BBM Notes compiled by Njihia Kaburu 7) Bills of Exchangei) Difference between cheques and bills of exchangeii) Legal requirements for valid bills of exchangeiii) Endorsement of bills of exchangeiv) Holder of a billv) Acceptance of bills of exchange

BILLS OF EXCHANGEThe law relating to bills of exchange is contained in the bills of exchange Act 27 of laws of Kenya which is a carbon copy of the English Bills of Exchange Act 1882.Definition: under Sec. 3(1) of the Act, A bill of exchange is; an unconditional order in writing addressed 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 bearer.

Example

£100 Nairobi, 1st November 1993

Sixty days after date pay to the order of Tom Ochieng the sum of one hundred pounds for value received.

To: Paul Kamau Signed:

P O Box 59575

NAIROBI John Onyango

PARTIES TO A BILLThe various parties to a bill are: The drawer (John Onyango) The drawee (Paul Kamau)

o He becomes the acceptor by writing his name across it. The payee (Tom Ochieng).

ESSENTIALS/ LEGAL REQUIREMENTS FOR A VALID BILL(a) Unconditional. For example, if the drawer stipulates 'provided that the receipt form at the foot hereof is

duly signed', this is not a bill of exchange since there is a condition imposed: Bavins, Junior and Sims v London and South Western Bank Limited.

(b) An "order". To say "I shall be pleased if you will pay .... " is not an order but a mere request, but the expression "please pay..." is a polite order.

(c) "In writing". This includes print and typewriting.(d) "Signed" by the drawer. However, a person's signature can be put to a bill by his agent.(e) An order "to pay". S.3(2) provides that "which orders any act to be done in addition to the payment of

money is not a bill of exchange."(f) An order to pay a sum "certain in money". S.9 provides that pay a sum is certain within the meaning of the

Act, although it is required to be paid:- with interest; - by stated instalments;- by stated instalments, with a provision that upon default;- according to an indicated rate of exchange or according to a rate of exchange to be ascertained as directed

by the bill. S10(1) provides that a bill is payable on demand, or at sight, or "on presentation"; or- in which no time for payment is expressed.

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BBM Notes compiled by Njihia Kaburua) Payable "at a fixed or determinable future time; if it is not payable on "3 months after the date" (i.e. after

the date of the bill) or "30 days after.This maturity date of the bill may be fixed by reference to the occurrence of some event and this will be valid, provided the event is something that is "certain to happen" e.g. 3 months after my death". If the event is not certain to happen (e.g. "3 months after I marry") the document will not be a bill of exchange, and the occurrence of the event will not make it valid.(S. 11 (2))

b) Expressed to be made "to bearer", (payable to order). This means that the holder of the bill when it is duly presented for payment i.e. the bill specifies no particular payee, or the only or last endorsement thereon is "in blank" (s.7).

c) Payable "to or to the order of" a named payee.

TYPES OF OR CLASSIFICATION OF BILLa) To whom payable

Bearer Bill - This is a bill payable to the bearer or holder.Oder Bill – This is a bill payable to the order of a specified person.

b) When payable Sight bill – This is a bill payable on demand Usance Bill – This is a bill payable at a fixed or determinable future date

c) Where drawn and payable .Inland bill – This is a bill drawn and payable within East Africa, any other bill is foreign.

d) Whether transferableTransferable bill – This is a bill transferable by the holder either by delivery or endorsement and delivery.Non-transferable bill – This is a bill containing a stipulation prohibiting transfer.

ACCEPTANCEThe term "acceptance" used in relation to bills of exchange has a special meaning. Acceptance of a bill of exchange is the signification by the drawee that he accepts the order of the drawer to pay over the sum stated to the payee. A bill of exchange is used by a debtor to settle his account with his creditor but, being an order to someone else to pay the sum stated (as opposed to a promise by the drawer to pay), the creditor is not normally going to take the bill in settlement unless the drawee acknowledges that he will meet the bill (and, in addition, is a person of substance); until he does make such acknowledgement, the drawee is under no liability on the bill.

In practice, the bill is normally handed to the payee to present it to the drawee for acceptance. If the drawee agrees to pay the bill, he will sign his name across it, and by that act he accepts the liability to meet the bill when it is duly presented for payment. This is subject to the following rules;

Presentation of Bills For AcceptanceAlthough a bill must be presented for acceptance and be accepted by the drawee in order to render him liable on the bill, it is not in fact necessary, as a general rule, for the holder of a bill to present it for acceptance. He can hold on to it, unaccepted, until maturity or he can negotiate to a third party, although a bill that has not been accepted will in practice be much harder to pass on for value.

