NEGOTIABLE INSTRUMENTS

INTRODUCTION There are certain documents, which are freely used in commercial transactions and monetary dealings. These documents, if they satisfy certain conditions, are known as negotiable instruments. ‘Negotiable’ is a word to mean transferable from one person to another in return for consideration. ‘Instrument’ means a written document by which right is created in favor of some person. The law relating to negotiable instrument is contained in the Bill of Exchange Act (Cap. 27) and the Cheque Act (Cap 41), which deals with promissory notes, bills of exchange and cheques. As per the Act, no definition is given. However, in simple, a negotiable instrument can be described as a commercial document which represents money. It passes to a bonafide transferee free from any defect. Therefore a negotiable instrument refers to a document, which entitles a person to a sum of money or money value which is transferable from one person to another by mere delivery or by endorsement and delivery.

NATURE OF NEGOTIABLE INSTRUMENTS A negotiable instrument is a Chose in Action. A chose in action is a property right which cannot be enjoyed by physical possession, but which can only be enforced by legal action, for Example a debt, patent or copyright etc. Most types of chose in action are assignable but;

1. Notice to the debtor is always advisable and sometimes essential; and 2. The assignee can obtain no better rights than the assignor. 3. However, out of customary usage certain types of chose in action have evolved to

which these restrictions do not apply. These are known as negotiable instruments.

Justice Willis defines a negotiable instrument as the property, which is acquired by anyone who takes it bona fide and for value notwithstanding any defect of title in the person from whom it is taken. According to Thomas, a negotiable instrument is one, which is transferable by delivery or by endorsement and delivery without notice to the party liable, in such a way that the holder of it for the time being may sue upon it in his own name and, the property in it passes to a bonafide transferee for value free from any defect in the title of the person from whom he obtained it.

CHARACTERISTICSa) No notice: If made payable to bearer, it is negotiable by mere delivery, but if

payable to order it is negotiable by delivery and endorsement. No notice is required to be given to the debtor.

b) Good faith: A transferee taking a negotiable instrument in good faith acquires a good title despite the defective title of the transferor. This constitutes an exception to the rule ‘Nemo dat quad non habet’, (no person can pass a better

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title than his own.)c) Freely transferable: They are freely and easily transferable from one person to

another without any formality. In other words, the right of ownership of these instruments can be easily transferred from one person to another by mere delivery, or endorsement and delivery.

d) Title of holder free form all defects: This means that a person who takes an instrument bonafide and for value (known as holder in due course) gets a good title of ownership even though the title of the transferor may be defective.

e) Recovery: The holder in due course can sue upon the instrument in his own name for the recovery of the amount. He need not give notice of transfer to the party liable on the instrument.

f) Presumption: Certain presumptions apply to all negotiable instruments. Namely that the instrument was: - Made, drawn or accepted for consideration. Made or drawn on a date appearing on the instrument and; Transferred before its maturity date.

TYPES OF NEGOTIABLE INSTRUMENTS Negotiable instruments are of two types namely: -

Negotiable by statute. Negotiable by custom.

Instruments negotiable by statute are: Bills of Exchange. Promissory Notes and; Cheques.

These are recognized by the Bills of Exchange Act: There are also certain other instruments which have acquired the character of negotiability by the usage or custom of trade. This includes:

i. Circular Notes. ii. Dividends Warrants.

iii. Share Warrants. iv. Bearer Debentures and; v. Treasury Bills.

The above documents acquired their negotiability by commercial usage in England, which was codified in the year 1882 in the Bills of Exchange Act 1882. This Act was introduced in Kenya on 14th May, 1927 and is the current law relating to negotiable instruments. There are other negotiable instruments in commercial use but they are irrelevant for the purposes of these notes, which include Money orders, Postal orders, Share certificates, Letters of credit etc. BILLS OF EXCHANGE Section 3(1) of the Bill of Exchange Act defines the Bill as an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person

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to whom it is addressed to pay on demand or at fixed or determinable future time, a sum certain in money to or to the order of a specified person or bearer of the instrument.

