Every negotiable instrument to qualify as such must meet special requirements relating to form and content. These are mandatory requirements for the validity of the instrument. The absence of any one of such requirements renders the instrument non-negotiable. On the other hand, if it fulfills, it becomes negotiable i.e. transferable from one person to another person by delivery. The term ‘negotiability’ here refers to the capacity of the instrument being transferred by delivery or endorsement and simultaneously entitling the transferee rights and entitlements emanating from the instrument. When there is a valid negotiation the right and the document together, pass on to the transferee. As you can see from article 715(1), this very essence i.e. inseparability of the document from the the right, is used as a key element in defining negotiable instruments by the commercial code.
The general part of the commercial code (articles 715-731) does not provide any common standard by which the negotiability of negotiable instruments can be measured. Rather it only provides specific requirements applicable to bills of exchange, promissory notes and cheques. Since all these instruments are commercial papers, we will in general examine the basic requirements applicable to all, at the same time comparing and contrasting them with the specific requirements of each instrument. The negotiability requirements of bills of exchange, promissory notes and cheques are indicated in article 735, 823 and 827 respectively.
A—Written Form
Negotiable instruments must be in written form. Clearly an oral order or promise can create the danger of fraud or make it difficult to determine liability. Negotiable instruments must possess the quality of certainty only formal, written expression can give. The mode of writing can be handwritten, typed or printed.
We don’t find any explicit requirement of writing in the commercial code provisions. However, articles 735, 823 and 827 impliedly require the instrument to be in writing. All these articles begin by the phrase “…shall contain” and then enumerates the specific requirements. These specific requirements are statements to be written by the drawer or maker. Hence, the code makes it apparent that an oral order or promise could not be considered as a commercial instrument. Additionally, article 715 defines a negotiable instrument as “any document” making it clear that only a written instrument may qualify as negotiable.
There are practical limitations concerning the writing and the substance on which it is placed. The writing must be on material that lends itself to permanence. Instruments carved in blocks of ice or recorded on other impermanent surfaces would not qualify as negotiable instruments.
The instrument must also be portable. If it is not portable, it cannot meet the requirement that it be freely transferable. For example, Abera writes on the side of a dog “I Abera promise to pay Almaz or order 1,000 birr on demand.” Technically this meets the requirements of a negotiable instrument, but as a dog cannot easily be transferred in the ordinary course of business, the instrument is non-negotiable.
Permanence and portability are not spelled-out legal requirements under the commercial code. When we think of a cheque, we normally envision a preprinted form with the “normal” terms and phrases on it, including the bank’s name and address, “pay to the order of,” and so on. The commercial Code says nothing to indicate that negotiable instrument must be typed or printed or placed on any specific of material, apart from the fact that it impliedly requires that it be in writing. If disputes related to permanence and portability are brought before our courts the judge has to construct whether a given instrument is negotiable or non-negotiable, guided by the underlying role and function of instruments in facilitating business transaction. Avoiding risk of loss and making business easy and simple; that is the overall relevance of instruments. Moreover, the judge should also take into account the intention of the parties, custom of business in the area and other relevant circumstances attached to the case and rules of interpretation which could help him reach at correct and fair conclusion.
B—Signature
The issue of signature is very important in the law of negotiable instrument, because it has varying implications for each party starting from issuance of the instrument throughout each successive stages of the negotiation. First of all, signature by the maker or drawer makes the instrument valid and binding creating duties on the person who initiates it and immediately creating rights upon delivery to the holder. Secondly, it has to be emphasized that the key to liability on a negotiable instrument is a signature. Every party who signs a negotiable instrument bears either primary or secondary liability for payment of that instrument when it comes due.
Having said so, let’s examine as to who should and how a negotiable instrument should be signed so as to be called a valid instrument. Generally, for an instrument to be negotiable, it must be signed by;
1) The maker if it is a promissory note (Art 823(g)
2) The drawer if it is a Bill of exchange or a cheque (Arts 735(h) and 827(e) respectively.) If a person signs an instrument as the agent of the maker or drawer, it is legally considered as if the maker or drawer has effectively signed the instrument, provided the agent has the appropriate authority.
In general terms, Art 734(1) of the code requires declarations made by commercial instrument to bear the signature of the person making it (i.e. the maker or the Drawer). Since a negotiable instrument creates a duty on the person signing on it, it is self-evident that he should have legal capacity to perform juridical acts.
Determining what constitutes a signature, in some cases may become difficult to determine. The word ‘signature’ by definition includes ‘any symbol adopted by a party with present intention to authenticate a writing.’ Art 734(1) imposes a general requirement of signature without defining “signature”. Typically, this provision acknowledges that signature may be made by a hand written mark or by mechanical process such as stamp. However, a thumb mark by a physical person unable to sign should be verified by an authentic declaration to bind that person. [(Art 734(3)]. Although this rule seems applicable to a physical person unable to sign, it has to be similarly applicable to any physical person even literate and able to sign, as far as he chooses a thumb mark as his signature.
The rules in Art 734 are limited to the manner of making signature. They do not indicate as to what a mark, word or symbol could be validly called a signature. Hence, as far as it unequivocally manifests the intention of the maker or drawer, a very broad interpretation should be given as to what mark, symbol or may be properly called as signature. According to the American uniform commercial code (hereinafter to be cited as UCC) any name, including a trade or assumed name, word, mark, or symbol executed or adopted by a person with present intention to authenticate a writing is regarded as a signature. Thus, initials, an x mark, a trade name or assumed name is sufficient.
