BBM Notes compiled by Njihia Kaburu

7) Bills of Exchange i) Difference between cheques and bills of exchange ii) Legal requirements for valid bills of exchange iii) Endorsement of bills of exchange iv) Holder of a bill v) Acceptance of bills of exchange
BILLS OF EXCHANGE The law relating to bills of exchange is contained in the bills of exchange Act 2 of laws of !en"a which is a carbon cop" of the English #ills of Exchange Act $%%2& Definition' under (ec& )*$) 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
-$.. /airobi+ $st /ovember $00)

(ixt" da"s after date pa" to the order of Tom 1chieng the sum of one hundred pounds for value received& To' 2aul !amau 2 1 #ox 303 3 /A451#4 6ohn 1n"ango (igned'

PARTIES TO A BILL The various parties to a bill are' The drawer *6ohn 1n"ango) The drawee *2aul !amau) o He becomes the acceptor b" writing his name across it& The pa"ee *Tom 1chieng)& ESSENTIALS LEGAL RE!"IRE#ENTS FOR A $ALI% BILL *a) 7nconditional& 8or example+ if the drawer stipulates 9provided that the receipt form at the foot hereof is dul" signed9+ this is not a bill of exchange since there is a condition imposed' Bavins, Junior and Sims v London and South Western Ban Limited. *b) An :o&'e&:& To sa" :4 shall be pleased if "ou will pa" &&&& : is not an order but a mere request+ but the expression :please pa"&&&: is a polite order& *c) :In (&i)ing:& This includes print and t"pewriting& *d) *Signe'* b" the drawer& However+ a person9s signature can be put to a bill b" his agent& *e) An order :)o +a,:& (&)*2) provides that :which orders an" act to be done in addition to the pa"ment of mone" is not a bill of exchange&: *f) An order to pa" a sum :ce&)ain in -one,:& (&0 provides that pa" a sum is certain within the meaning of the Act+ although it is required to be paid' ; with interest, ; b" stated instalments, ; b" stated instalments+ with a provision that upon default, ; according to an indicated rate of exchange or according to a rate of exchange to be ascertained as directed b" the bill& ($.*$) provides that a bill is pa"able on demand+ or at sight+ or :on presentation:, or ; in which no time for pa"ment is expressed& 1

BBM Notes compiled by Njihia Kaburu a) 2a"able :at a fixed or determinable future time, if it is not pa"able on :) months after the date: *i&e& after the date of the bill) or :). da"s after& This maturit" date of the bill ma" be fixed b" reference to the occurrence of some event and this will be valid+ provided the event is something that is :certain to happen: e&g& ) months after m" death:& 4f the event is not certain to happen *e&g& :) months after 4 marr":) the document will not be a bill of exchange+ and the occurrence of the event will not ma<e it valid&*(& $$ *2)) b) Expressed to be made :)o .ea&e&:+ *pa"able to order)& This means that the holder of the bill when it is dul" presented for pa"ment i&e& the bill specifies no particular pa"ee+ or the onl" or last endorsement thereon is :in blan<: *s& )& c) 2a"able :to or to the order of: a named pa"ee& T/PES OF OR CLASSIFICATION OF BILL a) To whom pa"able #earer #ill ; This is a bill pa"able to the bearer or holder& 1der #ill = This is a bill pa"able to the order of a specified person& b) >hen pa"able (ight bill = This is a bill pa"able on demand 7sance #ill = This is a bill pa"able at a fixed or determinable future date c) >here drawn and pa"able& 4nland bill = This is a bill drawn and pa"able within East Africa+ an" other bill is foreign& d) >hether transferable Transferable bill = This is a bill transferable b" the holder either b" deliver" or endorsement and deliver"& /on;transferable bill = This is a bill containing a stipulation prohibiting transfer&

ACCEPTANCE The term :acceptance: used in relation to bills of exchange has a special meaning& Acceptance of a bill of exchange is the signification b" the drawee that he accepts the order of the drawer to pa" over the sum stated to the pa"ee& A bill of exchange is used b" a debtor to settle his account with his creditor but+ being an o&'e& to someone else to pa" the sum stated *as opposed to a +&o-ise b" the drawer to pa")+ the creditor is not normall" going to ta<e the bill in settlement unless the drawee ac<nowledges that he will meet the bill *and+ in addition+ is a person of substance), until he does ma<e such ac<nowledgement+ the drawee is under no liabilit" on the bill& 4n practice+ the bill is normall" handed to the pa"ee to present it to the drawee for acceptance& 4f the drawee agrees to pa" the bill+ he will sign his name across it+ and b" that act he accepts the liabilit" to meet the bill when it is dul" presented for pa"ment& This is sub?ect to the following rules, P&esen)a)ion of Bills Fo& Acce+)ance Although a bill must be presented for acceptance and be accepted b" the drawee in order to render him liable on the bill+ it is not in fact necessa&,+ as a general rule+ for the holder of a bill to present it for acceptance& He can hold on to it+ unaccepted+ until maturit" or he can negotiate to a third part"+ although a bill that has not been accepted will in practice be much harder to pass on for value& #efore presentation of a bill for acceptance+ it is said to be a draft and must be presented to the drawee& 5ules for presentation of bills for acceptance are, i& 4t ma" be presented b" the drawee or his agent& ii& 4t must be presented as a reasonable hour on a business da"& iii& 4f addressed to more than $ drawee to an" of them in person& iv& 4f drawee dead+ to his personal representative& v& 4s drawee is ban<rupt+ to him or his trustee in ban<ruptc"& vi& 4t ma" be presented through post if trade custom permits& 2