Parties to a bill of Exchange: 1. Drawer: The person who orders money to be paid on his behalf. 2. Drawee: The person to whom the order is given. 3. Payee: The person to whom the money will be paid. 4. Endorser: The holder of an order bill who signs the back when transferring it. 5. Endorsee: The person to whom an order bill is indorsed. 6. Bearer: The person in possession of a bearer bill. 7. Holder: The payee or endorsee who is in possession of an order bill or the person

in possession of a bearer bill (the bearer). 8. Holder for value: A holder who has given, or who is deemed to have given value

for the bill i.e. consideration. 9. Holder in due course: A holder who has taken a bill;

Complete and; Regular on the face of it, Before it was overdue, Without notice of previous dishonor by non-payment, In good faith, For value, Without notice of any defect at the time of negotiation.

Note: The payee cannot be a holder in due course because the bill is made

payable to him, it is not negotiated to him. The difference between a holder for value and holder in due course is

important because a holder for value can only acquire the same title as his transferor, whereas a holder in due course can sometimes acquire a better one.

A bill must have all the following essentials: 1. It must be an order i.e. it’s terms must be imperative. But the use of the word ‘please

pay…’ does not prevent an instrument from being an order. 2. The order to pay must be unconditional i.e. there must be no other condition

attached to the making of the payment such as ‘pay x one thousand shillings and notify me’

3. The order must be in writing. 4. It must be addressed by one person to another. 5. It must be about payment of money only. 6. If the order is not to pay on demand, the time of payment is fixed or determinable. A

determinable event is one which is bound to take place, but the time is uncertain e.g. ‘pay x on his fathers death’

7. The order must be to pay a certain sum of money.

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8. It must have three parties, namely, the drawer, drawee and the payee. 9. It must be signed by the drawer.

On demand: A bill is payable on demand if expressed to be payable on demand or at sight or on presentation if no time for payment is expressed.

To or order of a specified person: Unless the bill is payable to bearer, the payee must be named or indicated with reasonable certainty. A bill may be payable to two or more persons jointly, or to bolder of a particular office.

To bearer: A bill is payable to bearer if it is drawn as such, or if the only or last endorsement is in blank. When the holder of an order bill signs the back without adding words indicating to whom the bill is endorsed the bill is said to be endorsed in blank.

Illustration: If B (a buyer) owes S (a seller) Ksh. 5,000/= for goods supplied, by using a bill of exchange he can request F (probably a financier or agent) to pay the debt, B having given or agreed to give F the necessary funds. At the same time the bill can be used to enable B to obtain a period or credit, whilst S will nevertheless receive prompt payment (although a slightly smaller amount).

The bill of exchange may be drawn as follows:

13 April 2013

To F

Three months after date pay S or her order the sum of Five Thousand Kenya shillings (Ksh. 5000), valued received

Signed by : B Kisumu

Thus B has drawn a bill requiring F to pay Ksh. 5,000/= to S or to the order of S. Note that: i. The bill is payable at a fixed date in the future, but it could have been made

payable ‘on demand’. ii. The bill is payable to ‘S or order’. A bill may however be made payable to ‘bearer’. iii. S will have to ‘present’ the bill to F since F will not have an obligation to pay until

he has ‘accepted’ the bill by signing his name on the face of it. By accepting the bill F becomes primarily liable to pay the bill on the agreed date.

iv. S may keep the bill until the agreed date, i.e. until maturity, and then present it to

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F for payment or he may sell (i.e. negotiate) it. The buyer will pay less than Ksh. 5,000/= for the bill because he will have to wait until maturity to collect the money. The buyer would therefore be said to have ‘discounted’ the bill.

v. The bill may be negotiated several times before payment. Negotiation is effected by the holder signing his name on the back of the bill. This is known as ‘endorsement’.

vi. Although the acceptor (F) is primarily liable to pay, the drawer (B) and any endorser may also be liable on the bill. By signing the bill each endorser acts as a surety for the acceptor, although each endorser can claim an indemnity from the drawer or a previous endorser.

vii. If F refuses to pay the bill when it is presented for payment on the agreed date it is said to be ‘dishonored’ and the holder will be able to sue F, or as stated above he may sue the drawer or a subsequent endorser.

