governed by a

single international law, the lex mercatoria.2This law defined the bill of exchange

as an instrument that allowed apermutatio pecuniae presentis cum absenti (an exchange

of money by one who is present with one who is absent). Because the bill applied

specifically to an exchange between loci distantia (distant places), it was exempt

from the medieval Christian Church's prohibition against interest on loans. Because of

this exemption, it rapidly became the key instrument of medieval banking.

______

1Saunders v. Maclean, Law Reports, Queen's Bench Division, vol. 11, p. 341 (1883).

2Latin: "law merchant." Common commercial rules and procedures used throughout Europe during the Renaissance.

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In the seventeenth century, however, the rise of national laws brought about

differences in the rules governing bills of exchange. The French bill of exchange came

to be governed by the Savory Code of 1673, the Perfect Tradesman, and the works of

Jousse. In Germany, the applicable law was the Wechselrecht. In England, the courtscreated a case law that reflected the practice in English banks.

At the end of the nineteenth century, the lex mercatoria was

codified in England in the Bills of Exchange ActBills of Exchange ActBills of Exchange ActBills of Exchange Act (BEA) of 1882.

Today, the BEA continues in force in the United Kingdom and in

virtually all of Britain's former colonies.

In 1896, in the United States, the National Conference on

Commissioners of Uniform Laws drafted a Uniform Negotiable

Instruments Law (UNIL), which was largely based on the BEA. By 1920,

all of the American states had adopted the UNIL. Then, in the 1940s, the UNIL was

modernized and integrated into the more comprehensive Uniform Commercial CodeUniform Commercial CodeUniform Commercial CodeUniform Commercial Code (UCC),

which by 1950 had been adopted in all states except Louisiana.3

On the European continent, there were calls throughout the latter half of the

nineteenth century for the creation of an international negotiable instruments law.

Finally, in 1907, a conference convened at The Hague to draw up a convention. A draft

was agreed to in 1912, but World War I interrupted ratification. The League of Nations

then organized a series of conferences to update the 1912 draft. In 1930, three GenevaGenevaGenevaGeneva

Conventions on the Unification of the Law Relating to Bills of ExchangeConventions on the Unification of the Law Relating to Bills of ExchangeConventions on the Unification of the Law Relating to Bills of ExchangeConventions on the Unification of the Law Relating to Bills of Exchange (ULB) were

signed.4The following year, two additional Geneva Conventions on Unification of the

Law Relating Lo Checks (ULC) were also signed.5Within 15 years, the ULB and ULC had

been ratified by most continental European countries, and today they serve as the

standard laws governing bills of exchange and checks in virtually every nation,6with

the exception of the Anglo-American common law countries.7

Although there are currently no uniform worldwide rules governing bills of exchangeand promissory notes, there is a widely followed set of international rules governing

the collection of checks;" the International Chamber of Commerce's Uniform Rules for

Colleclions.9Most domestic laws allow banks to incorporate the ICC's Rules into their

collection instructions, and this is the common practice for international collections

worldwide.10

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3The lext of the Uniform Commercial Code is posted on the Legal Information Institute's Web site at

http:/www.law.cornell.edu/ucc.table.html.

4The three arc the Convention. Providing a Uniform Law for Bills of Exchange and Promissory Notes, the Convention

for the Settlement of Certain Conflicts with Billy of Exchange and Promissory Notes, and the Convention on the

Stamp Laws inininin Connection with Bills of Exchange and Promissory Notes.

5They are the Convention Providing a Uniform Law for Checks and the Convention for the Settlement of Certain

Conflicts of Laws in Connection with Checks.

6For a brief history of negotiable instrument law in Europe, as well as the text of the ULB, seeseeseesee Frederick Wal-

lace, Introduction to European Commercial Law, pp. 92-123 (1953),

7The differences between the Anglo-American rules and the Geneva conventions (which are fairly substantial) led lo

calls in the 1950s for the drafting of a new international convention with true international appeal. The call was

taken up belatedly by the UN Commission on International Trade Law (UNCITRAL), which produced a final text in May

1988, in December of 1988, the UN General Assembly approved a resolution adopting the text and opened the

conventioncalled the Convention on International Bills of Exchange and Inter national Promissory Notes (CIBN)

for ratification. Although only 10 stales must ratify the Convention before it will come into effect, as of 1999

only Guinea and Mexico had ratified the CIBN, and it seems unlikely that it will come into effect anytime soon. See

Multilateral Treaties Deposited with the Secretary-General: Status as at 30 April 1999, posted on the Internet at

http://www.un.org/Depts/Tremy/finaUls2/neivfiks/part_boo/x_boo/ x_12.html.

For a brief history and description of the CIBN, as well as the text, see "United Nations Convention on

International Bills of Exchange and International Promissory Notes,'" International Legal Material, vol. 28, pp.

170-211 (1989), with John Spagnoles "Introductory Note."

8Both the common law countries and the countries that follow the continental European practice have distinct rules

governing bank deposits and the collection of checks. See, e.g., Article 4 of the UCC, entitled "Bank Deposits and

Collections"; and the ULC.

Types of Bills ofTypes of Bills ofTypes of Bills ofTypes of Bills ofExchangeExchangeExchangeExchange

A bill of exchange

is an unconditional

written order. The

party creating the bill (the drawee) orders another party (the drawee) to pay money,

usually to a third party (a payee).

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The form that a bill of exchange must take depends on the governing law. The common

law requires only that a bill (or draft) be in writing and be payable either to order

or to bearer.11The ULB adds to this the requirements that a bill (a) contain the term

"bill of exchange" in the body and language of the check,12(b) state the place where

the bill is drawn, (c) state the place where payment is to be made, and (d) be dated.

These requirements are summarized in Exhibit 12-1.

Time and Sight BillsTime and Sight BillsTime and Sight BillsTime and Sight Bills

Bills may be either "time bills" or "sight bills." A time billtime billtime billtime bill is payable at a

definite future time. A sight billsight billsight billsight bill (or demand bill) is payable when the holder

presents it for payment or at a stated time after presentment. Exhibit 12-2 shows an

example of a time bill.

Trade AcceptancesTrade AcceptancesTrade AcceptancesTrade Acceptances

A trade acceptancetrade acceptancetrade acceptancetrade acceptance is the bill of exchange most commonly used in the sale of goods.

On this bill, the seller of the goods is both the drawer and the payee. The bill

orders the buyer the drawee to pay a specified sum of money.

The use of trade acceptance is best illustrated with an example. SunnySales, Inc. in

California has traditionally sold raisins to GuttenTag, GmBH, in Germany on terms that

require GuttenTag to make payment in 90 days. This year, however, SunnySales needs

cash. To get cash, it draws trade acceptance that orders GuttenTag to pay $ 100,000to

the order of SunnySales 90 days later. SunnySales then presents the bill to GuttenTag.GuttenTag accepts by signing the bill on its face and returning the bill to

SunnySales. GuttenTags acceptance creates an enforceable promise to pay the bill

when it comes due in 90 days.

______

9ICC Publication No. 522 (1996), The Uniform Rules for Collection was first published in 1956. The 1996 edition

was the second revision. Seethe ICC Internet Web site athttp://www.iccwbo.org/iccpub/default.asp fur information

on this and other ICC publications.

10For example. UCC, 4-102(3), slates that the provisions in Article 4 (Bank Deposits and Collections) of the

UCC may be varied by agreement, except that "no agreement tan disclaim a bank's responsibility for its own lack of

good faith or failure to exercise ordinary care."

