Commercial Law 4 March 2014

Bills of Exchange
There is legislation called a Bills of exchange Act. A bill of exchange is an
order by one person (the drawer) to another person called the drawee to some
person who may be named (the payee) or to the bearer of the bill. The payee
maybe a third person or he may be the drawer. When the drawee accepts the bill
he becomes the acceptor.
The drawer of the bill is liable on it as soon as it is put into circulation. The
drawer is the one who is paying money to the payee. Drawee only becomes
liable under the bill if it is presented to him for acceptance and he accepts it.
The drawee becomes liable if he accepts. If he does not accept the bill, it means
the bill is dishonoured, the drawee doesnt have to be a bank it can be a regular
person. The primary source of law relating to Bills of exchange is Bills of
exchange Act. The act extends to bills of exchange, promissory notes and
cheques. Some bills are presented for acceptance if it is payable at sight or on
demand it is payable immediately on presentation to the drawee without any
prior acceptance, at this point it would be paid or dishonoured. A cheque is a
bill of exchange payable on demand, drawn by a bank presented for payment
not for acceptance. Payee need not present it but can transfer it to third party to
cancel debt. Bill can be discounted to pay a debt. The person in lawful
possession of a bill is called a holder, can be a holder of value and a holder in
due course. There must be a payment obligation which is unconditional and this
makes it attractive in commerce (comes without restrictions). Obligation is
substantially independent of the contract that is used to support. The obligation
is largely independent of the underline transaction in which it is drawn; the bill
can be enforced regardless of a breach in the underline contract. The buyer
cannot refuse to honour the Bill on the grounds that goods are late or defective.
Fielding & Platt v Najjar 1969 1 WLR 357, pg 361
The plaintiff company had contracted to make and export to the defendant an
aluminum extrusion press. The defendant re-assured the plaintiff that it would
be lawful for him to import the plant, but asked that the plant be described
falsely on the invoice as parts for rolling mill. Payment was made by
promissory notes. After the first two promissory notes had not been met, the
plaintiff ceased production, and sued on the notes and succeeded summarily.
The defendant appealed.
Held: The plaintiff was entitled to payment under the first note, because it had
performed its obligations under the contract, and there was no failure of
consideration. However there was no such completed consideration for the
second promissory note, and the defendant should be allowed to defend.
The request to mis-invoice the goods, if illegal, was severable, and did not
undermine the contract as a whole. To succeed in their defence of illegality, the
defendant had to show that the plaintiff was aware that performance by
importing the plant would be illegal, and had agreed to go ahead
notwithstanding that illegality. That had not been demonstrated in this case.
An innocent party who is ignorant of the facts or circumstances that would
make performance of a contract illegal may be allowed to recover money paid
by him under the illegal contract.
Only in exceptional circumstances should a court deprive a claimant of
judgment on a claim based on a promissory note.
Lord Denning MR said: The plaintiffs, Fielding and Platt Ltd are
manufacturers of machinery. Their business is in Gloucester. In the middle of
1965 they entered into a contract with a Lebanese company called SCIALE
Aluminum of Lebanon. They agreed to make and sell to the Lebanese company
an aluminum extrusion press for a total sum of 235,000. The plant and
equipment was to be delivered free on board at a British port. The time for
delivery was 10 1/2 months from 19 June 1965. Payment was to be made by six
promissory notes given by the defendant, the managing director of the Lebanese
company, Mr. Selim Najjar, personally; and he deposited shares, of his own, as
security for the due payment of the promissory notes. The promissory notes
were payable at intervals during the progress of the work. The first four were
payable whilst the plaintiffs were making the machinery in England. Thus the
first note was payable on 4 October 1965, for 23,500; the second on 4
December 1965, for 47,000, the third on 4 February 1966, for 47,000; and the
fourth on 4 April 1966, for another 47,000. The fifth note was payable on 4
June 1966, for 47,000, which was just about the time when the machinery was
to be delivered to the port. The sixth note, the final one, for 23,500, was
payable on 4 August 1966.
On 4 October 1965, the first promissory note, for 23,500, fell due. It was not
paid. The defendant apologized for not paying it. He asked for a few days
grace. He said that had been agreed. So be it. He was given a few days
Nova (Jersey) Knit v Kammgran Spinneri 1977 2 ALL ER 463 477, the
seller has the assurance of payment.
English and German companies traded in partnership. They agreed that all
disputes between them should be arbitrated in Germany. The English company
sold machinery to the German company and by way of payment received some
24 bills of exchange. After the first six bills of exchange had been paid, the
German company refused further payment on the ground that the English
company had mismanaged the affairs of the partnership and that the machinery
which it supplied was defective. The English company then began in England
an action on the bills. The German company sought to stay the action under the
provisions of the Arbitration Act.