The location of the signature on the document is unimportant, though the usual place is the lower right hand corner. Although, there is no clear indication as to the right location of the signature in the commercial code, any mark or symbol on the body of the instrument should be regarded as a valid signature. The intention of the person putting his signature on the instrument and avoiding any uncertainty should be taken as key factor in determining the validity of signature.
C—Unconditional promise or order to pay
For an instrument to be negotiable, it must contain an express order or promise to pay. A promise is simply a pledge to transfer money. For the purpose of negotiable instruments, a promise must be express and unconditional. A mere acknowledgement of debt, which might logically imply a promise, is not sufficient to constitute valid promise. The promise must be an affirmative, not acknowledgment.
Example: –
“Ato X, I.O.U Br 1,000”.
Here I.O.U stands for, “I owe you.” This is only an admission of indebtedness or acknowledgement of debt. There is no promise to pay and therefore the instrument is not a promissory note.
Order, which is associated with three party instruments i.e. Bill of exchange & cheque can be defined as command to another to transfer money. An order instrument orders, or directs, a third party to pay the instrument as drawn. It must be more than an authorization or request.
When the drawer issues a cheque, the word ‘pay’ (to the order of a payee) is a command to the drawee bank to pay the cheque deducting from his account when presented. The order is mandatory, but sometimes it may be written in a courteous form with words “please pay” or” kindly pay”. The bottom line is the language used by the drawer must be a precise and express one.
Unconditionality of promise or order
A negotiable instrument’s vitality as a substitute for money or as a credit device would be dramatically reduced if it had conditional promises attached to it. It would be expensive and time consuming to investigate conditional promises or orders and therefore the transferability of the negotiable instrument would be greatly restricted. Substantial administrative costs also would be required to process conditional promises. Furthermore, the payee or the holder of the instrument would risk the possibility that the condition will not occur.
Example: –
- “I promise to pay X Birr 3000 deducting there out any money which he may owe me”
- “Pay to Y Birr 1745 on D’s Death provided D leaves you enough money to pay him.”
iii. “I promise to pay Z Birr 400, seven days after K’s marriage”
All the above instruments are not negotiable because the promise and order is coupled with a condition. No one could safely purchase the instrument without investigating whether the conditions have materialized. Even then, the facts disclosed by the investigation might be incorrect. To avoid such problems Arts. 735 (b), 823(b) and 827(a) of the commercial code provide that only unconditional promises or orders can be negotiable. However, when it comes to what constitutes an unconditional instrument the code is silent.
According to Indian law promise to pay at a specified time or at a specified place or after the occurrence of an event which is certain to occur, or payment after calculating interest at a certain rate is regarded as negotiable.
Example: –
i) “I promise to pay X Birr 1,000 on January 1st, 1980.”
ii) “I promise to pay X Birr 125 on demand at Dire Dawa.”
iii) “I promise to pay X Birr 500 seven days after the death of C”
Question 1
Read Art 735 (d & e), 823 (c & d), 827 (c), Art 769 & 825 (1) (b)
can a commercial paper indicating specified time or specified place for payment and or making the payment conditional upon an event certain to occur (like the example given in iii above) be regarded as a valid instrument? State your reason(s).
The uniform commercial code specifying what constitutes an unconditional instrument states;
“A promise or order is unconditional (and negotiable) unless it states (i) an express condition to payment, (ii) that the promise or order is subject to or governed by another writing or (iii) that rights and obligations with respect to the promise or order are stated in another writing. A reference to another writing does not of itself make the promise or order conditional.”
Although the UCC provides a broader definition of what is ‘unconditional’ it recognizes certain conditions which do not make the instrument conditional to prevent certain necessary conditions commonly used in business transactions. One such condition is statements of consideration. The instrument may state the terms of the underlying agreement or refer to the condition paid for.
For instance, the words “as per contract” or “this debt arises from the sale of goods X and Y”
Question 2
Read Art. 800 Com. C
Do you think stating the underlying contract giving rise to the issuance or negotiation of the bill, makes the Bill of exchange conditional, hence non-negotiable? Why?
The UCC also provides that mere reference to another agreement does not affect negotiability, if, however the instrument is made subject to the other agreement it is rendered non-negotiable. A statement that an instrument’s payment is secured by collateral will not render an otherwise negotiable instrument non-negotiable.
The UCC states that if the terms of an instrument provide that payment can be made only out of particular fund or source, such terms will not render the instrument conditional, it remains negotiable. It allows market forces to determine whether the instrument will be marketable. A note dated march 3, 1995, for example, reads. “Gilbert corporation promises to pay to the order of the Miami Herald Br, 500 on demand, payment of said obligation is restricted to payment from accounts receivable,” In this case, payment is restricted to one particular source i.e. account receivable.
Lastly, a simple statement in an otherwise negotiable note indicating that the note is secured by mortgage does not destroy its negotiability. However, it should be noted that the statement that a note is secured by mortgage must not stipulate that the maker’s promise to pay is subject to the terms and conditions of the mortgage. Art 729 of the com. Code in a similar fashion, states that an instrument may contain an endorsement in pledge indicating to the effect that the instrument is secured by a pledge. Art 729 of the code which refers to cases of pledge, is applicable only at the time of endorsement. In other words, it does not cover inserting similar statements at the time of issuance by the drawer or maker. The wording of Art 729 is not intended to govern the case of condition at all. The message conveyed by the article is about one form of endorsement called restrictive endorsement.
Filed under: Articles, Banking and Negotiable Instrument