ADVANTAGES OR IMPORTANCE OF BILL OF EXCHANGE. A bill of exchange is a double secured instrument. If the bill is dishonored by the acceptor, the holder or the payee may look to the drawer of the bill for payment. In case of immediate need of money, a bill can be discounted with a banker. Two separate trade debts can be discharged by a bill of exchange.

ACCEPTANCE Under the Act, the presentment for acceptance is not necessary, although it is always advisable to do so, for if it is refused, the parties other than the drawee become liable immediately. In three cases, however, the bill must be presented for acceptance, namely: 1. Where it is payable after sight, presentment for acceptance is necessary so as to

ascertain the date of maturity. 2. Where it is expressly stipulated that it must be presented for acceptance. 3. Where it is drawn payable elsewhere than at the place of residence or place of

business of the drawee.

A bill payable ‘after sight’ must be presented for acceptance or negotiated within a reasonable time. The effect of non – compliance with this requirement is to discharge the drawer and all prior endorsers. Presentment is dispensed with and the bill may be treated as dishonored by non – acceptance under the following circumstances: 1. Where the drawee is dead, bankrupt, a fictitious or a person not having capacity to

contract e.g. an infant. 2. Where after the exercise of reasonable diligence such presentment cannot be

effected. 3. Where although the presentment has been regular, has been refused on some other

grounds. RULES REGULATING PRESENTMENT FOR ACCEPTANCE. Presentment must be made in conformity with the following rules:

It must be made by the holder or his agent to the drawee or his authorized agent.

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It must be made at a reasonable time on a business day before the bill is overdue. Where there are two or more drawees who are not partners, presentment must

be made to them all except where one of them has authority to accept on behalf of all.

Where the drawee is dead, presentment may be made to his personal representatives.

Where the drawee is bankrupt, presentment may be made to him or to his trustee in bankruptcy.

Presentment may be made through the post, if this mode is authorized by agreement or usage.

Acceptance may be either general or qualified4. I. A general acceptance is signified by the drawee by signing his name on the

bill with or without the word ‘accepted’ without adding any condition regarding payment or time. As a general rule, the acceptance should be general i.e. as it is drawn without any new conditions whatsoever.

II. A qualified acceptance is one, which is made subject to some condition or qualification, thereby varying the effect of the bill drawn. The holder of the bill may refuse to take a qualified acceptance and the bill may be treated as dishonored. But if he accepts qualified acceptance the drawer and the endorsers are discharged unless they agree to it. A qualified acceptance may take any of the following forms.

Conditional: Where payment by the acceptor is expressed to be dependent on the fulfillment of a stated condition e.g. ‘accepted when a cargo is sold to me’.

Partial acceptance: Acceptance to pay only part of the amount for which the bill is drawn.

Local acceptance: Acceptance to pay at a place different from the one mentioned in the bill.

Qualified time: Acceptance at a time different from that in the order of the drawer.

Acceptance by some of drawees only: Where the drawees are not partners and only or some of them accepts.

NEGOTIATING A BILL OF EXCHANGE A bill is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee as the holder of the bill so that he can recover the amount of the bill from the parties liable on it. When a bill is payable to a bearer negotiation takes place by its mere delivery and when it is payable to order, the instrument is negotiated by the holder by endorsement and delivery thereof. Delivery of the instrument is necessary in both cases and it must be made voluntarily with the intention of passing the property to the person to whom it is delivered. A negotiable instrument can be transferred from one person to another by delivery or by endorsement followed by delivery, but a chose in action can be transferred by assignment only. A chose in action is a right over a thing that is intangible but one has a right to recover it, if it is withheld. Examples of choses in action

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are patents under contract, copyright etc.