Bristow J at first instance refused the stay but his decision was reversed by the
Court of Appeal.
Held: The appeal succeeded. The arbitration agreement did not extend to
disputes on bills of exchange upon which, in any event, their Lordships pointed
out, there was no dispute.
Lord Wilberforce said: I take it to be clear law that unliquidated cross-claims
cannot be relied upon by way of extinguishing set-off against a claim on a bill
of exchange. As between the immediate parties, a partial failure of
consideration may be relied upon as a pro tanto defence, but only when the
amount involved is ascertained and liquidated. The amount claimed here in
respect of the machines is certainly neither ascertained nor liquidated, and the
claim in respect of the mismanagement is one for a wholly unrelated tort, so that
there would seem to be no basis for denying the appellants claim that, as
regards the bills, there is no dispute.
Lord Salmon (dissenting but on a different point) said: I agree that there is no
defence to the bills, since the only possible defence (which is not relied upon by
the respondents) could be that their acceptance had been procured by fraud,
duress or for a consideration which had failed and because the damages claimed
in the arbitration are unliquidated damages and such damages cannot be set off
against a claim on the bills of exchange.
Lord Russell of Killowen said: It is in my opinion well established that a claim
for unliquidated damages under a contract for sale is no defence to a claim
under a bill of exchange accepted by the purchaser: nor is it available as a set-
off or counterclaim. This is a deep rooted concept of English commercial law. A
vendor and purchaser who agree upon payment by acceptance of bills of
exchange do so not simply upon the basis that credit is given to the purchaser so
that the vendor must in due course sue for the price under the contract of sale.
The bill is itself a contract separate from the contract of sale. Its purpose is not
merely to serve as a negotiable instrument; it is also to avoid postponement of
the purchasers liability to the vendor himself, a postponement grounded upon
some allegation of failure in some respect by the vendor under the underlying
contract, unless it is total or quantified partial failure of consideration.
There is an exception, where breach gives rise to total failure or consideration or
partial failure in a quantified amount.
A bill of exchange is autonomous for two reasons:
- The bill maybe negotiated and fall into the hands of an innocent third
party who is unaware of disputes within contract.
In consumer transactions cheques are used, cheques are not usually
negotiated.
- The bill is treated as good as cash, the payee should not be in worst a
position than if he had received money
A bill of exchange is an order by one person to pay another. A promissory note
is merely a promise to pay money given by one person to another. Paper money
is form of a promissory note- promise by BOJ to pay banks.
Definition and requirement
Section 3 of the Bill of Exchange Act defines what a bill of exchange is. Section
73says a cheque is a bill of exchange drawn on a banker payable on demand. A
document that does not is not a bill of exchange.
- Unconditional order- the bill must order payment, must not be contingent,
it is not a request. Cannot say give Mary if money is in a particular fund?
- The order must be in writing, it may be in print. No requirement that
states where it must be printed
- Must be addressed from one person to another
- Section 5, drawer and drawee must be different
- Bill must be signed by the drawer. Drawer can sign through an agent. If
signature if forged, the drawer is not liable. Person signing is liable unless
they state they are signing in a representative capacity section 26. Forged
signature renders the bill inoperative see section 25.
- Where a person signs a bill as drawer, endorser acceptor, and adds words
to his signature indicating that agent or in the signs for or on behalf of a
principal, or in a representative character, he is not personally liable
thereon; but the mere addition to his signature of words describing him as
an agent, or as filling a representative character, does not exempt him
from personal liability. In determining whether a signature on a bill is that
of the principal or that of the agent by whose hand it is written, the
construction most favourable to the validity of the instrument shall be
adopted
- . Elliott v Bax Ironside 1925 2 KB 301
Directors had accepted a bill on behalf of the company. The drawer
required the directors to indorse the bill personally, and they did so,
signing the name of the company as well as their own names. They were
held personally liable on the indorsement, on the basis that the company
was already liable on the bill by virtue of the acceptance.
- Must be payable on demand or on a fixed or determinable date. See
section 10
- A bill must have a date, or there must be an event providing that the date
is not contingent, the date must be served. Hong Kong & Shanghai
Banking Trade Corp v GB trade co 1988 CLC 238
Bills had been drawn using a printed form which provided that they were
payable at.sight. The drawer had inserted the words 90 days after
acceptance between the words at and sight was partially overtyped. It
was argued that the documents were not bills within the statutory
definition because they were payable 90 days after acceptance and
therefore payment depended on a contingent event. The Court of Appeal
explained that the ruling requiring payment to be due on a determinable
date is required because it is necessary for a number of purposes to
determine the maturity date of the bill. See pg 626