11UCC, g 3-1(14(2), provides: "A writingis (a) a draft ('bill of exchange') if it is an order; (b) a 'check'

if it is drawn on a bank and payable on demand; (c) a 'certificate of deposit' if it is an acknowledgement by a

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bunk of receipt of money with an engagement to repay it; (d) a 'note' if it is a promise other than a certificate

of deposit."

12In the case of a promissory note, the term would be "promissory note," and. according to the ULC, a check

requires the term "check."

The advantage

to SunnySales of

having a trade

acceptance is

that it can sell

the bill of

exchange in the

money market

more easily thanit can assign a

$100,000 account

receivable. A trade acceptance is shown in Exhibit 12-3.

When the drawee of a bill of exchange is a bank, the bill is known as a check.check.check.check.

Unlike other bills of exchange, checks are always payable on demand.13See Exhibit 12-

4.

______

13ULC, Article28; UCC,

3-104 (2)(b)

D. PROMISSORY NOTESD. PROMISSORY NOTESD. PROMISSORY NOTESD. PROMISSORY NOTES

A written promise

to

pay

a

determinate

sum of money made between two parties is a promissory note,promissory note,promissory note,promissory note, or

simply a note. The party who promises to pay is called the maker;

the party who is to be paid is the payee. Exhibit 12-5 defines the

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different parties to bills Of exchange and promissory notes.

The only difference between a promissory note and a bill of exchange is that the maker

of

a

note

promises

to

personally

pay

the

payee,

rather

than

orderinga

third

party

to

do

so.

Exhibit

12

-

6

shows examples of typical promissory notes.

The rules governing bills of exchange apply to promissory notes as well. The forms

of both instruments are also alike. Thus, whereas the common law does not require that

a note contain the wordspromissory note, the LILB does.

Notes are used in a variety of credit transactions and are

commonly given the name of the transaction involved. For example, a"collateral note" is one secured by personal property; a "mortgage

note" is secured by real property; an '"installment note" is

payable in installments.

When a bank is the maker promising to repay money it has received, plus interest,

the promissory note is called a certificate of depositcertificate of depositcertificate of depositcertificate of deposit (CD). CDs in amounts up to

$100,000 are customarily called "small CDs"; those for $100,000 or more, "large CDs."

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Most large CDs, and some small CDs, are negotiable. Exhibit 12-7 shows a negotiable

CD.

E.E.E.E.

NEGOTIABILITYNEGOTIABILITYNEGOTIABILITYNEGOTIABILITY

OFOFOFOFBILLSBILLSBILLSBILLS

ANDANDANDAND

NOTESNOTESNOTESNOTES

Bills of

exchange

and

promissory

notesmay be

either

negotiable

or

nonnegotiable.

For

trade to run smoothly, especially international trade, these instruments need to be

negotiablethat is (generally speaking), as freely exchangeable as money. Indeed, so

long as the form and content of the instruments are proper, the law guarantees the

full transferability of the right to receive payment. If there is any limitation on

this right, an instrument is said to be nonnegotiable.

To be negotiable, a bill or note must (a) be in the proper form and (b) contain a

promise by the maker or drawer to make payment. The requirements for form were

discussed earlier (see Exhibit 12-l).Tomuet the promissory requirements, a bill or

note must do the following:

1. State an unconditional promise or order to pay

2. Stale a definite sum of money or a monetary unit of account

3.

Be

payable

on

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demand or at a definite time

4. Be signed by the maker or drawer

Unconditional Promise or Order to PayUnconditional Promise or Order to PayUnconditional Promise or Order to PayUnconditional Promise or Order to Pay

A bill of note must contain a promise or an order to pay that is unconditional.

A bill or note must contain an affirmative promise by the maker, or an order to a

drawee, to be negotiable. The promise is inadequate if it is only implied.

For example, an "I.O.U." only acknowledges an obligation of indebtedness. Although

it may imply an obligation to pay, it does not contain an affirmative undertaking to

do so. It is not, therefore, a negotiable instrument.

The promissory notes shown in Exhibit 12-6 are different because they clearly state

that the makers promise to pay the payees. Similarly, the bills of exchange shown in

Exhibits 12-2, 12-3, and 12-4 each order a drawee to pay a payee.

UnconditionalityUnconditionalityUnconditionalityUnconditionality

The promise or order to pay made in a bill or note cannot be conditioned upon the per-

formance

of

some

other

obligation.

The

reason

for

this

isbasic

to the

concept of negotiability. If the holder of a bill or note had to determine whether a

collateral promise had or had not been fulfilled, the utility of these instruments

would be greatly reduced.

To illustrate, if Ivan promises to pay Pierre only if Pierre delivers goods to Ivan

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before July 4, anyone who might be interested in purchasing this promissory note

would have to determine whether delivery was actually made. This would be both

expensive and, if an error were made, risky. Thus, both the law and the pragmatic

requirements of trade dictate that a bill or note containing a promise or order to pay

that is conditioned on the performance of a collateral obligation is nonnegotiable.

Mere reference to some other agreement, however, does not make a bill or note non-

negotiable. It is common practice, in fact, to mention the underlying contract that

caused the drawer or maker to issue the bill or note, either for record keeping or for

informational purposes. Thus, statements that the bill or note arises out of a

separate agreement, or that it is drawn under a letter of credit, or that the ability

of the drawer or maker to perform is secured by a mortgage or a security interest do

not affect negotiability.14

Definite Sum of Money or Monetary Unit of AccountDefinite Sum of Money or Monetary Unit of AccountDefinite Sum of Money or Monetary Unit of AccountDefinite Sum of Money or Monetary Unit of Account

A bill or note must be payable in money, which must be for a definite sum.

Both the common law and the ULB specify that the sum paid must be money.money.money.money.15151515 The com-

mon law defines money as "a medium of exchange authorized or adopted by a domestic or

foreign government and includes a monetary unit of account established by an

intergovernmental organization or by agreement between two or more nations."

10

The ULBprovides that the "usages of the place of payment" determine the meaning and the value

of money.17

In international practice, or usage, the parties to international bills and notes

routinely define their monetary obligations by referring to monetary units of account

(such as the International Monetary Fund's Special Drawing Right or the European

Union's euro) or to an ad hoc basket of several foreign currencies (see chapter 6).

Both the common law and the ULB, accordingly, allow bills and notes to be payable in

the currency of one country or several countries, or in a monetary unit of accountdefined by an IGO.

Definite SumDefinite SumDefinite SumDefinite Sum

The sum to be paid must be "certain" or "determinate."18In other words, the amount

to be paid must be ascertainable from the bill or note itself without reference to an

outside source. For example, a promissory note that provides for the payment of 1,000

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plus interest of 10 percent per annum until the time it is cashed states a definite

sum because the parties can figure out the amount that is due from the information

provided on the face of the note.

Both of the principal negotiable instruments laws set out exceptions to this basic

rule. Both allow the parties to define the sum to be paid in one currency (the moneyof account) while requiring payment to be made in another (the money of payment), even

though this requires the parties to refer to exchange rates that are not embodied in

the bill or note.19In addition, the common law allows for payments to be made in

installments (the ULB does not).20Neither, however, permits the use of variable

interest rates.21

______

15

UCC, 3-104(a); ULB, Article 1. Article 1 of the ULC contains the same provision for checks.

16UCC, 1-201(24).

17ULB, Article 41.

18UCC, 3-106(1), uses the phrase "sum certain"; ULB, Article 1(1); uses "determinate sum."

19UCC, 3-107(2);ULB, Article 41.

20UCC, 3-106(l)(a); ULB, Article 5.