ENDORSEMENTS OF BILL OF EXCHANGE. Bills payable to a specified person or his order can be negotiated only by endorsement and delivery. Endorsement of a bill may be:- Blank Endorsement. Special Endorsement. Conditional Endorsement. Restrictive Endorsement.

Essentials or Characteristics of an Endorsement:a) It must be written on the face of the bill or on its reverse side or on a slip of paper

attached to the bill. This slip of paper is technically referred to as an allonge. b) An endorsement must be signed by the endorser. c) It must be an endorsement of the entire bill. d) If the bill is payable to the order of two or more persons who are not partners, all

must endorse the bill. e) An endorsement may be blank, special, restrictive or conditional. f) Wherein a bill is payable to order, the payee or endorsee is wrongly designated, or

his name is mis-spelt, he may endorse the bill as therein described, adding as he thinks fit, his proper signature.

Types of Endorsement: a) Blank Endorsement. An endorsement is said to be blank when the endorser simply

writes his signature on the back of the bill and the bill so endorsed becomes payable to the bearer even if it was originally payable to order.

b) Special Endorsement. A special endorsement takes place where the endorser signs his name and adds a direction to pay the amount stated in the bill to a specified person. A special endorsement specifies the person to whom or to whose order the bill is to be payable. A blank endorsement can be turned into a special endorsement.

c) Conditional Endorsement. This is an endorsement, which restricts limits or negatives the liability of the endorser. It limits the endorser’s liability on the bill e.g. sans recourse (without recourse) which means that the endorser disowns all liability. It may also be endorsed sans frais (Without expenses), which means that the endorser will accept liability for the value of the bill but not for the expenses of enforcing it.

d) Restrictive Endorsement. This is an endorsement that prohibits further transfer or negotiation of the bill. It limits transferability e.g. a bill endorsed ‘pay x only’. This gives the right to the endorsee (x) to claim payment on the bill but prohibits him from transferring the right of payment to anyone else.

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RULES OF NOTICE OF DISHONOUR a. The notice may be given by the payee or his agent. b. It must be given within a reasonable time of the dishonour. c. It may be given in the payee’s name or that of his agent. d. It may be oral or written. e. If written, it need not be signed. f. Return of the dishonoured bill is sufficient notice. g. The notice may be given through the post if trade usage or custom permit.

g) It must be given to the drawer or endorser or their personal representatives if they have since died.

h) If the drawer or endorser has been declared bankrupt, the notice must be given to their trustees in bankruptcy.

NOTING AND PROTESTING OF BILLS A foreign bill must be protested if dishonoured. Upon the dishonour of a bill the payee must hand it over to a notary public who presents the bill to the acceptor for a second time.

Noting the bill involves making of a minute by a Notary Public, who has to present the bill either at the acceptor's office if it is made payable there, and if made payable at a bank then to that bank, and gets the answer given for non-payment of the bill. Then he affixes to the bill a slip of paper which he has briefly typed (or written) on it the fact that he presented this bill to the named drawee at the place and date, the cause or reason for protesting the bill, the demand made, and the answer given, if any, or the fact that drawee or acceptor could not be found. He then appends his signature and affixes a stamp, this being the stamp required on a legal document. This formal process is called protest5.

PROTESTING A BILL A protest is a formal declaration by a notary public attesting to the fact that a bill has been dishonoured on presentation to the acceptor. It’s contents include: Name of the person on whose behalf the protest is made. Reason for the protest. Date and place in which the protest is made. Particulars of the notary public.

The dishonoured bill or a copy thereof must be attached to the protest. A protest is conclusive evidence that a bill has been dishonoured.

