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Commercial Instruments Ralph Ramkarran SC
The use of the phrase
“Commercial Instruments” to describe this part of the Programme as
well as the subject on which I have been invited to speak and to define
the other subjects suggests that the organisers intended that I should be
expansive in my selection of material.
An instrument is described in commercial law as a documentary
intangible. There are two
types of documentary intangibles -- documents of title to money and to
goods. I would confine my
remarks to documentary intangibles which include Promissary Notes,
Cheques, Bills of Exchange, Bills of Lading and Letters of Credit.
The first three are documents of title to money and are provided
for in the Bills of Exchange Act, Chapter 90:13.
There is no legislation relating to Bills of Lading and Letters of
Credit, which are documents of title to goods and we rely on the common
law to define the rights and duties of the parties to the agreements
defined by and contained in these documents.
There is a long historical background
to the great advances in commercial law which Guyana has adopted and
incorporated in its statute law although, compared with other countries,
the state of Guyana’s legislation is far behind.
A brief review of that background may lend some interest to this
subject which is regarded by some lawyers as dry and boring.
Such is far from reality. BACKGROUND
The law merchant or lex
mercatoria preceded the development of the common law, the courts of
which eventually incorporated the Merchant and Admiralty courts and
absorbed the law merchant.
The development of trade which was unleashed by the growth of
capitalism, established the necessity for a body of principles to regulate
relations between traders. The
law merchant began and developed as a distinct source of law administered
by special Mercantile courts. The
‘general law of nations’ based on mercantile codes and customs such as
the Laws of Oléron reflecting international maritime and commercial
practice were applied. Oléron, an island off the west coast of France,
was for some while in the ownership of the English Crown as a commune of
the province of Guienne (Aquitaine).
The decisions of its mercantile community were treated as of the
highest authority in England.
The law merchant developed to serve the trading community and to
deal with disputes among traders who were of different countries.
It adopted a realistic attitude towards proof of facts, freedom
from the technical rules of evidence and procedure which particularly
plagued the common law courts and the recognition of the custom of
merchants, as generating rights deserving of international recognition to
be interpreted in a broad fashion to provide stability of the European
markets.
One important principle adopted by the law merchant was speed in
adjudication which was necessary for the efficient conduct of trade.
In one reported case the plaintiff sued for the recovery of a debt
at 8 a.m. and the defendant was summoned to appear at 9 a.m. He did not
appear at 9 a.m. or at 11 or at 12 when he was ordered to appear.
At 12 o’clock judgement was given against him and his goods were
attached and delivered to the plaintiff at 4 p.m.
The principle was so important that it was given statutory
recognition as far back as 1303 in Carta Mercatoria and in 1353 in Statute
of the Staple.
The flexibility of the lex mercatoria enabled it to recognise
negotiable instruments thus advancing the principle that a right to a sum
of money embodied in a bill of exchange or a promissory note could be
conferred even though the instrument was not under seal.
By these means the lex mercatoria by passed the rigidities of the
common law which took some time to adapt to the flexibilities of the lex
mercatoria after it had been subsumed by the latter.
R. M. Goode
preferred the verb “vanquished”.
It was in the seventeenth century under the direction of Coke C. J.
that the courts of common law began to displace the merchant
courts. Building upon the
earlier labours of Holt C.
J. who had laid the foundations of the law relating to
negotiable instruments, bailment and agency, Lord Mansfield, who is
regarded as the father of commercial law, reduced the large and diffuse
body of case law into an ordered structure overseeing its full absorption
into the common law. A
century after his retirement, the Sale of Goods Act of 1893 provided that
“the rules of the common law,
including the law of merchant . . . shall continue to apply to contracts
for the sale of goods”.
I cannot conclude this brief historical overview without failing to
mention the great writers and lawyers who contributed to the development
of commercial law such as Benjamin, Byles, Chalmers, Charlesworth,
Blackburn and others whose works, which still bear their names, have
become classics.