A similar approach was taken in Novaknit Hellas SA v Kumar Bros
International Ltd 1998 CLC
A series of bills drawn under a sale contract were stated to be payable either 60
days from shipment or 60 days from presentation of documents. Under the
sale contract the bills were to be presented for acceptance with shipping
documents relating to the goods. On this basis the Court of Appeal held that
bills payable 60 days from presentation of documents had the same effect as
if they had been made payable 60 days from sight, since the bills would be
presented for acceptance at the same time as the shipping documents.





Additional Notes
A promissory is payable on or before date is not valuable. This may also apply
to a bill.
1. A bill must order payment to or to the order of a specific person so it can
be payable to a named payee or his order this is transferable. If it says to a
payee only it is not transferable. If it is payable to bearer it is transferred
by delivery and any person to who transferred can enforce it.
2. The order must be to pay a certain sum of money.
Sec 9 to amount to be paid must be certain though payment could be by
installments or in another currency.
An order to pay and do something else is not valid (conditional)

Read incomplete Bill and Transfer of a bill

Types of holders of a Bill
Holder is the person entitled to enforce it by him presenting it for payment to
the drawee and if it is dishonored he can take steps to institute proceedings to
enforce it.
Act defines a holder as a bearer of a bill or payees endorsement of an order.
1. Mere holder: is a holder otherwise than for value who does not claim title
through a holder in due course. His rights are limited
a. Can Transfer it by delivery/endorsement.
b. Can insert the date
c. Can present it for payment

2. Holder for value who can enforce payment by showing he provided
consideration and so qualified as a holder for value
a. Any consideration sufficient to support a simple contract
b. An antecedent debt, maker or negotiator of the bill and not that of a
3
rd
party. The debt must be paid by the person liable on the bill.
Oliver v Davies 1949 2KB 727
Diamond v Graham 1968 1WLR 1061
c. A holder is taken to provide consideration for a bill if the
consideration had been at any time after for if so he can rely on
consideration given by a previous party.
MK I nternational v Housing Bank 1991 1Bank LR, 74

3. The holder in due course is in a privilege and protected position. Sec 29.
He holds the bill free from any defect by prior parties and free from
personal defenses available to previous pries e.g. partial or total
consideration

Qualified he must have taken a bill complete and regular on the face of it
and he becomes a holder.
a. Before it was overdue and without notice of it previously being
dishonored
b. He took the bill in good faith for value and at the time the bill was
negotiated to him he had no notice of any defect in title of the person
who negotiated.
A person seeking to enforce a bill must satisfy each of the following
1. Must be holder of the bill; a stronger the holder to better to enforce it.
Re J ones v Waring 1926 670 HL
J ade I nternational Steel v Robert Nicols Steel 1978 3All ER 104
2. The bill must be regular and complete on the face of it e.g. A missing
endorsement makes the bill irregular thus the bill is incomplete. It is also
incomplete if details are missing e.g. the payee and the amount missing
except to the date as it can be inserted.
Arab Bank Ltd v Russ 1752 2QB 106
3. The bill must not have been overdue at the time of transfer e.g. check
goods for six months.
Bill in demand in circulation for a long time. Sec 36(3)
4. The holder must have been no notice of persons of dishonor.
5. The holder must take the bill with no notice of defect and in good faith.
Sec 29(4)
J ones v Gordon 1877 2App CAS
6. The holder must take bill for value and to qualify as a holder for value
must provide consideration; can rely on consideration of previous holder.
Clifford Chance v Silver 1992 2Bank LR 11
Barclays Bank v Astley Trust 1970 2QB 527

Section 83 promisory note