VHD 320 Syllabus Theme 1: Bills of Exchange
Click here for important sections to remember
STUDY UNIT 1: INTRODUCTION TO
THE LAW OF NEGOTIABLE
INSTRUMENTS
TEXTBOOK (NAGEL COMMERCIAL LAW (FIFTH EDITION 2015)) PAR 30.01 –30.29
1. UNDERSTAND THE CONCEPTS OF COMMERCIAL PAPER AND NEGOTIABLE
INSTRUMENT
• Negotiable instruments are otherwise known as commercial paper (e.g. a cheque)→
the document has a certain value which is much higher than the intrinsic value of the
piece of paper itself e.g. a cheque which gives a person a personal right to claim
payment
o Why? Because it embodies a personal right which can only be enforced
through possession of the document, e.g. an entrance ticket to a cinema
o Person will only qualify as the holder of a cheque if he is in possession of the
document and only that person will be able to sue on the document and claim
payment from a bank
• Not all such documents are negotiable instruments, because they cannot all be
negotiated (e.g. share certificates, postal orders and bills of lading) while bank notes,
share warrants, bills of exchange, cheques and promissory notes are negotiable
instruments
o The concept ‘commercial paper’ is wider than the concept ‘negotiable
instrument’
Negotiable instruments Non-negotiable instruments
Bank notes Share certificates
Share warrants Postal orders
Bills of exchange Bills of lading
Cheques
Promissory notes
Page | 1
, VHD 320 Syllabus Theme 1: Bills of Exchange
DEFINITION OF NEGOTIABLE INSTRUMENT: (NB) (para 30.03 NB +30.26-30.28)
• Written contract (cambial contract and underlying obligation)
o Underlying obligation (e.g. contract of purchase and sale) is causa for
cambial contract
o Cambial contract = real contract (NB)
▪ Means that the signature is not sufficient on its own to found liability –
must ALSO be delivered
• Negotiable instrument has a dual meaning:
① The document and the rights it embodies may easily be transferred
from one person to another
② Any subsequent holder of the document (transferee) who takes it in
good faith and for value usually acquires all the rights evidenced by
the document, even though his predecessor had a defective title
thereto, and can obtain more rights ∴ the nemo plus iuris rule ≠
apply
▪ Holder in due course →
- (1) needs to be bona fide,
- (2) needs to give value for the document and
- (3) negotiation needs to take place
• If the transferee had not been bona fide/had not given value, he
will acquire no better title than his predecessor had
∴ the nemo plus iuris rule will apply
o What does “for value” mean? → something must be given in return, e.g.
laptop
• The bill of exchange, cheques and promissory notes are provided for in the Bills of
Exchange Act 34 of 1964:
BILL OF CHEQUE PROMISSORY NOTE
EXCHANGE
DEFINITION Section 2(1): Section 1: Section 87(1):
*NB TO KNOW An unconditional A bill drawn on a An unconditional promise in
DEFINITIONS
order in writing, bank and writing made by one person to
addressed by one payable on another, signed by the maker,
person to another, demand and engaging to pay on
signed by the demand or at a fixed or
person giving it, Bill → cheque determinable future time, a
requiring the must also comply sum certain in money, to a
person to whom it with the definition specific person, or to his order,
is addressed to of a Bill or to a bearer.
pay on demand, Thus the same 8
or at a fixed or validity
determinable requirements of a
future time, a sum Bill apply
certain in money
to a specific
person or his
order, or to bearer
Order to pay by Order to pay by A note contains a promise to
drawer (pay “C”) drawer (pay “C”) pay (whereas a bill contains an
order to pay)
Page | 2
, VHD 320 Syllabus Theme 1: Bills of Exchange
An instrument Because a
which does not cheque is a bill, Practical relevance:
comply with these the provisions of
requirements or the Act 1. IOU/Acknowledgement
with which an applicable to bills of debt
order is given for generally also 2. Prescription Act:
an act to be apply to cheques Debt ito bill,
performed in cheque/promissory note – 6
addition to the years
payment of Other debts – 3 years
money is not a
valid bill for See article in 2013 (July) De
purposes of the Rebus 42 + ch 9.142(?)