Before presentation of a bill for acceptance, it is said to be a draft and must be presented to the drawee.Rules for presentation of bills for acceptance are;

i. It may be presented by the drawee or his agent.ii. It must be presented as a reasonable hour on a business day.iii. If addressed to more than 1 drawee to any of them in person.iv. If drawee dead, to his personal representative. v. Is drawee is bankrupt, to him or his trustee in bankruptcy.vi. It may be presented through post if trade custom permits.

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BBM Notes compiled by Njihia KaburuHowever presentation for acceptance may be dispensed with if.

a) The drawee if fictitious or has no capacity.b) Presentation cannot be effected even with the exercise of reasonable diligence.c) It is refused.

Acceptance itselfThis is signification assent by the drawee and may be general or qualified. The drawee must sign the bill for acceptance purposes.

a) A general Acceptance is an acceptance by which the drawee accepts the bill as drawn in its tenor b) Qualified acceptance is an acceptance by which the drawee varies or modifies the terms of the bill as

drawn.A qualified acceptance may take any of the following forms.- Conditional- The acceptor agrees to pay part of the amount only.- Partial – The acceptor agrees to pay the part of the amount only.- Local – The acceptor agrees to pay sum at a particular place.- Time – The acceptor changes the time of payment.- Acceptance by some but not all drawees

The payee is not bound to accept a qualified acceptance and may reject it whereupon the sum becomes payable.

Dishonor by Non-acceptanceIf the drawee is not prepared to meet the bill, he will return it to the holder with a note to this effect, and the bill is then said to be dishonoured by non-acceptance. The holder then knows that the debtor has given him a valueless scrap of paper, and will commence proceedings against him (the debtor, the drawer of the bill, not the drawee) to recover his debt. Technically, such action is not an action on the debt but an action on the bill, for in drawing the bill the drawer "engages that in due presentment it will be accepted and paid according to its tenor and that if it is dishonoured he will compensate the holder..." (Section 55(1)).

In certain circumstances, the bill can be treated as dishonoured by non-acceptance without ever having been presented for acceptance. These circumstances are:- Where the drawee is dead or bankrupt.- Where the drawee is a fictitious person.- Where the drawee is a person not having the capacity to contract.- Where, after the exercise of reasonable diligence, such presentment cannot be effected.- Where, although the presentment has been irregular, acceptance has been refused on some other ground.

DISCOUNTING AND NEGOTIATIONAfter acceptance the drawee becomes the acceptor. The bill is now complete and may be negotiated or discounted.

Discounting a bill This is payment of a bill by a bank or financial institution less the discount for the expired duration. The bank or financial institution becomes the payee of the bill.

Negotiation of billsUnder Section 31(1) of the Act, a bill is negotiated when it is transferred from one person to another so as to constitute the transferee holder thereof. The transferee becomes entitled to the sum due. A bill may be negotiated in two ways:

i) By mere deliveryii) By endorsement and deliveryBearer bills are negotiable by mere delivery. The party negotiating such bill is referred to as transferor by delivery and is not liable on the instrument if dishonored.Order bills are negotiable by endorsement and delivery.

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BBM Notes compiled by Njihia KaburuEndorsement is regulated by the provisions of the Act. An endorsement entails the execution of a bill for purposes of negating it. Characteristic of an endorsement- It must be written on the bill or on its back or on a slip of paper attached to the bill ALLONGE - It must be an endorsement of the entire bill- If payable to 2 or more persons who are not partners is must be endorsed in favour of all.

An endorsement may take any of the following forms.a) Special endorsement – This is an endorsement which specifies the person to whom or to whose order the bill is

payable.b) Restrictive endorsement – This is an endorsement which prohibits further negotiations of the bill. The endorsee

becomes the payee but cannot negotiate the bill further. c) Conditional endorsement – This is an endorsement by which the endorser inserts a condition subject too which

the bill is payable or limits his liability on the bill.

TRANSFEROR'S TITLE (HOLDER IN DUE COURSE)The position of the transferee of a bill of exchange depends to a large extent on whether or not he is 'holder in due course'.

Holder in Due CourseSection 29 of the Act defines "a holder in due course" as "a holder who has taken a bill, complete and regular on the face of it, under the following conditions:- That he became the holder of it before it was overdue and without notice that it had been previously

dishonoured, if such was the fact.- That he took the bill in good faith and for value and that at the time the bill was negotiated to him, he had no

notice of any defect in the title of the person who negotiated it.Rights of Holder in Due CourseA holder in due course enjoys the following privileges:

- He holds the bill free of prior defects.- He can pass on this perfect title to a subsequent transferee, unless it is restrictively endorsed.- He can sue on the bill in his own name.=

Where the bill has been endorsed by a holder in due course after the defect of title arose, any person holding the bill thereafter will not be affected by the defect and will enjoy a perfect title to the bill.