21UCC, 3-106(l)(a);ULB, Article 5.

For a bill or note to function reliably in commerce, the time when it is payable has

to be ascertainable from its face.22The time requirement actually serves several

functions. It tells the maker, drawee, accommodation maker, or acceptor when he is

required to pay. It allows secondary parties, such as drawers, endorsers, and

accommodation endorsers, to determine the date when their obligations arise. Itestablishes when the statute of limitations will run. And finally, with interest-

bearing bills or notes, it defines the period for calculating the present value of the

instrument.

Signed by the Maker or DrawerSigned by the Maker or DrawerSigned by the Maker or DrawerSigned by the Maker or Drawer

Bills of exchange must be signed by the drawer, and promissory notes by their maker.

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For this purpose, a signature can be "any symbol executed or adopted

by a party with present intention to authenticate a writing."23Signatures do not have

to be put on bills or notes at any particular time. Bills and notes lacking a drawer's

or maker's signature are simply incomplete, as Case 12-1 illustrates.

_______

22So long as a final definite date for payment can be ascertained from the face of the instrument, this require-

ment is satisfied. The common law makes exceptions to this rule for acceleration clauses (which push forward the

date when an instrument is payable in the event that an installment payment is missed), and the common law also

allows for extension clauses (which let a maker or drawer postpone payment for a fixed time period). UCC, 3-109

(l)(c).

23UCC, 1-201(39). No definition is given in the ULB, but commercial practice in Europe follows the common law

usage.

_____________________________________________________________________

Case 12Case 12Case 12Case 12----1 Constantaras v. Anagnostopoulos1 Constantaras v. Anagnostopoulos1 Constantaras v. Anagnostopoulos1 Constantaras v. Anagnostopoulos

South Africa, Witwatersrand Local Division, 1987.

South African Law Reports, vol. 1988, pt. 3, p. 769 (1988)

The defendant, Mr.Anagnostopoutlos, signed several checks as an accommodation maker,

or aval (that is, as surety and coprincipal). A Mr. Evangelous Souloutas had drawn the

checks, but Mr. Ervangelous Souloutas had drawn the checks, but Mr. Souloutas had not

signed them at the time that the defendant put his signature on them. When the bank on

which the checks were drawn refused to pay on two of the checks, each in the amount of

4,200 rand, the holder, Mr. Constantaras, sought to obtain payment from Mr.

Anagnostopoulos. When Mr.Anagnostopoulos refused to pay, Mr. Constantaras brought this

suit.

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Judge Kriegler:Judge Kriegler:Judge Kriegler:Judge Kriegler:

I turn then to consider the defense which wasthat no liability qua aval arose

because of the alleged sequence in which the defendant and Souloutas put their

respective signatures on the check. Souloutas had allegedly not yet signed the checks

as drawer when defendant, by his signture over the appropriate stamp, signified to the

world at large and in particular to subsequent holders of the check, that he bound

himself as surety and co-principal debtor for the obligations reflected on the face

thereof. Therefore, so it was contended, defendant's signature was legally

ineffectual.

Of course the argument was not as bluntly put as that. Its steps were the following.

First, a contract of aval is unique in that it is a real undertaking of suretyship

signified on and in respect of the obligation evidenced by a bill of exchange. That

then entails, secondly, that the document on which it is recorded must be a bill of

exchange. Thirdly, one than goes to the definition in the Bills of Exchange Act, 34

of 1964 to ascertain what a bill of exchange is. Reference is then made to the

definitions in 1 of the Act of the terms "bill" and "check," which in turn direct

one to 2. Subsections (1) and (2) of 2 of the Act read as follows:

(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 at a determinate future time, a sum

certain in money to a specified person or his order, or to bearer.

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(2), (the defendant] argues that an unsigned check is

not a bill. Therefore, so the argument concludes, the signature of an aval put

on a check before the drawer has signed it is a nullity.

The argument then focuses on the fifth characteristic of the bill as defined, namely

that it is to be signed by the person giving it and, drawing support from subsection

In my view the atgument is fallacious. In the first instance it... [gives too much

importance to] the heading to 5 2. which reads "Definition of and requirements for a

bill of exchange."24It is clear to me that the Legislature, in one and the same

breath, defined a bill and listed the prerequisites for its validity. [It does not

follow] . .. that an instrument, complete and regular in every other respect hut

lacking a signature, is some innominatel25! piece of paper, as Mr. Roos, for the

defendant, would have it. It is simply a bill which, for lack of a signature, is

inchoate,[26]e.g.,an unsigned check.

The use of the term "an unsigned check" is common, not only in laymen's language but

in a legal context. There are many examples of which this case is but one. The

defendant admitted in paragraph 2 of his opposing affidavit that he signed ''the

checks, annexes A and B to the summons" and in paragraph 3.3 alleged that "not one of

the checkshad been signed." To my mind there is nothing anomalous in that choice of

language.

They were, indeed, unsigned checks. If one looks at the Bills of Exchange Act

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itself, there arc several examples of similar use of language. Thus 16(1)

provides:

A bill may be accepted(a) before it has been signed by the drawer

Clearly the notional lawgiver (in fact, the draftsman of 18 of the United Kingdom

progenitor of our 16, namely in the Bills of Exchange Act 1882)" realized that a

bill before it has been signed by the drawer, is a bill capable of being accepted. So,

too, the opening words of & 24(1) ("If a person signs a bill as drawer ..,") indicate

that before the drawer has signed the instrument, it is a bill. The subtlety

necessarily involved in regarding the document as something unknown and unnamed until

the moment the drawer has put the last dot of his signature on it, is unrealistic, not

consonant with commercial or legal parlance and inconsistent with the very language of

the Act.

Furthermore, the defendant unequivocally undertook specific obligations in the

knowledge that the checks were as yet unsigned and, obviously, before they had been

delivered he knew they had to be signed by the drawer and would be signed by him

before they were delivered. Until delivery they would be in (inchoate) (see 88 of

the Act), but once delivered the contract of the drawer would be concluded. See Denis

V. Cowen, The Law of Negotiable Instruments in South Africa.2* The learned author

points out that:

[t]here is no authority on the question whether the contract of aval is incomplete

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and revocable until delivery.

That question does not arise in the present case. Here the checks were delivered, as

defendant intended them to be. In my opinion the defendant's obligations qua aval

arose at the latest when the checks were delivered. They were delivered, bearing his

signature, recording an obligation

which he undertook to secure through his personal suretyship. The checks were

delivered precisely as the defendant intended them to be. They signify to the payee

and to any further holders of the checks that defendant stood surety for the

obligations of the drawer. In my view he is bound by that indication. It matters not

that the drawer's signature had not yet been affixed when the aval signed on the

reverse of the checks.

The defendant was ordered to pay the plaintiff 8,400 rand, plus interest.

______

24Omskrywing van en vereistes virn wissel in the Afrikaans text. As to the propriety of referring to the

heading of a section as an aid in interpretation, see L.C. Steyn, Uitleg van Wette, pp.147, 148 (5th ed., 1974)

25From Latin innominatus:unnamedoranonymous. ]

26From Latin inchoatus:has begun.It means in its early stages of development or incipient.]

27Victoria, Anno 45-46, Chap. 16.

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no more rights in the I.O.U. than Anna had. As a consequence, Chekhov can use Anna's

failure to make delivery of the widgets as an excuse (or "defense") for not paying

Vanya. Vanya's only recourse is to return to Annaif Anna can be foundand get back

whatever money he may have paid for the I.O.U.