Act (section 2(2))
2. EXPLAIN WHY A BILL, CHEQUE OR PROMISSORY NOTE IS TYPIFIED AS A WRITTEN
CONTRACT;
• A negotiable instrument such as a cheque is usually drawn because of a contract
between the parties, e.g. a contract of purchase and sale, ito which the drawer has to
pay the purchase price to the payee
o This main contract is the underlying obligation between the parties
o It is also the causa for the existence of the cambial contract
• When the parties agree to use a negotiable instrument as a mode of payment, an
additional/auxiliary contract is concluded on the document itself → cambial
contract
o Cambial contract’s purpose: to help execute the underlying obligation
o A cambial contract is sometimes described as a real contract, which means
that signature alone ≠ sufficient to found liability and that the document
embodying the personal right must also be delivered to the other party
o Section 19(1) provides that no contract on a bill, whether it be that of the
drawer, acceptor, indorser or aval shall be complete and irrevocable, until
delivery of the instrument in question in order to conclude such a contract
▪ Exception wrt acceptor and aval: where actual delivery is not
necessary as they may give notice of the acceptance or signing of the
aval to the person entitled to the bill
Page | 3
, VHD 320 Syllabus Theme 1: Bills of Exchange
3. IDENTIFY THE DRAWER, PROMISSOR, DRAWEE, PAYEE, ACCEPTOR, INDORSER,
INDORSEE, HOLDER AND AVAL AND UNDERSTAND EACH PARTY’S LEGAL POSITION.
PARTIES INVOLVED IN BILLS, CHEQUES AND NOTES
DRAWER The person who gives the written order (to the bank) that an amount
of money has to be paid, i.e. the person who creates a bill or cheque
PROMISSOR/MAKER The person who creates a note (a promise to pay). The maker of a
note engages that he will pay it according to its tenor and is
precluded from denying to a holder in due course the existence of
the payee and his then capacity to endorse. The promissor/maker
of a note does not correspond with the drawer of a bill, but with the
acceptor of a bill
DRAWEE The person to whom the order to pay is addressed. He must be
named or otherwise indicated with reasonable certainty in a bill. In
the event of a cheque, the drawee must always be a bank. In the
case of a note there is no drawee (another bank – the collecting
bank – could be involved with cheques)
PAYEE The person in whose favour the document was initially drawn. If the
bill is not payable to the bearer, the payee must be named or
otherwise indicated with reasonable certainty. A bill may be drawn
payable to:
• 2/more payees jointly
• 1 of 2 payees
• 1 of several payees in the alternative
• To the holder of an office
ACCEPTOR The drawee who has become a party to the bill by acceptance
(AND THE ISSUE OF thereof. No person shall be liable as a drawer, accepter or indorser
LIABILITY - NB) unless he has signed the bill in that capacity. In order to be liable on
a bill (section 21) → a person’s signature has to appear on it. The
drawee of a bill (usually the bank) is not liable on the instrument
because he did not sign it. He is merely involved in the bill but he is
not a contracting party to it. When he accepts the bill (assents to the
order of the drawer by signing the bill) he becomes a party to the
bill and is liable on it. Acceptance only takes place in case of bills of
exchange. Where the bank has signed and certified the cheque →
will be liable contractually, which is similar to acceptance.
Acceptance is where a drawee has signed a bill (which is not a
cheque). Cheques are not accepted – they can only be certified.
Only bills can be accepted.
INDORSER The payee of a bill ≠ a party to the bill and is therefore not liable on
it. He has certain rights though, such as to negotiate the bill. If the
payee negotiates the instrument by way of indorsement (signature)
he will thereafter be known as the indorser of the document. Due to
his having signed the instrument, he becomes a party to it and is
liable thereon. The indorser, therefore, is the person who has
negotiated the document by way of indorsement and delivery
INDORSEE An indorsee may indorse a bill to someone else by name, e.g. Pay D
or Order. The person thus indicated by name, D, is known as the
indorsee. D may in turn negotiate the document by indorsement
and delivery, in which instance he (D) too becomes an indorser.