The skilled and inspired draftsmanship of Sir Mackenzie Chalmers
produced the Bills of Exchange Act 1882 and the Sale of Goods Act 1893
which were adopted throughout the Commonwealth and the latter in the
United Stated as the Uniform Sales Act.
Every day in Guyana thousands of transactions take place between
persons and organisations involving the use of a Cheques and Promissory
Notes.
Also, every day ships arrive in Guyana with goods which have to be
delivered to consignees and paid for.
These transactions are aided and facilitated by Bills of Exchange,
Bills of Lading and Letters of Credit. PROMISSORY NOTES
Sections 85 to 91 of the Bills of Exchange Act Chapter 90:03
provide for Promissory Notes. This
instrument is the one with which lawyers are most familiar because of the
frequency of its use in a wide range of credit transactions including loan
transactions between banks and their customers.
Most lawyers in their daily work are retained to prepare Promissory
Notes for clients. For this
reason particular attention should be paid to the law surrounding
Promissory Notes.
Such a note is defined as “an
unconditional promise in writing made by one person to another, signed by
the maker, engaging to pay on demand, or at a fixed on a determinable
future time, a sum certain in money to, or to the order of, a specific
person, or to the bearer.”
Thus the essential elements of a Promissory Note are as follows:
1.
It must be a promise;
2.
Which must be unconditional;
3.
And in writing;
4.
And made by one person to another;
5.
And signed by the person making it;
6.
And engaging to pay money;
7.
And engaging to pay nothing but money;
8.
Which must be a sum certain;
9.
And payable;
(a) on demand, or (b) at a fixed determinable time;
10.
And payable;
(a) to the order of a specified person, or (b) to bearer.
There must be a promise to pay.
Thus an acknowledgement of a sum owed which does not contain an
express promise to pay is not a note - Gould
v. Coombs (1845) 1 C.B. 543.
The promise must be unconditional.
The nature of this requirement is demonstrated by two cases.
In Bavins v. London and South
Western Bank [1900] 1 Q.B. 270, the intended cheque contained
after the words “Pay, etc,”
the words “Provided the receipt
form at foot hereof is duly signed, stamped and dated”.
It was held that the instrument was not a cheque, since the bank
could not pay, except conditionally, that is, upon obtaining the receipt
of the payee. On the other
hand, in Nathan v.
Ogdens (1905) 93 L.T. 553, the instrument contained at the
foot of the words, “The receipt at the back hereof must be signed”.
It was held that, as the words were not addressed to the bank, but
to the payee, the bank was unaffected by them, the order to pay was
unconditional, and the instrument was a cheque.
The promise must be made by one person to another.
A person includes a body of persons whether incorporated or not so
that a partnership is included in the definition of “a person”.
Also, a promissory note may be made by two or more makers and they
may be liable jointly or jointly and severally as the note may provide.
The “sum must be certain,
not susceptible of contingent or
indefinite additions” - Byles; for example, a sum of “£65
and all other sums which may be due” would not be within the rule - Smith
v. Nightingale (1818) 2
Stark. 375; nor would
a sum “and all fines according to
rule” - Airey
v. Fearnsides 4 M.W. 168; 7
L.J. (Ex.) 288; 2 Jur 596;
nor where the order to pay a sum “first
deducting thereout” monies due to the drawer - Barlow v. Broadhurst (1820)
4 Moore C.P. 471. But
a sum is not uncertain because it is expressed in a foreign currency - Cohn
v. Boulkean (1920) 36 T.L.R.
767.
The Act provides that the sum is certain although it is required to
be paid (a) with interest (b) by stated installments (c) by stated
installments, with a provision that upon default in payment of any
installment the whole shall become due (d) according to an indicated rate
of exchange to be ascertained as directed by the bill.
Where the note is payable on demand, the Act provides that it must
be presented for payment within a reasonable time of the indorsement.