Bankers and merchants, who are well aware of the problems that arise in taking

instruments by assignment, are not anxious to do so. They prefer to be paid in cash,

or by a negotiable instrumentthat is, by an instrument that is, for most purposes,

the same as cash.

NegotiationNegotiationNegotiationNegotiation

NegotiationNegotiationNegotiationNegotiation is the transfer of a bill or note in such a way that the recipient becomes

a holder. Unlike an assignee (who acquires only the rights of the

assignor), a holder can acquire more rights from the transferor than

the transferor possessed. Trie rights that a holder acquires depend

on the manner in which the instrument was negotiated and the

governing law.

Negotiating Order PaperNegotiating Order PaperNegotiating Order PaperNegotiating Order Paper

Order paperOrder paperOrder paperOrder paper is a billbillbillbill or note that either (a) contains the name of

a payee capable of endorsing it, such as "pay to the order of

Francisco Madero," or (b) contains as its last endorsement a so-

called special endorsementthat is, for example, "pay to Otto Bismarck." (See Exhibit

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12-8.) Order paper is negotiated by delivery and endorsement. That is, a bill

payable to the order of Giulio Romano would be negotiated when Giulio signed the back

and delivered it to a holder.

Negotiating Bearer PaperNegotiating Bearer PaperNegotiating Bearer PaperNegotiating Bearer Paper

Bearer paperBearer paperBearer paperBearer paper is an instrument that either (a) contains on its face an order to pay

the bearer or to pay in cash or (b) contains as its last endorsement a so-called blank

endorsement, that is, the signature of the payee or the signature of the last endorsee

named in a special endorsement. (See Exhibit 12-9.) Bearer paper is negotiated by

delivery alone.

The use of bearer paper is riskier than the use of order paper. If it is lost or

stolen it must still be paid, as the next case points out.

________________________________________________________________________

Case 12Case 12Case 12Case 12----2 Miller v. Race2 Miller v. Race2 Miller v. Race2 Miller v. Race

England, Court of King's Bench, 1758.

English Reports, vol. 97, p. 398.

William Finney owed 21 pounds and 10 shillings

to Bernard Odenhany. Finney purchased a note in

that amount from the Bank of England that was

drawn upon the bank itself and that was made

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ayable, to bearer, Finney then sent the bunk's

note to Odenhany in the mail on December 11,1756. That night the mail was robbed, and

the note in question, and several other notes, were carried off by the robber. On

December 12, the note came into the possession of an innkeeper by the name of Miller.

On December 13, having learned of the robbery, Finney applied to the Bank of Englan

to stop payment on the note. The bank agreed to do so.

Shortly thereafter. Miller presented the note to the Bank of England for payment.

The bank's clerk, who was named Race, refused either to pay the note or return it to

Miller. Miller thereupon brought suit against Race to compel him to make payment.

At issue was the following question: "Whether, under the circumstances of this case,

the plaintiff had a sufficient property in

this bank note, to entitle him to recover in

the present action."

Lord Mansfield:Lord Mansfield:Lord Mansfield:Lord Mansfield:

* * *

[This case] has been very ingeniously argued by Sir Richard Lloyd for the defendant.

But the whole fallacy of the argument turns upon comparing bank notes to what they do

not resemble, viz. to goods, or to securities, or documents for debts.

Now they are not goods, not securities, nor documents for debts, nor they so

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esteemedbut are treated as money, as cash, in the ordinary course and transaction

of business, by the general consent of mankind; which gives them the credit and

currency of money, to all intents and purposes. They are as much money as guineas

themselves are; or any other current coin, that is used in common payments, as money

or cash.

... Here, an innkeeper took it, bona fide, in his business from a person who made an

appearance of a gentleman. Here is no pretense or suspicion of collusion with the

robberfor this matter was strictly inquired and examined into at the trialand it

is so stated in the case, "that he took it for full and

valuable consideration, in the usual course of

business." Indeed, if there had been any collusion, or

any circumstances of unfair dealing, the case had been

much otherwise. If it had been a note for l,000 it

might have been suspicious, but this was a small note

for 21 10s only, and money was given in exchange for

it.

... A bank note is constantly and universally, both at home and abroad, treated as

money, as cash; and paid and received, as cash; and it is necessary, for the purposes

of commerce, that their currency should be established and secured.

... No dispute ought to be made with the bearer of a cash notein regard to

commerce, and for the sake of creditthough it may be both reasonable and customary,

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to stay the payment, till inquiry can be made, whether the bearer of the note came

by it fairly, or not.

Judgment for the plaintiff

_____________________________________________________________________

Converting Order to Bearer Paper and Bearer to Order PaperConverting Order to Bearer Paper and Bearer to Order PaperConverting Order to Bearer Paper and Bearer to Order PaperConverting Order to Bearer Paper and Bearer to Order Paper

Order paper can be converted to bearer paper by an endorsement in blank or by an

endorsement to pay to the bearer. Bearer paper can be converted to order paper through

the use of a special endorsement, such as "Pay to John Adams."

The manner in which a bill or note must be negotiated depends on its character at

the time of negotiation. If it is order paper, it must be negotiated by delivery and

endorsement; if it is bearer paper, by delivery alone. To illustrate: A note is made

payable to Mustafa Kemal, who endorses it by signing his name on the back. The note

can now be negotiated by delivery alone, and whoever receives it from Kemal can also

negotiate by delivery alone. Any subsequent holder can, of course, add a special

endorsement to convert the note back to order paper. For example, the note may come

into the possession of Ali Jinnah, who could add the statement "pay Ahmad Khan," sign

the note himself, and deliver it to Khan. Khan would then have to endorse it himself

before he could negotiate the note.

EndorsementsEndorsementsEndorsementsEndorsements

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collection process. In common law countries, only a bank can become a holder once

this endorsement has been added to a bill or note, unless the instrument is specially

endorsed by a bank to a person who is not a bank.31Under the ULB, anyone can become a

holder, but they can only endorse the instrument for the purpose of making

collection.32

An endorsement prohibiting further endorsementsendorsement prohibiting further endorsementsendorsement prohibiting further endorsementsendorsement prohibiting further endorsements states that the instrument may be

paid only to a particular person. An example is "Pay to Henrik Ibsen only." This

endorsement is treated differently by the two main commercial law systems.

In common law countries, an endorsement prohibiting further endorsements is treated

as if it were a special endorsementthat is, as though the example

said, "Pay to Henrik Ibsen."33The ULB treats such an endorsement as

if it were a qualified endorsement (e.g., "Pay to Henrik Ibsen,

without recourse"); in other words, the endorser does not guarantee

acceptance or payment.34

An agency endorsementagency endorsementagency endorsementagency endorsement requires the endorsee to pay the proceeds

from the negotiation of a bill or note to the endorser or to some

third party. In common law countries, such an endorsement is

phrased as "Pay to Alexander Leslie, agent for Oliver Cromwell [signed] Oliver

Cromwell" or "Pay to Alexander Leslie in Trust for Charles Tudor [signed] Oliver

Cromwell." In civil law countries, the wording is "Pay to Maximilien Robespierre, for

value in security [signed] Napoleon Bonaparte" or "Pay Maximilien Robespierre, for

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value in pledge to Louis Bourbon [signed] Napoleon Bonaparte."

______

30UCC, 3-206(1); ULB, Article 15.

31UCC, 4-201(2).

32ULB, Article 18.

33UCC, 3-206(1).

34ULB, Article 15.