DISCHARGE OF A BILL An instrument is discharged when all rights and obligations arising under it have completely ceased to exist. But when any particular party is discharged the instrument

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may still continue to be negotiable and the un-discharged parties remain liable on it. For example if the bill is not presented for payment on its due date of maturity, the endorsers are discharged from their liability, but the acceptor remains liable. A party may be discharged from liability in the following ways:

a. By payment: When payment is made or after the maturity of the bill to the holder in due course by the drawee or acceptor, all parties to the instrument are discharged.

b. By renunciation/waiver: When the holder at or after maturity renounces his rights against the acceptor, unless the holder delivers the bill to the acceptor.

c. By cancellation: Where the holder at or after maturity renounces his rights against the acceptor. Such renunciation must be in writing unless the holder delivers the bill to the acceptor.

d. By merger: When the acceptor of the bill becomes holder for the bill at or after maturity in his own right.

e. Non presentation for payment: If a bill is not presented to the acceptor within the stipulated time, the drawer and any other endorser are discharged.

f. 6. By material alteration Sec.64(1): When the bill is materially altered without the consent of all the parties liable, the bill becomes void except against: -

A party who has made, authorizes or assented to the alteration, and; A subsequent endorser that is one who endorsed after the alteration took

place.

The following alterations are held material: - Changing date. Changing the sum payable. Changing the place of payment. Changing the time of payment. In cases where the bill has been accepted generally, addition of a place of payment

without the acceptor’s consent. This section, (Sec. 64) does not apply to accidental alteration or damage.

HOLDERS OF A BILL. HOLDER IN DUE COURSE Section 29 describes a holder in due course as a holder who has: - 1. Taken a bill complete and regular on the face of it, 2. Before it was overdue, 3. Without notice that it had been previously dishonored if such was the fact, 4. In good faith and for value, 5. Without notice, of lack of title at the time the person who negotiated it negotiated the

bill.

It must be noted that the original payee is not a holder in due course, because the bill is

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not negotiated to him. But as soon as he negotiates it, the person who obtains it satisfying the above conditions, becomes holder in due course.

Rights of a holder in due course: He may sue on the bill in his own name. He holds it free from any defect of the title of the prior parties.

Where his title is defective; a.If he negotiates it to the holder in due course the holder obtains a good title. b. If he obtains payment, the person who has paid him in due course gets a valid

discharge.

Duties of a holder in due course: To present bill for acceptance in case the bill is payable after sight. To present the bill for payment or else the drawer and endorsers will be discharged. To give notice of dishonor when the bill has been dishonored by non-acceptance or by

non-payment. To note or protest the bill in the event of bill being dishonored.

HOLDER FOR VALUE When value has been given at anytime for a bill, the holder is deemed to be a holder for value as regards the acceptor and all the parties to the bill who become parties prior to such time. His title is similar to that of a holder in due course except he cannot sue his immediate transferor for he has not paid any consideration to him for the bill, but he may sue the acceptor and all parties to the bill who became parties prior to giving of the consideration.

ACCOMODATING PARTY This is a person who has signed a bill as a drawer, acceptor or endorser without receiving value thereof but for the purpose of lending his name to another person. Such a party is however liable to a holder for value whether or not the holder was aware of his status.

CHEQUES A Cheque is an unconditional order in writing addressed by a person to a banker signed by the former requiring the banker to pay on demand a sum certain of money to a specified person or his order or to the bearer. From the above definition, it can be observed that a cheque is a bill of exchange with two additional qualifications, namely: a.It is always drawn on a specified banker, and; b. It is always payable on demand.

Distinction between a Bill and Cheque As a general rule, the law relating to Bills of exchange applies equally to Cheques. There are however, few points of differences between the two, namely: A cheque is always drawn on a banker, while a bill may be drawn on anyone including

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the bank. A cheque can only be drawn payable on demand, a bill may be drawn payable on

demand, or on the expiry of a certain period after date of sight, or on the happening of a determinable future event.

A bill requires acceptance before payment can be demanded, a cheque does not require acceptance and is intended for immediate payment.

A three days period of grace is allowed in the case of bills not payable on demand, while no grace period is given in case of cheques.

Notice of dishonor of a bill is necessary, but no notice is necessary in the case of a cheque.

A cheque may be crossed but not a bill. The Drawee is the banker on whom the Cheque is drawn. It is also referred to as the

paying bank. The collecting bank is the bank which collects payment for its customer (the payee)

who pays in the Cheque for the credit of his account. M,..