If it is not so presented, the indorser is discharged. In
determining what is a reasonable time, regard shall be had to the nature
of the instrument, the usage of the trade, and the facts of the particular
case.
Presentment for payment is necessary where the note is in the body
of it made payable at a particular place.
It must be presented at the place stated in order to render the
maker liable.
In Zephyr v.
Bank of Nova Scotia (1988) 42 W.I.R. 192 the Guyana Court
of Appeal reviewed the law
relating to the promissory notes and bills of exchange and demolished the
basis for so many frivolous defences to promissory notes with which many
of us have had to contend over so many years.
Over the past twenty years there have been several important
cases on Promissory Notes,
the study of which would bring great benefits. CHEQUES
The Act defines a cheque as a bill of exchange drawn on a banker
payable on demand. It is the normal means by which a person who has funds
in the hands of a bank withdraws it, or a part of it.
Money deposited with a banker on a current account, or collected in
by the banker on the customer’s behalf and credited to his or her
current account, is in law regarded as
a loan made by the customer to the banker subject to the implied
stipulation arising out of the custom of bankers that the banker will
repay the same by honouring the customer’s cheques upon the banker,
provided that the balance due to the customer is sufficient to cover the
cheque.
Jacob’s (Jacob’s on Bills of Exchange, Cheques etc) extended
definition of a cheque is an unconditional order in writing addressed by a
person to a banker, signed by such person, requiring the banker to pay on
demand a sum certain in money to the order of a specified person or to a
bearer.
The provisions of the Act applicable to bills of exchange are also
applicable to cheques.
A banker is liable to his customer for non-payment of a cheque if
he or she has sufficient funds of the customer in his current account with
which to meet it. The
customer’s right of action is, of course, not upon the cheque, but for
damages for breach of the banker’s implied contract to honour his cheque
- Foley
v. Hill (1848) 2 H.L Cas 28;
or for negligence - Marzette
v. Williams (1830) 1 B.
Ad. 415 and Rolin
v. Steward (1854) 14 C.B. 595.
In contrast to other bills, cheques are not required to be accepted
and therefore the holder cannot sue the banker on whom the cheque is
drawn. The drawer is not
discharged by the holder’s failure to present in due time.
Notice of dishonour to the drawer is not necessary, as absence of
funds in the drawee’s hands, the almost universal cause of dishonour,
excuses it, as does countermand of payment.
They must be drawn on a banker and be payable on demand and are
generally, though not necessarily an inland bill of exchange.
The object of crossing a cheque is to prevent negotiation by a
person who may have obtained it wrongfully.
The crossing may be such merely as to force such person to obtain
payment of the cheque through the medium of a bank, so that he must either
himself have an account at a bank or must negotiate the cheque to someone
who has an account there.
The Act provides for crossing by the drawer, the holder, by banker
to collecting banker and by the collecting banker.
It sometimes happens that it is desired or necessary to pay by
cheque in a transaction where the payee of a sum will accept payment in
the form of a cheque but wishes to be certain that the banker has the
necessary amount to the credit of the drawer.
The effect of the certified cheque was set out in the judgement of
the Privy Council in Gaden
v. Newfoundland Savings Bank
[1899] A.C. 281: “A cheque certified before
delivery is subject , as regards its subsequent negotiation, to all the
rules applicable to uncertified cheques.
The only effect of the certifying is to give the cheque additional
currency by showing on the face that it is drawn in good faith on funds
sufficient to meet its payment, and by adding to the credit of the drawer
that of the bank on which it is drawn”.
In this case the cheque was paid into the payee’s bank and drawn
upon in the ordinary way, but on presentation for collection to the
drawer’s bank it was found that it has failed.
The payee contended that, by crediting her with the amount, her
bank had become purchasers of the cheque at their own risk, and could not
upon its dishonour debit her with the amount of it.
This contention failed, the court holding that the position in the
case of a certified cheque was precisely the same as it would have been in
the case of an uncertified cheque.