Under the common

law and the ULB,

an agency

endorsee may

properly

negotiate the

instrument only as directed. This restriction on rights, however, applies only to the

immediate endorsee and not to any subsequent holder.35

Forged EndorsementsForged EndorsementsForged EndorsementsForged Endorsements

When an endorsement is forged,forged,forged,forged, the question arises as lo who should have to sue the

forger; or, if the forger cannot be found, who has to assume the

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loss. There are several possible ways to answer this question. The

one that makes most sense commercially (that is, the one that is most likely to

encourage the free transfer and exchange of bills and notes} is lo make the drawer or

maker liable. This is the rule adopted by the ULB. The ULB makes a forgedforgedforgedforged endorsement

fully effective, and both the person taking an instrument with such an endorsement as

well as all subsequent holders are entitled to payment.36

Another possibility is to impose liabilityliabilityliabilityliability on the person who was best able to

prevent the forgery from happening. This is possibly the fairest rule, but it also

encourages excessive and expensive litigation. It is the rule followed in most common

law countries. As a general rule, the common law makes a forged endorsement

ineffective, placing the burden for determining the validity of an endorsement on the

endorsee taking an instrument from a forger. The next case illustrates this rule.

______

35UCC, 3-206(1); ULB, Article 19.

36ULB, Article 7.

_____________________________________________________________________

Case 12Case 12Case 12Case 12----3 Mair v. Bank of Nova Scotia3 Mair v. Bank of Nova Scotia3 Mair v. Bank of Nova Scotia3 Mair v. Bank of Nova Scotia

Court of Appeal of Eastern Caribbean Stales, Civil Division, 1983.

West Indian Reports, vol. 31, p. 186 (1983).

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Appellate Judge Berridge:Appellate Judge Berridge:Appellate Judge Berridge:Appellate Judge Berridge:

This is an appeal from a decision of Judge Robotham dated June 18,1980 in which

judgment was given for the respondent bank in respect of a claim by the appellant

alleging negligence and breach of duty in the sum of $6,000 and interest, together

with costs.

The brief facts of the case are that sometime in 1974 the appellant, an architect by

profession, engaged one Barbara Hill of Barbados, herself an architect, to assist him

in Antigua by doing specific architectural work. Hill took up her assignment with the

appellant who gave her an advance of $6,000 payable by check drawn on the St John's,

Antigua, branch of the Bank of Nova Scotia for work already done and to be done in the

future. Shortly thereafter Hill returned to Barbados following differences which arose

between her and the appellant and in respect of which there is litigation which is not

before the court.

The check was dated January 16, 1974 and made

payable to "Barbara Hill"; but it was altered on

the face of it by the addition of the word

"Associates" as payee, endorsed "Barbara Hill"

and deposited at the branch of the respondent

bank at Worthing, Christchurch, Barbados, on

January 23,1974 to the credit of "Barbara Mill

Associates". On January 29, 1974, the check was

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returned to the Antigua branch of the bank who deducted $6,000 from the appellant's

account and in due course the canceled check was forwarded to the appellant who, by

letter dateddateddateddated May 7, 1974, drew the bank's attention to the alteration and demanded

reimbursement on the grounds that (i) it was negligent in not observing the alteration

in which event it should not have paid, and (ii) it had not carried out his

instructions. The bank refused to reimburse the appellant and as a consequence

proceedings were instituted by the appellant.

In arguing the ... appeal, counsel submitted that the alteration was a material

alteration on the face of the instrument which [made it void] under Section 64 of the

Bills of Exchange Act (of Antigua and Barbuda] the provisions of which are similar to,

if not identical with, comparable legislation throughout the Commonwealth. Counsel

further contended that (i) the mandate of the drawer of the check was not

substantially carried out, (ii) the alteration was apparent, (iii) the bank was not a

holder in due course, and (iv) the damage suffered was the debiting of the appellant's

account with a payment to someone other than the payee stated by the appellant.

It is pertinent at this stage to set out the provisions of Section 64 of the Bills

of Exchange Act, which reads as follows:

(1)Where a bill or acceptance is materially altered without the assent of all

parties liable on the bill the bill is avoided except as against a party who has

himself made, authorized, or assented to the alteration, and subsequent

endorsers. Provided that, where a bill has been materially altered, but the

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alteration is not apparent and the bill is in the hands of a holder in due course,

such holder may avail himself of the bill as if it had not been altered, and may

enforce payment of it according to its original tenor.

(2)In particular the following alterations are material, namely, any alteration of

the date, the sum payable, the time of payment, the place of payment, and where a

bill has been accepted generally, the addition of a place of payment without the

acceptor's assent.

In Vance v. Lowther,37 where an alteration related to the date of the check, it was

held that it was material and invalidated the check; and that the circumstance that

the plaintiff had not been guilty of negligence in taking it was immaterial. Baron[38]

Pollock said:39

Any material alteration of a bill or note invalidates it, and the question is, what

is the true principle on which the materiality must be determined. The county court

judge seems to have thought that it was necessary to consider the surrounding

circumstances in each case. In that I think he was wrong, and that we ought to look at

the question of materiality with reference to the contract itself, and not with

reference lo the surrounding circumstances.

But it would be unreasonable if the alteration to an earlier date debarred the

banker form debiting the customer, if paid after the original date.

Similar in a number of respects to the facts in the instant case are those in

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Slingsby v. District Bank, Ltd.40

_______

37Law Reports, Exchequer's Division, vol. 1, p. 176(1876).

[38 Baron is the title for the judges of the English Court of Exchequer.]

39Id., at p. 178

40All England Law Reports, vol. 1931, p. 143 (King's Bench, 1931).

where words were inserted between the payee's name and the words "or order" and

endorsed to conform with the designation of the payee as altered. It was held that the

check had been materially altered within the body of Section 64 (1) of the Bills of

Exchange Act and therefore the check had been avoided.

The materiality of the alteration being dependent upon its character and effect, it

necessarily follows that if the mandate of the customer has been substantially com-

plied with then the banker can charge the customer, the alteration notwithstanding.

Authority for the foregoing is to be found in Halsbury's Laws of England.41

I am of the opinion that the check was materially altered without the assent of the

appellant.

To constitute an apparent alteration within the meaning of the Bills of Exchange Act

it should be apparent upon inspection of the bill that its text has undergone a

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change. The document itself must show that some revision of the text has taken place

and its appearance must be consistent with the revision having occurred after

completion or issue, although it may also be consistent with the revision having

occurred before completion.42

An inspection of the check reveals that the alteration is obviously in a different

handwriting form that in which the rest of the document was drawn and it should have

been observed that it had undergone a change.

In regard to the difference between the rights of a "holder in due course" and a

"holder" I can do no better than quote from the words of Lord Justice Denning in Arab

Bank, Ltd. v. Ross:43

The difference between the rights of a "holder in due course" and those of a

"holder" is that a holder in due course may get a better title than the person from

whom he took, whereas a holder gets no better title. In this regard a person who takes

a bill, which is irregular on the face of it, is in the same position as a person who

takes a bill which is overdue. He is a holder, but not a holder in due course. He does

not receive the bill on its own intrinsic credit. He takes it on the credit of the

person who gives it to him. He can sue in his own name but he takes it subject to the

defects of title of prior parties: see Section 38 of the Act of 1882.

In the instant case the bank took the check which was irregular on the face of it.

The bank was not a holder in due course and cannot [therefore] avail itself of the

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proviso to Section 64(1) of the Bills of Exchange Act.

On the question of damages, the appellant's claim is in contract. It is a well-

established principle that whenever a party proves a breach of contract but no actual

damage (as was contended by learned counsel for the bank) he recovers as a rule

nominal damages only.