HOLDER (NB) The holder is the payee, indorsee or bearer of a bill who is in
possession of the instrument. As a general rule, the holder is the
Page | 4
Click here for important sections to remember
STUDY UNIT 1: INTRODUCTION TO
THE LAW OF NEGOTIABLE
INSTRUMENTS
TEXTBOOK (NAGEL COMMERCIAL LAW (FIFTH EDITION 2015)) PAR 30.01 –30.29
1. UNDERSTAND THE CONCEPTS OF COMMERCIAL PAPER AND NEGOTIABLE
INSTRUMENT
• Negotiable instruments are otherwise known as commercial paper (e.g. a cheque)→
the document has a certain value which is much higher than the intrinsic value of the
piece of paper itself e.g. a cheque which gives a person a personal right to claim
payment
o Why? Because it embodies a personal right which can only be enforced
through possession of the document, e.g. an entrance ticket to a cinema
o Person will only qualify as the holder of a cheque if he is in possession of the
document and only that person will be able to sue on the document and claim
payment from a bank
• Not all such documents are negotiable instruments, because they cannot all be
negotiated (e.g. share certificates, postal orders and bills of lading) while bank notes,
share warrants, bills of exchange, cheques and promissory notes are negotiable
instruments
o The concept ‘commercial paper’ is wider than the concept ‘negotiable
instrument’
Negotiable instruments Non-negotiable instruments
Bank notes Share certificates
Share warrants Postal orders
Bills of exchange Bills of lading
Cheques
Promissory notes
Page | 1
, VHD 320 Syllabus Theme 1: Bills of Exchange
DEFINITION OF NEGOTIABLE INSTRUMENT: (NB) (para 30.03 NB +30.26-30.28)
• Written contract (cambial contract and underlying obligation)
o Underlying obligation (e.g. contract of purchase and sale) is causa for
cambial contract
o Cambial contract = real contract (NB)
▪ Means that the signature is not sufficient on its own to found liability –
must ALSO be delivered
• Negotiable instrument has a dual meaning:
① The document and the rights it embodies may easily be transferred
from one person to another
② Any subsequent holder of the document (transferee) who takes it in
good faith and for value usually acquires all the rights evidenced by
the document, even though his predecessor had a defective title
thereto, and can obtain more rights ∴ the nemo plus iuris rule ≠
apply
▪ Holder in due course →
- (1) needs to be bona fide,
- (2) needs to give value for the document and
- (3) negotiation needs to take place
• If the transferee had not been bona fide/had not given value, he
will acquire no better title than his predecessor had
∴ the nemo plus iuris rule will apply
o What does “for value” mean? → something must be given in return, e.g.
laptop
• The bill of exchange, cheques and promissory notes are provided for in the Bills of
Exchange Act 34 of 1964:
BILL OF CHEQUE PROMISSORY NOTE
EXCHANGE
DEFINITION Section 2(1): Section 1: Section 87(1):
*NB TO KNOW An unconditional A bill drawn on a An unconditional promise in
DEFINITIONS
order in writing, bank and writing made by one person to
addressed by one payable on another, signed by the maker,
person to another, demand and engaging to pay on
signed by the demand or at a fixed or
person giving it, Bill → cheque determinable future time, a
requiring the must also comply sum certain in money, to a
person to whom it with the definition specific person, or to his order,
is addressed to of a Bill or to a bearer.
pay on demand, Thus the same 8
or at a fixed or validity
determinable requirements of a
future time, a sum Bill apply
certain in money
to a specific
person or his
order, or to bearer
Order to pay by Order to pay by A note contains a promise to
drawer (pay “C”) drawer (pay “C”) pay (whereas a bill contains an
order to pay)
Page | 2
, VHD 320 Syllabus Theme 1: Bills of Exchange
An instrument Because a
which does not cheque is a bill, Practical relevance:
comply with these the provisions of
requirements or the Act 1. IOU/Acknowledgement
with which an applicable to bills of debt
order is given for generally also 2. Prescription Act:
an act to be apply to cheques Debt ito bill,
performed in cheque/promissory note – 6
addition to the years
payment of Other debts – 3 years
money is not a
valid bill for See article in 2013 (July) De
purposes of the Rebus 42 + ch 9.142(?)