This rule was applied in Imperial
Bank of Canada v. Bank of
Hamilton [1903] A.C. 49 and the effect of the two cases have been
summarised thus: “Where a cheque is marked or
certified by being initialled by the bank on which it is drawn, the
marking operated as a representation that the bank, at the time of
certifying, has funds of the drawer in its hands sufficient to meet
payment of the cheque but, at any rate in the absence of any specific
usage, the marking appears to have no other effect” - Chalmers. BILLS OF EXCHANGE
A Bill of Exchange is a piece of paper which is used to transfer
money from one person to another instead of using actual money.
An “ordinary” bill is more commonly used in commercial
transactions where the person paying for the goods does not wish to make
immediate payment.
The transaction occurs when “Y” wishes to import goods.
He or she arranges with a finance house to provide the purchase
money. Y then draws the bill
on the finance house and they accept it to show that they will pay it in
three months time. Y then
sells the bill to “Z” in exchange for the documents of title to the
goods. Z now has a bill which
he knows will be paid by the finance house on 1st July.
Z is then a position, is he wishes, to take the bill to another
finance house in any country and get them to discount the bill, that is,
pay him immediately, less commission and interest.
They then take the bill from Z and as the owners of it will present
it for payment to the original finance house on 1st July.
Thus Y gets his goods and three months credit.
Z gets paid immediately. The
two finance houses assist by carrying out their special function.
The Bills of Exchange Act which is based on the 1882 Act drafted by
Sir Mackenzie Chalmers, after reading 2,500 cases, applies to the bills of
exchange. One of the most
important functions of the Act was to assist the concept of negotiability
by creating a special type of holder who could get good title to a bill of
exchange even if there had been all manner of irregularities in the prior
dealings with it, provided he acted in good faith and without knowledge of
the irregularities. He or she
is called by the Act a “holder in
due course”. He or she
is given substantial protection and a variety of presumptions are made in
his or her favour. The Act
lays down stringent rules which must be complied with and after this he or
she has little to fear.
A bill of exchange is defined as an unconditional order in writing
addressed by 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 to the bearer.
The Act further specifically provides that an instrument which does
not comply with these conditions is not a bill of exchange.
A bill is payable on demand or at some future time such as at a
fixed period after date or sight or at a fixed period after the occurrence
of a specified event which is certain to happen, even though the time of
happening may be uncertain.
The bill must be delivered, presented and accepted.
Delivery means the transfer of possession, actual or constructive.
Acceptance of a bill is the signification by the drawee of his
assent to the order of the drawer and the only persons who can accept a
bill are the drawees.
The holder of the bill must present it for acceptance if it is
payable after sight, if the bill so stipulated or if it is drawn elsewhere
than at the residence or place of business of the drawee.
Many other detailed and strict rules exist with regard to the
presentment, a holder in due course, negotiation, protesting and other
aspects.
The bill of exchange is one of the most popular forms of payment
for goods sold and is in regular use in Guyana and all other countries
engaged in trade. However, despite the potential for legal engagement in
relation to bills of exchange, there is a great deal of mystery over the
provisions relating to bills of exchange.
This may be because commercial law is not a subject that is part of
the syllabus of most law schools, including our own.
It would be of profit
to the legal profession to expand its understanding of this area of the
law. BILLS OF LADING At
common law a bill of lading is considered to embody the right to
possession of the goods (and also ownership, if so intended by the parties
on a transfer of the bill – Sewell
v Burdick (1884 ) 10 AC 74 ) but not to the personal rights
created by the contract of carriage:
Brandt v Liverpool, Brazil and River Plate Steam Navigation Co.
Ltd (1924) 1 KB 575 per Scrutton LJ at p.