In the instant case the appellant claims that the damage suffered by him is the

debiting of his bank account with an amount payable by check drawn by him to "Barbara

Hill" and not "Barbara Hill Associates"; but, I am unable to perceive what damage the

appellant has suffered on account of the alteration of the check.

... In the circumstances, I would allow the appeal and vary the order of the trial

judge by entering judgment for the appellant in the sum of $5 nominal damages....

______

41Vol. 2, p. 205, para. 380 (3rd ed).

42Automobile Finance Co. of Australia, Ltd. v. Law, Commonwealth Law Reports, vol. 49, p. 1 (Australia, High Court,

1933) refers.

43All England Law Reports, vol. 1952, pt. 1, p. 709 at p. 717 (Court of Appeal, 1952).

There are two major exceptions to the general common law rule that

a forged endorsement is ineffective. One is the imposter rule.imposter rule.imposter rule.imposter rule. This

says that when a drawer, maker, or endorser draws, makes, or endorses

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an instrument to an imposter, the imposter's subsequent endorsement

is effective. For example, a man walks into a shop, says that he is John Lender, a

creditor of the shop owner, Pete Gullible, and asks to be paid. Gullible, believing

the man to be his creditor, writes a check made out in favor of John Lender. The man

then cashes the check at a nearby supermarket and disappears. Because the man was an

imposter, the forged signature he put on the check is effective. Gullible cannot stop

payment and his bank must negotiate the check when the supermarket presents it.

The second common law exception to the rule that a forged signature is ineffective

is the fictitiousfictitiousfictitiousfictitious payee rule.payee rule.payee rule.payee rule. This says that when the instrument is issued in the name

of a fictitious payee, the person purporting to be that payee can make an effective

endorsement. To illustrate: A disgruntled employee, Ann Sly, tells her employer that

he needs to sign a check that she has made out so that she can pay a supplier. He does

so. Ann then forges the supplier's endorsement and cashes the check herself. In

reality, the supplier (whether or not it really exists or was a fiction) has no claim

against Sly's employer. The supplier's forged endorsement, however, is effective, and

the employer must honor the check when an innocent holder presents it for payment.

EXHIBIT 12EXHIBIT 12EXHIBIT 12EXHIBIT 12----13 Liability When a Negotiable Instrument Is Forged13 Liability When a Negotiable Instrument Is Forged13 Liability When a Negotiable Instrument Is Forged13 Liability When a Negotiable Instrument Is Forged

Situation CommonSituation CommonSituation CommonSituation Common

Law ULBLaw ULBLaw ULBLaw ULB

A stolen instrument is forged. Immediate

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endorsee Drawer

The forger is an imposter. Drawer

Drawer

The forger endorses for a fictitious payee. Drawer

Drawer

The liabilities of endorsers and drawers for forged instruments

under the common law and the ULB are compared in Exhibit 12-13.

Limitations on the Excuses That Drawers and Makers Can Use toLimitations on the Excuses That Drawers and Makers Can Use toLimitations on the Excuses That Drawers and Makers Can Use toLimitations on the Excuses That Drawers and Makers Can Use to

Avoid Paying Off a Bill or NoteAvoid Paying Off a Bill or NoteAvoid Paying Off a Bill or NoteAvoid Paying Off a Bill or Note

The major disadvantage of taking a bill, note, or other contractual

obligation by assignment is that the maker or drawer can raise a

wide range of excuses for not having to pay off the instrument. The

advantage of taking an instrument by negotiation is that many of these excuses are

limited.44

The most extensive limitations imposed on the excuses of makers and drawers are

those contained in the ULB. Anyone who acquires a bill or note by negotiation is a

holderholderholderholder who is entitled to payment from the maker or drawer. There are only three

excuses available to these parties. One is that the possessor is not a holder because

he did not acquire title through an uninterrupted series of endorsements. For example,

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someone possessing an instrument that is payable on its face to one person but

endorsed on the back by another could not be a holder.

The second excuse is that the holder acquired the instrument in bad faith. Bad faithBad faithBad faithBad faith

includes such things as the actual theft of the instrument; having actual knowledge

that the instrument is stolen, lost, or misplaced; or having actual knowledge that the

payee, or some prior holder, is not properly entitled to payment.

The third excuse is that the holder acquired the instrument through gross

negligence.negligence.negligence.negligence. This is essentially the same as bad faith, except that the holder does not

have to have actual knowledge. He must, however, have acted in a truly careless manner

in failing to detect some defect in the instrument or in the rights of the maker,

drawer, or a prior holder.45These excuses are summarized in Exhibit 12-14.

In contrast to the ULB, the common law imposes very few limitations on the excuses

that makers and drawers can use to get out of their obligation to pay off a bill or

note. To cut short

EXHIBIT 12EXHIBIT 12EXHIBIT 12EXHIBIT 12----14 ULB Excuses That Drawers and Makers Can Use to Avoid Paying Bill of14 ULB Excuses That Drawers and Makers Can Use to Avoid Paying Bill of14 ULB Excuses That Drawers and Makers Can Use to Avoid Paying Bill of14 ULB Excuses That Drawers and Makers Can Use to Avoid Paying Bill of

Exchange and Promissory NotesExchange and Promissory NotesExchange and Promissory NotesExchange and Promissory Notes

Person in possession ExcusePerson in possession ExcusePerson in possession ExcusePerson in possession Excuse

Not a holder 1. Not a holder

Holder 1. Acquired instrument in bad faith

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2. Acquired instrument through gross

negligence

______

44In the United States, the courts and statutory materials refer to "defenses" rather than excuses. In the United

Kingdom, the phrase is "failure of equities." In the civil law countries, the terms "defenses," "justifications,"

and "excuses" are all used. Excuses will generally be used here.

45

ULB, Article 16.

EXHIBIT 12EXHIBIT 12EXHIBIT 12EXHIBIT 12----15 Common Law Excuses That Drawers and Makers Can Use to Avoid Paying Bills15 Common Law Excuses That Drawers and Makers Can Use to Avoid Paying Bills15 Common Law Excuses That Drawers and Makers Can Use to Avoid Paying Bills15 Common Law Excuses That Drawers and Makers Can Use to Avoid Paying Bills

of Exchange and Promissory Noteof Exchange and Promissory Noteof Exchange and Promissory Noteof Exchange and Promissory Note

Person in Possession ExcusePerson in Possession ExcusePerson in Possession ExcusePerson in Possession Excuse

Not a holderNot a holderNot a holderNot a holder Not a holder

HolderHolderHolderHolder Breach of contract (including breach of

contract warranties)

Lack or failure of consideration

Fraud in the inducement

Previous payment of the instrument

Unauthorized completion of an

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40/93

(HDC).46An HDC is a holder who acquires an instrument (1) for

value, (2) in good faith, and (3) without notice that it is overdue, that it has been

dishonored, or that the maker, drawer, or a prior endorser has a valid excuse for not

paying it off.47The requirement that an HDC has to give value for an instrument means

that someone who receives an instrument as a gift or by inheritance can only be an

ordinary holder. Good faith means that the holder cannot have knownor have

reasonably suspectedthat the instrument was defective.

Liabilities of Makers, Drawers, Drawees, Endorsers, and Accommodation PartiesLiabilities of Makers, Drawers, Drawees, Endorsers, and Accommodation PartiesLiabilities of Makers, Drawers, Drawees, Endorsers, and Accommodation PartiesLiabilities of Makers, Drawers, Drawees, Endorsers, and Accommodation Parties

Two kinds of liability are imposed on makers, drawers, and endorsers of bills and

notes. One is liability "on the instrument"that is, liability arising out of a

signature. The other is "warranty" liabilitythat is, responsibility arising out of

the implied guarantees a person makes at the time he transfers or presents a

negotiable instrument. In neither case, it is important to note, is liability based on

the underlying contract.