BBM Notes compiled by Njihia Kaburu However presentation for acceptance ma" be dispensed with if& a) The drawee if fictitious or has no capacit"& b) 2resentation cannot be effected even with the exercise of reasonable diligence& c) 4t is refused& Acce+)ance i)self This is signification assent b" the drawee and ma" be general or qualified& The drawee must sign the bill for acceptance purposes& a) A general Acceptance is an acceptance b" which the drawee accepts the bill as drawn in its tenor b) @ualified acceptance is an acceptance b" which the drawee varies or modifies the terms of the bill as drawn& A qualified acceptance ma" ta<e an" of the following forms& - Aonditional; The acceptor agrees to pa" part of the amount onl"& - 2artial = The acceptor agrees to pa" the part of the amount onl"& - Local = The acceptor agrees to pa" sum at a particular place& - Time = The acceptor changes the time of pa"ment& - Acceptance b" some but not all drawees The pa"ee is not bound to accept a qualified acceptance and ma" re?ect it whereupon the sum becomes pa"able& %ishono& ., Non0acce+)ance 4f 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 'ishono1&e' ., non0acce+)ance& The holder then <nows 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& Technicall"+ such action is not an action on the 'e.) but an action on the .ill+ 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&&&: *(ection 33*$))& 4n certain circumstances+ the bill can be treated as dishonoured b" non;acceptance without ever having been presented for acceptance& These circumstances are' ; >here the drawee is dead or ban<rupt& ; >here the drawee is a fictitious person& ; >here the drawee is a person not having the capacit" to contract& ; >here+ after the exercise of reasonable diligence+ such presentment cannot be effected& ; >here+ although the presentment has been irregular+ acceptance has been refused on some other ground& %ISCO"NTING AN% NEGOTIATION After acceptance the drawee becomes the acceptor& The bill is now complete and ma" be negotiated or discounted& %isco1n)ing a .ill This is pa"ment of a bill b" a ban< or financial institution less the discount for the expired duration& The ban< or financial institution becomes the pa"ee of the bill& Nego)ia)ion of .ills 7nder (ection )$*$) 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 ma" be negotiated in two wa"s' i) #" mere deliver" ii) #" endorsement and deliver" #earer bills are negotiable b" mere deliver"& The part" negotiating such bill is referred to as transferor b" deliver" and is not liable on the instrument if dishonored& 1rder bills are negotiable b" endorsement and deliver"& 3

BBM Notes compiled by Njihia Kaburu Endorsement is regulated b" the provisions of the Act& An endorsement entails the execution of a bill for purposes of negating it& Aharacteristic of an endorsement - 4t must be written on the bill or on its bac< or on a slip of paper attached to the bill ALL1/BE - 4t must be an endorsement of the entire bill - 4f pa"able to 2 or more persons who are not partners is must be endorsed in favour of all& An endorsement ma" ta<e an" of the following forms& a) (pecial endorsement = This is an endorsement which specifies the person to whom or to whose order the bill is pa"able& b) 5estrictive endorsement = This is an endorsement which prohibits further negotiations of the bill& The endorsee becomes the pa"ee but cannot negotiate the bill further& c) Aonditional endorsement = This is an endorsement b" which the endorser inserts a condition sub?ect too which the bill is pa"able or limits his liabilit" on the bill& TRANSFEROR2S TITLE 3HOL%ER IN %"E CO"RSE) The position of the transferee of a bill of exchange depends to a large extent on whether or not he is 9holder in due course9& Hol'e& in %1e Co1&se (ection 20 of the Act defines :a holder in due course: as :a holder who has ta<en 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 previousl" dishonoured+ if such was the fact& - That he too< the bill in good faith and for value and that at the time the bill was negotiated to him+ he had no notice of an" defect in the title of the person who negotiated it& !ights of "older in #ue $ourse A holder in due course en?o"s 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 restrictivel" endorsed& - He can sue on the bill in his own name&C >here the bill has been endorsed b" a holder in due course after the defect of title arose+ an" person holding the bill thereafter will not be affected b" the defect and will en?o" a perfect title to the bill& Hol'e& fo& 4al1e This is a holder of a bill of exchange who has actuall" provided or who is deemed to have provided consideration on it& !ights for a holder for value The holder of a bill of exchange who does not come within the statutor" definition of a holder in due course holds the bill sub?ect to prior equities and his title ma" 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& Gene&al %1)ies of a Hol'e& $& 2resentation for acceptance ' 4t is the dut" of the pa"ee to present the bill to the drawee for acceptance& 2& 2resentation for pa"ment' 4t is the dut" of the pa"ee to present the bill to the acceptor for pa"ment& )& /otice of dishonor' 4t is the dut" of the pa"ee to notif" the drawer or endorser the fact of the dishonor of a bill D& /oting and protesting PRESENTING A BILL FOR PA/#ENT 7nder (ec& D3 *$) of the Act+ a bill must be presented for pa"ment - 4f pa"able on demand+ it must be presented within a reasonable time of issue or negotiations - 4f pa"able at a future date+ it must be presented on the date it falls due or within the ) da"s of grace& 4