Act (section 2(2))
2. EXPLAIN WHY A BILL, CHEQUE OR PROMISSORY NOTE IS TYPIFIED AS A WRITTEN
CONTRACT;
• A negotiable instrument such as a cheque is usually drawn because of a contract
between the parties, e.g. a contract of purchase and sale, ito which the drawer has to
pay the purchase price to the payee
o This main contract is the underlying obligation between the parties
o It is also the causa for the existence of the cambial contract
• When the parties agree to use a negotiable instrument as a mode of payment, an
additional/auxiliary contract is concluded on the document itself → cambial
contract
o Cambial contract’s purpose: to help execute the underlying obligation
o A cambial contract is sometimes described as a real contract, which means
that signature alone ≠ sufficient to found liability and that the document
embodying the personal right must also be delivered to the other party
o Section 19(1) provides that no contract on a bill, whether it be that of the
drawer, acceptor, indorser or aval shall be complete and irrevocable, until
delivery of the instrument in question in order to conclude such a contract
▪ Exception wrt acceptor and aval: where actual delivery is not
necessary as they may give notice of the acceptance or signing of the
aval to the person entitled to the bill
Page | 3
, VHD 320 Syllabus Theme 1: Bills of Exchange
3. IDENTIFY THE DRAWER, PROMISSOR, DRAWEE, PAYEE, ACCEPTOR, INDORSER,
INDORSEE, HOLDER AND AVAL AND UNDERSTAND EACH PARTY’S LEGAL POSITION.
PARTIES INVOLVED IN BILLS, CHEQUES AND NOTES
DRAWER The person who gives the written order (to the bank) that an amount
of money has to be paid, i.e. the person who creates a bill or cheque
PROMISSOR/MAKER The person who creates a note (a promise to pay). The maker of a
note engages that he will pay it according to its tenor and is
precluded from denying to a holder in due course the existence of
the payee and his then capacity to endorse. The promissor/maker
of a note does not correspond with the drawer of a bill, but with the
acceptor of a bill
DRAWEE The person to whom the order to pay is addressed. He must be
named or otherwise indicated with reasonable certainty in a bill. In
the event of a cheque, the drawee must always be a bank. In the
case of a note there is no drawee (another bank – the collecting
bank – could be involved with cheques)
PAYEE The person in whose favour the document was initially drawn. If the
bill is not payable to the bearer, the payee must be named or
otherwise indicated with reasonable certainty. A bill may be drawn
payable to:
• 2/more payees jointly
• 1 of 2 payees
• 1 of several payees in the alternative
• To the holder of an office
ACCEPTOR The drawee who has become a party to the bill by acceptance
(AND THE ISSUE OF thereof. No person shall be liable as a drawer, accepter or indorser
LIABILITY - NB) unless he has signed the bill in that capacity. In order to be liable on
a bill (section 21) → a person’s signature has to appear on it. The
drawee of a bill (usually the bank) is not liable on the instrument
because he did not sign it. He is merely involved in the bill but he is
not a contracting party to it. When he accepts the bill (assents to the
order of the drawer by signing the bill) he becomes a party to the
bill and is liable on it. Acceptance only takes place in case of bills of
exchange. Where the bank has signed and certified the cheque →
will be liable contractually, which is similar to acceptance.
Acceptance is where a drawee has signed a bill (which is not a
cheque). Cheques are not accepted – they can only be certified.
Only bills can be accepted.
INDORSER The payee of a bill ≠ a party to the bill and is therefore not liable on
it. He has certain rights though, such as to negotiate the bill. If the
payee negotiates the instrument by way of indorsement (signature)
he will thereafter be known as the indorser of the document. Due to
his having signed the instrument, he becomes a party to it and is
liable thereon. The indorser, therefore, is the person who has
negotiated the document by way of indorsement and delivery
INDORSEE An indorsee may indorse a bill to someone else by name, e.g. Pay D
or Order. The person thus indicated by name, D, is known as the
indorsee. D may in turn negotiate the document by indorsement
and delivery, in which instance he (D) too becomes an indorser.
HOLDER (NB) The holder is the payee, indorsee or bearer of a bill who is in
possession of the instrument. As a general rule, the holder is the
Page | 4