Liability on the InstrumentLiability on the InstrumentLiability on the InstrumentLiability on the Instrument

A person who signs an instrument has a contractual obligation to make payment. For

makers, drawees, and accommodation parties, this obligation is

"primary"; that is, they must make payment on presentmentpresentmentpresentmentpresentment of the

instrument. If it is other than a demand instrument, it must be

presented on the day it is due. If it is a demand instrument, it

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must be presented within a reasonable time after it was signed.

______

46A holder has the burden of proving that he is a holder in due course. UCC, 3-307 (3).

47Id., 3-303.

______________________________________________________________________

Case 12Case 12Case 12Case 12----4 Far East Realty Investment,4 Far East Realty Investment,4 Far East Realty Investment,4 Far East Realty Investment,

Inc. v. Court of Appeals et al.Inc. v. Court of Appeals et al.Inc. v. Court of Appeals et al.Inc. v. Court of Appeals et al.

The Philippines. Supreme Court, Second Division, 1988.

Supreme Court Reports Annotated, Second Series, vol. 166,p.256 (1988).

On September 13, I960, Dy Hian Tat, Siy Chee, and Gaw Suy An went to the Manila office

of Far East Realty Investment, Inc. (Far East) and obtained a loan in the sum of

P4,500.00 (Philippine currency), which they needed in their business, and which they

romised to pay, jointly and severally, in 1 month's time together with interest at

the rate of 14 percent per annum. To assure Far East that it would be repaid, Dy Hian

Tat drew a check on his account with China Banking Corporation (the bank), dated

September 13, 1960, for 1'4,500.UO, and Siy Chee and Gaw Suy An signed the check on

its back as accommodation parties. The three men were to redeem the check in 1 month's

time by paying cash to Far East in the sum of P4,500.00; otherwise. Far East was to

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resent the check for payment at the bank.

Almost 4 years later, on March 5, 1964, Far East presented the check to the bank for

ayment. The bank refused to pay as the account of Dy Hian Tat had been closed for

wine time. Far East then made a demand on the Dy Hian Tut, Siy Chee, and Gaw Suy An

for repayment of their loan. When they refused to pay, Far East brought suit. The City

Court of Manila ruled in favor of Far East, so Dy Hian Tat, Siy Chee, and Gaw Suy An

appealed. The Court of First Instance of Manila also ruled in favor of Far East, but

the Court of Appeals reversed, holding that Fur East had not presented the check for

ayment within a reasonable time. Far East (the petitioner) then appealed to the

Philippine Supreme Court.

Justice Paras:Justice Paras:Justice Paras:Justice Paras:

The main, issue in this case is whether or not presentment for payment and notice of

dishonor of the questioned check were made within reasonable time.

Where the instrument is not payable on demand, presentment must be made on the day

it falls due. Where it is payable on demand, presentment must be made within a

reasonable time after issue, except that in the case of a bill of exchange,

presentment for payment will be sufficient if made within a reasonable lime after the

last negotiation thereof.48

Notice may be given as soon as the instrument is

dishonored, and, unless delay is excused, must be

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given within the time fixed by the law.49

No hard and fast demarcation line can be drawn between what may be considered as a

reasonable or an unreasonable time, because "reasonable time" depends upon the

peculiar facts and circumstances in each case.50

It is obvious in this case that presentment and notice of dishonor were not made

within a reasonable time.

"'Reasonable time" has been defined as so much lime as is necessary under the

circumstances for a reasonable prudent and diligent man to do, conveniently, what the

contract or duty requires should be done, having a regard for the rights and

possibility of loss, if any, to the other party.51

____

48Negotiable Instruments Law, 71.

49Id.,102.

50Arturo M. Tolentino, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, vol. 1, p. 327

(8th ed., 1986-1988).

In the instant case, the check in question was issued on September 13,1960, but was

presented to the drawee bank only on March 5,1964, and dishonored on the same date.

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to certify dishonor by the law of the place where the dishonor occurs."52In the

United States, such a person is a notary public.53The certification has to show (a)

who presented the instrument for payment, (b) the place where this was done, and (c)

the reason given by the maker or drawee for refusing to make payment.54

The third requirement is to give notice to the parties with secondary liability.

This is done, initially, by notifying the drawer (if the instrument is a bill) and the

last endorser. At the same time, any other endorser whose address the holder is aware

of must also be notified. In turn, any endorser who receives such a notice mustto

maintain his rights against his immediate endorsernotify that person. In the United

States, notice has to be given within 3 business days;55in Europe, the requirement is

2 business days.56Any form of notice is sufficient so long as it identifies the

instrument and states that the instrument has been dishonored.57

Warranty LiabilityWarranty LiabilityWarranty LiabilityWarranty Liability

The most dramatic difference between negotiable instrument law in the United States

and in Europe (including the United Kingdom) shows up in connection with warranty

liability. In Europe, liability can arise only on the instrument. That is, unless

someone signs an instrument, he will have no liability for its payment. In sum, there

is no warranty liability.

In the United States, by comparison, any person who transfers an instrument in

exchange for considerationwhich includes a transferor of bearer paper who does not

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endorse the instrumentmakes five warranties, or implied guarantees, to his

immediate transferee and to every subsequent holder who takes the instrument in good

faith. These are as follows:

______

52UCC, 3-509(1).

53UCC, 3-509(1). In the United States, protest is required only in connection with a bill of exchange (draft)

"which appears to be drawn or payable outside of... the United States." UCC, 3-501(3).

54UCC, 3-509(2). If the maker or drawee could not be found, this fact can be substituted for the statement of

the reason for refusal.

55anks must give notice within 1 day. UCC, 3-508(2).

56

ULB, Article 44.

57UCC, 3-508(3).

1. The transferor has good title to the instrument or is otherwise authorized to

obtain payment or acceptance on behalf of one who does have good title.

2. All signatures are genuine or authorized.

3. The instrument has not been materially altered.

4. No defense of any party is good against the transferor.

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5. The transferor has no knowledge of any insolvency proceedings against the maker,

the acceptor, or the drawer of an unaccepted instrument.

The Role of Banks in Collecting and Paying Negotiable InstrumentsThe Role of Banks in Collecting and Paying Negotiable InstrumentsThe Role of Banks in Collecting and Paying Negotiable InstrumentsThe Role of Banks in Collecting and Paying Negotiable Instruments

Banks perform at least four functions in connection with the negotiation of bills and

notes. First, they may issue instruments themselves, such as certified checks or

certificates of deposit. Second, they may function as the drawee on a bill of exchange

or as the acceptor of a bill or promissory note, assuming primary liability for

payment. Third, they can act as an agent for a holder or transferee to make

collection. Fourth, they can take an instrument as an endorsee, paying the endorser,

and presenting the instrument for payment in their own right.

The significance of acting as an endorser rather than as an agent for collection

especially in connection with international transactionsis considered in the

following case.

_______________________________________________________________________

Case 12Case 12Case 12Case 12----5 Charles R. Allen, Inc. v.Island Cooperative Services5 Charles R. Allen, Inc. v.Island Cooperative Services5 Charles R. Allen, Inc. v.Island Cooperative Services5 Charles R. Allen, Inc. v.Island Cooperative Services

United States, Supreme Court of South Carolina, 1959.