CROSSING OF CHEQUES A crossed cheque differs from an open cheque in the way that the latter (Open Cheques) can be presented by the payee or the holder to the drawee bank and is paid over the counter. This means that open cheques may be negotiated and cashed by anyone who holds them in the same way as a bank note. If an open cheque has been stolen, no subsequent holder is required to repay the amount of the cheque to the true owner. It will be observed that an open cheque is not safe in the course of circulation. It can be stolen or lost and the finder of it can get it cashed unless the drawer has already informed the bank not to make payment. There are however, a number or ways in which either drawer or payee of a cheque may protect himself against loss by theft e.g. crossing a cheque as ‘account payee only’ or ‘not negotiable’. A crossing is a direction to the paying banker to pay the money generally to the banker or particular banker as the case may be but not to the holder across the counter. The mere crossing of cheques, however does not affect the negotiability of the instrument. The holder in due course has a perfect title to negotiate it, but the quality of negotiability may be taken away by the words ‘not negotiable’ inserted in the cheque. Section 49 provides that where a banker pays a specially crossed cheque otherwise than in accordance with the special crossing or a crossed cheque otherwise than to a banker, he is liable to the true owner of the cheque for any loss which may arise owing to the wrongful payment of the cheque.

The following are various kinds or crossings: - 1. General crossing: A general crossing is where a cheque bears across its’ face two

parallel lines with or without the addition of the words ‘and company’ between the lines6. The following are various forms of general crossings:-

2. Special crossing: Where a cheque across its face has an addition of the name of the bank with or without two parallel lines. The cheque can be cashed through the banker and the paying banker must not pay the cheque to a banker not named in

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the crossing. 3. Not negotiable crossing: Where a cheque bears the crossing ‘not negotiable’ it is

still transferable but its negotiability is limited. It becomes an ordinary cheque in action and transferee of it has a good title to it, he can pass good title, but where his title is defective, the subsequent transferee does not get any title to it.

4. Account payee: This crossing consists in addition to the general or special crossing the words ‘account payee’ or ‘account payee only’ or ‘account to x only’ Such crossings are a direction to the bank collecting payment that the proceeds when collected are to be credited to the account of the payee named on the face of the cheque.

INCHOATE INSTRUMENTSInchoate instruments mean incomplete bills. When a person signs a blank piece of paper and delivers it to another to be converted into a bill, it gives prima facie authority to the holder thereof to complete the bill for any amount. Such an instrument is called an inchoate instrument, in order that any such instrument when completed may be enforceable against any person who becomes a party thereto. Prior to it’s completion, it must be filled within a reasonable time and strictly in accordance with the authority given.

BANKER & CUSTOMER RELATIONSHIP. The relationship between a banker and his customer is that of debtor and creditor. A banker is one who in ordinary course of business honors cheques drawn upon him by persons from and or whom he receives money on current accounts. The conditions upon which the bank accepts opening an account are matters of agreement between the bank and the individual customer but there are some implied conditions or duties which are to be followed by all the bankers such as;-

The banker will treat every account as private and confidential. The matters can only be disclosed in exceptional circumstances e.g. on an order of court.

Undertake to honor the cheques drawn by sufficient funds to the customer so long as he holds sufficient funds to the customer’s credit to meet the cheque. When a customer has insufficient funds in account to meet the cheque, the banker is within his rights to return it unpaid and when he does so, the cheque may be marked ‘ insufficient funds’ or ‘refer to drawer’. If a banker without justification fails to pay the cheque drawn on the drawers account when it has sufficient funds in it, he will be liable for damages for breach of contract.

Reasonable care in conducting the customer’s business. This includes the duty to honour the customer’s cheques and the duty to pay the customer’s proper authority.

Collect his customers cheques provided they are banked with him for collection. To pay the customer money due on his account. To credit the customer’s account with the amount as and when required. Where a customer gives his document to his banker for safe custody, he must then

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take reasonable care of the documents.