Holder for valueThis is a holder of a bill of exchange who has actually provided or who is deemed to have provided consideration on it.Rights for a holder for valueThe holder of a bill of exchange who does not come within the statutory definition of a holder in due course holds the bill subject to prior equities and his title may be upset if the title of prior holder was defective; he does have remedies against intervening parties, but the general rule of "nemo dat quod not habet" applies.

General Duties of a Holder1. Presentation for acceptance : It is the duty of the payee to present the bill to the drawee for acceptance.2. Presentation for payment: It is the duty of the payee to present the bill to the acceptor for payment.3. Notice of dishonor: It is the duty of the payee to notify the drawer or endorser the fact of the dishonor of a bill 4. Noting and protesting

PRESENTING A BILL FOR PAYMENTUnder Sec. 45 (1) of the Act, a bill must be presented for payment- If payable on demand, it must be presented within a reasonable time of issue or negotiations- If payable at a future date, it must be presented on the date it falls due or within the 3 days of grace.

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BBM Notes compiled by Njihia KaburuRules relating to presentation for payment

a) The bill must be presented by the holder or his agentb) If payable on demand, it must be presented within a reasonable time of acceptance or negotiationc) If payable in future, it must be presented on the date it fall due or within the 3 days of graced) It must be presented at the specified place if any or the acceptors residencee) If the acceptor is dead it must be presented to his personal representativef) If the acceptor is bankrupt, it must be presented to him or his trustee in bankruptcyg) If trade custom permits, it may be presented through the posth) It must be presented at a reasonable hour or a business day

DISHONOURED BILLUnder Sec. 47(1) of the Act a bill is said to be dishonored if:

- Payment is refused on presentation or cannot be obtained- Presentation is excused by law

Noting and Protesting Of BillsUpon dishonor of a bill for non-payment, the payee is bound to have it noted and protested. The bill must be delivered to notaries public who must re-present it to the acceptor for payment of the bill. This is referred to as noting a bill

Protesting a billThis is a formal declaration by notaries public to the effect that a bill has been dishonored.It must state:- The name of the persons for and against to whom it is made- Date and place and reasons for the protest- Signature of the notaries public- A copy of the bill or the dishonored bill must be attached

A protest is conclusive evidence that a bill has been dishonored

NoticeUpon the dishonor of a bill, the payee must notify the drawer or endorser and have it noted and protested by a notaries publicRules Relating To Notice of Dishonour

a) The notice must be given by or on behalf of the payeeb) It may be given in the payees name or in that of the agentc) It may be Oral or writtend) Return of the dishonored bill is sufficient noticee) A written notice needs not to be signedf) The notice must be given within a reasonable time of the dishonorg) In the event of death, the notice must be given up the personal representative of the endorserh) In the event of bankruptcy, it may be given to him or to his trustee in bankruptcyi) Notice by post takes effect when posted

DISCHARGE OF BILLS OF EXCHANGEA bill is said to be discharged when all rights of Action on it are extinguished. However a party may still be liable on a bill. It depends on the method of discharge.A bill may be discharge in any of the following:a) Payment in due course: Under Sec. 50(1) of the Act a bill is discharged by payment in due course if the amount

due is paid by or on behalf of the drawee or acceptor at or after maturityb) Acceptor-the holder at maturity or merger: Under Sec. 61(1) of the Act, if the acceptor of a bill becomes the

holder at or after the maturity and as of right, the bill is discharged by merger of the payee and acceptor

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BBM Notes compiled by Njihia Kaburuc) Express waiver or renunciation: Under Sec. 62(1) of the Act the holder of a bill may at or after maturity

absolutely and unconditionally renounce his rights against the acceptor such renunciation discharges the bill. It must be written or the bill must be returned to the acceptor.

d) Cancelling: Under Sec. 63(1) of the Act, if a bill is intentionally cancelled by the holder or his agent.e) Material alteration: Under Sec. 64(1) of the Act, if a bill is materially altered, all persons who are not parties to

the alteration are discharged. Under Sec. 64(2), a material alteration includes- Change in the sum payable, time of payment, date of payment or place of payment

f) Non-presentation of the bill: Under Sec. 45(1) of the Act, a bill must be duly presented for payment failing which the drawer and endorser are discharged.

COMPILED BY: Francis Njihia Kaburu. IMIS, LL.B (Hons.), LL.M, Ph.D (cont), Lecturer, Business Department, MMUST.*****************************************watch this space*************************************

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