South Carolina Reports, vol. 234, p. 537 (1959).

island Cooperative Services Cooperative Association, Ltd. ("Island Coop"), a Canadian

corporation, sold some seed potatoes to the Charleston County Wholesale Vegetable

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Market, Inc. ("Vegetable Market"), of Charleston, South Carolina, for a purchase price

of $19,620. After the potatoes had been put aboard a ship in Charlottetown, Prince

Edward Island, Canada, for shipment to Charleston, South Carolina, Island Coop

repared a draft (or bill of exchange) in the amount of $19,620 on February 7, 1955.

Island Coop was the drawer, the Vegetable Market was the drawee, and the Bank of Nova

Scotia's branch office at Charlottetown, Prince Edward Island, was the payee.

Island Coop offered this and several other drafts to the Bank of Nova Scotia at a

discount, and the bank agreed to take them. Island Coop delivered the drafts to the

Bank of Nova Scotia on February 7,1955, accompanied by the following agreement:

1. The above bills, which represent amounts due to us for goods sold and delivered,

are offered for discount. Our claims against Drawee are hereby transferred to you

in the event of nonacceptance of any draft. The relative goods have already been

shipped.

2. Credit Proceeds to Current A/C Savings A/C No.

The Bank of Nova Scotia endorsed the draft drawn on the

Vegetable Market and forwarded it through its correspondent,

the Bank of New York, to the South Carolina National Bank of

Charleston for collection. The Vegetable Market paid the

South Carolina Bank the full $19,620 on February 14,1955.

At the same time that this transaction was going on between Island Coop, the

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Vegetable Market, and the three banks, Charles R. Allen, Inc. (''Allen"), a South

Carolina corporation, brought suit for breach of contract against Island Coop, and

won. The judgment Allen received entitled it to attach Island Coop's assets in South

Carolina. Allen thereupon attached the $19,620 held in the South Carolina National

Bank, claiming it was an asset of Island Coop. The Bank of Nova Scotia disagreed, and

it promptly served a claim on Allen, stating that the proceeds of the draft belonged

to it.

The trial court held that the Bank of Nova Scotia had taken the draft as an agent

for collection and not as a purchaser, and therefore Island Coop had been the owner of

the proceeds of the draft. Accordingly, the trial court held that Allen's attachment

was proper. The Bank of Nova Scotia appealed.

Justice Moss:Justice Moss:Justice Moss:Justice Moss:

The basic question for determination in this case is whether the appellant, Bank of

Nova Scotia, was the absolute owner of the proceeds of the draft at the time of the

attachment of the funds by the respondent. If the appellant was the owner thereof, and

Island Coop had no interest therein, then this action must fail....

The appellant, in its claim to the proceeds of the draft here involved, asserted

that under the laws of Canada that it had full and complete ownership and title to the

draft and the proceeds thereof at the time of the attachment. The law of Canada has

been proved to the effect that under the facts of this case surrounding the discount

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transaction as it took place in Canada, the Bank of Nova Scotia acquired under

Canadian law an absolute title to and ownership of the draft in Canada at the time the

draft was discounted on February 7,1955. A consideration of the law of Canada and of

the law of South Carolina, as applicable to factual situation here, leads us to the

conclusion that the laws of Canada and South Carolina are in accord. The application

of the laws of Canada or South Carolina requires us to reach the same conclusion. We

will, therefore, as is contended for by the respondent, apply the law of South

Carolina in this case.

It is the contention of the respondent that because the appellant had the right, in

the event of nonpayment of the draft in question, to charge the dishonored draft back

to the account of the depositor, that such showed that the appellant was a collecting

agent and not the owner of the draft in question. This contention is contrary to the

rule in this State. Likewise, the collection of interest upon the draft in question

did not prevent the bank from becoming the sole owner thereof.

In the case of Campbell v. Noble-Trotter Rice Milling Co., Inc. (Ex parte Calcasieu

Marine National Bank) this Court completely answered these contentions when it said:58

According to the prevailing view, the rule as to the passing of title to commercial

paper, deposited and credited as cash, applies, although the bank has the right to

charge dishonored paper back to the depositor instead of proceeding against the

maker.

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And it has been held that an interest arrangement will not prevent a bank from

becoming the sole owner of a draft. Thus, where the bank advances the full amount

of a draft, it becomes the unconditional owner, though jt is understood it will

collect interest on the amount advanced, depending upon the time it takes for

collection.

In the case of Lawton v. Lower Main Street Bank, it is said: 59

... where an item is endorsed without restriction by a depositor, nothing

appearing to indicate that it was received for collection, and it is at once

passed to his credit by the bank, and he is permitted to check upon the account,

he becomes the creditor of the bank, which, as the owner of the paper, is not the

agent of the depositor in collecting it but collects on its own behalf....

We think that under the authority of the case of Campbell v. Noble-Trotter Rice

Milling Co., Inc. ... the lower court must be reversed. The only factual difference

between the present case and the Campbell case is that in the latter case the bank

discounted a draft with a bill of lading attached, while here it discounted the draft

only, This factual difference does not make the case inapplicable to the present

situation.

In the Campbell case it appears that Noble-Trotter Rice Milling Co., Inc., a

Louisiana corporation, drew a draft on Allen Bros. Milling Co., Columbia, South Car-

olina, which represented the purchase price of a shipment of rice. Attached to the

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draft was a bill of lading covering the shipment, an invoice thereof, and a

certificate of insurance. This draft was made payable directly to the Cal-casieu-

Marine National Bank, located at Lake Charles, Louisiana, and was deposited... by the

Rice Milling Company in that bank, where it maintained a regular account, and where it

had been transacting business for years. The draft, according to the contention of the

bank, was not entered for collection, but was treated as cash and was immediately and

unconditionally placed to the credit of Rice Milling Co. and made subject to its

check.

______

58South Carolina Reports, vol. 188, p. 212.

59South Carolina Reports, vol. 170, p. 334.

In due course, the draft, together with attached papers, was forwarded by the bank

for collection to the First National Bank, Columbia, South Carolina, where it was paid

by the drawee, Allen Bros. Milling Co. The day the draft was paid to the First

National Bank of Columbia, South Carolina, the proceeds were attached by one M. P.

Campbell for the satisfaction of an unliquidated demand against Noble-Trotter Rice

Milling Co. The Louisiana bank intervened, claiming the proceeds of the draft by rea-

son of its ownership thereof. Judgment was rendered in favor of Campbell and the case

was appealed to this Court. The question for decision was whether the bank took the

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number of years, and over this period of time the bills of Island Coop had been

discounted. The draft in question was handled by the discount department rather than

by the collection department of said bank. The bank upon discounting the draft in

question, placed it without restriction and unconditionally to the checking account of

Island Coop and accorded to it the right to draw upon the funds, which said right was

exercised. There is no evidence contradictory of these facts.

... We conclude, after a consideration of all the facts in this case, that under the

applicable law thereto, that the title to the draft in question passed to the Bank of

Nova Scotia, and that it is entitled to the proceeds now held in the custody of the

South Carolina National Bank in Charleston, South Carolina.

Judgment reversed.

______________________________________________________________________

G. LETTERS OF CREDITG. LETTERS OF CREDITG. LETTERS OF CREDITG. LETTERS OF CREDIT

Assume that a buyer purchases goods overseas. When must the buyer make payment? The

seller, undoubtedly, would prefer to be paid in advance. The buyer, on the other hand,

would like to make sure, before paying, that (a) the goods are actually shipped and

that (b) the goods shipped meet his contractual specifications; and, in actuality, he

would prefer (c) to take delivery before paying.

Depend

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