Protection of Paying Banker. The paying banker has the benefit of the statutory protection, which is not accorded to the drawee of a bill of exchange. The protection allows the banker to carry out their banking transactions as unhampered as possible. Section 4 (1) of Kenya Cheque Act provides that where a banker, in good faith and in the ordinary course of business, pays a cheque or draft drawn on him to a banker, he does not in doing so incur liability by reason only of the absence of, or irregularity in endorsement of the instrument. The statutory protection is available to a paying banker when he pays the cheques in the some special circumstances:

Forged Endorsement: Where a banker pays against a cheque drawn on him in good faith, and in the ordinary course of business, he can debit the account of such a drawer with the amount so paid, even though the endorsement of the payee subsequently proves to be forged. A banker who pays a crossed cheque is also protected against a forged endorsement provided he has acted without negligence. In the case of Charles Vs. Blackwell (1877) - C drew a cheque in favour of D or order. E stole it and forged D’s endorsement. C’s banker paid the cheque in good faith and in their ordinary course of business. Held that the bankers were within their right to debit C’s account with the amount of the cheque.

A bank however, receives no protection if it pays a customer’s cheque when his signature has been forged. A bank is presumed to know the signature of its customer and it will not escape from its liability to repay its customer any money paid out on a forged cheque. It is not defence that the forged signature appeared quite a genuine signature.

Exceptions. Exception may arise if the customer has actively assisted or deliberately delayed the reporting of forgery after discovering it, or has by his own acts hindered or prevented the bank from pursuing the forgery. The Cheque Act provides that a banker paying a cheque drawn on him in good faith and in the ordinary course of business, which is not endorsed or irregularly endorsed, incurs no liability because of the absence or irregularity of endorsement. Note: A banker is not protected where the original amount in the cheque has been fraudulently increased and he makes the payment whether in good faith or not. He must refund the customer the difference between the original amount written by him and the amount fraudulently increased by alteration. But the banker may escape his liability by proving that the customer has been guilty of contributory negligence by leaving space for fraudulent manipulations.

Protection of the Collecting Banker. Section 3(2) of the Kenya Cheque Acts gives protection to the collecting banker who in good faith and without negligence and in the ordinary course of business: Receives payment for the customer of a prescribed instrument to which the customer

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has no title or has a defective title or; Credits the customer’s account with the amount of a prescribed instrument to which

the customer has no title or has a defective title. He does not incur any liability to the true owner of the instrument by reason only of having received payment of it, and a banker is not treated for the purpose of this subsections as having been negligent by reason only that he failed to concern himself with the absence of or irregularity in endorsement of a prescribed instrument of which the customer in question appears to be a payee. Section 2(1) Defines prescribed instrument as: - A cheque; or - A document issued by a customer of a banker which is not a bill of exchange, but is intended to enable a person to obtain payment from a banker of the sum of money specified in the document; or

A draft by a banker upon himself and payable on demand at an office of his bank.

PROMISSORY NOTES A promissory note is an unconditional promise in writing made by one person to another signed by the maker, engaging 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- Section 84 of Bills of Exchange Act. An analysis of the definition will show that a promissory note must posses the Following characteristics:

1. Must be in writing. A mere verbal promise to pay is not enough. 2. It must contain an express promise to pay. A mere acknowledgement of

debt is not sufficient. 3. The promise to pay must be unconditional. 4. The maker of the note must sign it.

A promissory note is a negotiable instrument generally made by the debtor to the creditor promising payment. When drawn by the debtor it is referred to as a draft and is incomplete. A note becomes complete when presented to the promise. If made by two or more persons, all are jointly and severally liable on it. A promissory note need not be protested in the event of dishonour. It neither requires acceptance nor presentation thereof. However, it must be handed over to the promisee.

Specimen of a promissory note:

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20th April 2013

On demand (or three months after date) I promise to pay X or order or bearer the sum of Ten thousand (Ksh. 10000)shillings only for the value received.

Signed: KISUMU

There are two parties to the note: The maker and; The payee.

The rules relating to bills of exchange in general apply to promissory notes.

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