BBM Notes compiled by Njihia Kaburu R1les &ela)ing )o +&esen)a)ion fo& +a,-en) a) The bill must be presented b" the holder or his agent b) 4f pa"able on demand+ it must be presented within a reasonable time of acceptance or negotiation c) 4f pa"able in future+ it must be presented on the date it fall due or within the ) da"s of grace d) 4t must be presented at the specified place if an" or the acceptors residence e) 4f the acceptor is dead it must be presented to his personal representative f) 4f the acceptor is ban<rupt+ it must be presented to him or his trustee in ban<ruptc" g) 4f trade custom permits+ it ma" be presented through the post h) 4t must be presented at a reasonable hour or a business da" %ISHONO"RE% BILL 7nder (ec& D *$) of the Act a bill is said to be dishonored if' - 2a"ment is refused on presentation or cannot be obtained - 2resentation is excused b" law No)ing an' P&o)es)ing Of Bills 7pon dishonor of a bill for non;pa"ment+ the pa"ee is bound to have it noted and protested& The bill must be delivered to notaries public who must re;present it to the acceptor for pa"ment of the bill& This is referred to as noting a bill P&o)es)ing a .ill This is a formal declaration b" notaries public to the effect that a bill has been dishonored& 4t must state' - The name of the persons for and against to whom it is made - Date and place and reasons for the protest - (ignature of the notaries public - A cop" of the bill or the dishonored bill must be attached A protest is conclusive evidence that a bill has been dishonored No)ice 7pon the dishonor of a bill+ the pa"ee must notif" the drawer or endorser and have it noted and protested b" a notaries public 5ules 5elating To /otice of Dishonour a) The notice must be given b" or on behalf of the pa"ee b) 4t ma" be given in the pa"ees name or in that of the agent c) 4t ma" be 1ral or written d) 5eturn of the dishonored bill is sufficient notice e) A written notice needs not to be signed f) The notice must be given within a reasonable time of the dishonor g) 4n the event of death+ the notice must be given up the personal representative of the endorser h) 4n the event of ban<ruptc"+ it ma" be given to him or to his trustee in ban<ruptc" i) /otice b" post ta<es effect when posted %ISCHARGE OF BILLS OF EXCHANGE A bill is said to be discharged when all rights of Action on it are extinguished& However a part" ma" still be liable on a bill& 4t depends on the method of discharge& A bill ma" be discharge in an" of the following' a) 2a"ment in due course' 7nder (ec& 3.*$) of the Act a bill is discharged b" pa"ment in due course if the amount due is paid b" or on behalf of the drawee or acceptor at or after maturit" b) Acceptor;the holder at maturit" or merger' 7nder (ec& E$*$) of the Act+ if the acceptor of a bill becomes the holder at or after the maturit" and as of right+ the bill is discharged b" merger of the pa"ee and acceptor

c) d) e) f)

BBM Notes compiled by Njihia Kaburu Express waiver or renunciation' 7nder (ec& E2*$) of the Act the holder of a bill ma" at or after maturit" absolutel" and unconditionall" renounce his rights against the acceptor such renunciation discharges the bill& 4t must be written or the bill must be returned to the acceptor& Aancelling' 7nder (ec& E)*$) of the Act+ if a bill is intentionall" cancelled b" the holder or his agent& Faterial alteration' 7nder (ec& ED*$) of the Act+ if a bill is materiall" altered+ all persons who are not parties to the alteration are discharged& 7nder (ec& ED*2)+ a material alteration includes; Ahange in the sum pa"able+ time of pa"ment+ date of pa"ment or place of pa"ment /on;presentation of the bill' 7nder (ec& D3*$) of the Act+ a bill must be dul" presented for pa"ment failing which the drawer and endorser are discharged&

CO#PILE% B/5 F&ancis N6ihia 7a.1&18 I#IS9 LL8B 3Hons8)9 LL8#9 Ph8% 3con))9 Lec)1&e&9 B1siness %e+a&)-en)9 ##"ST8 :::::::::::::::::::::::::::::::::::::::::(a)ch s+ace:::::::::::::::::::::::::::::::::::::

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