594. In other
words, the bill of lading is a document of title
to goods, not to contract rights; and as such it fulfils in
relation to the goods specified in it much the same functions, and is
transferred in much the same way, as a negotiable instrument in relation
to a stated money obligation. Thus
the consignee named in a bill of lading corresponds to the payee of a bill
of exchange and the indorsee of a bill of lading to the indorsee of a bill
of exchange.
A bill of lading may be negotiable or non-negotiable.
It is negotiable if it is expressed to be transferable, either by
the manner in which the consignee is designated or by the other terms of
the bill. Where the consignee
is designated ‘order’ this means it is transferable by indorsement of
the shipper and delivery. Where
the bill is made out in favour of a named consignee ‘or order’ this
means it is transferable by indorsement of the shipper and delivery.
Where the bill is made out in favour of a named consignee ‘or
order’ it is transferable by indorsement of the named consignee.
If the consignee is shown as ‘bearer’ or ‘holder’ or is
left blank, the bill is transferable by delivery without indorsement.
Where, on the other hand, the bill is consigned to a named consignee
without the addition of the words ‘or order,’ the bill is a
non-negotiable (‘straight’ or ‘straight consigned’) bill
unless the terms of the bill provide for its transfer, in which
event it will be transferable by the consignee’s indorsement and
delivery as if the words ‘or order’ had been added.
Like a bill of exchange, a bill of lading may be indorsed to a
named indorsee or in blank, and in the latter case becomes a bearer
document transferable by delivery without indorsement.
A negotiable bill of lading possesses in relation to goods most of
the features of negotiability accorded to instruments in respect of money.
Thus (a) it gives the holder control of the goods and entitles him
to collect them from the carrier on surrender of the bill; (b) it is
transferable by delivery with any necessary indorsement, no separate
assignment or notice of assignment being needed; (c) by virtue of (a) and
(b) its possession enables the holder to deal with the goods before
delivery. But in two respects the negotiability of a bill of lading
differs from that of a bill of exchange.
First, negotiability denotes no more than transferabiltiy by
delivery with any necessary indorsement.
The transferee does not, by virtue of the character of the
document, any better title than his transferor.
There is thus no equivalent to the ‘holder
in due course’ status which is available for instruments; it is
necessary for the bill to be made negotiable.
The bill of lading is also a receipt by the carrier, it evidence
the apparent condition of the
goods and it evidences the terms of the contract of carriage. LETTERS OF CREDIT
By far the majority of international sale contracts require that
payment of the purchase price will be made by means of a letter of credit,
so that the seller has a secured right to payment from a bank rather than
simply from the buyer whose creditworthiness
may be uncertain. Where
there is such a requirement the buyer will apply to its bank and request
that the latter issue a letter of credit to the seller, the beneficiary of
the credit. The documents to
be presented by the seller to trigger payment under the letter of credit
are likely to include the
original bill of lading or the seller’s letter of indemnity
countersigned by the
seller’s bank.
A letter of credit as defined by the Uniform Customs and Practice
for Documentary Credits as: “any
arrangement, however named or described whereby a bank (the issuing bank)
acting at the request and in accordance with the instructions of a
customer (the applicant for the credit), (i) is to make payment to or to
the order of a third party (the beneficiary), or is to pay, accept or
negotiate bills of exchange (drafts) drawn by the beneficiary, or (ii)
authorizes such payments to be made or such drafts to be paid, accepted or
negotiated by another bank, against stipulated documents, provided that
the terms and conditions of the credit are complied with.”
Where S in the United States has agreed to sell
computers to B in Guyana with payment to be made under an irrevocable
credit issued by a Guyana bank and advised and confirmed by a US bank, the
first step is taken by B who must apply to his bank in Guyana called the
Issuing Bank (IB) to open the credit in favour of S, that is, to issue a
letter of credit to S undertaking payment of the contract price.
IB may require B to put it in funds or may rely on B’s
creditworthiness. The credit
to be issued by IB may be either revocable or irrevocable. The former, little used at the present time, can be withdrawn
without notice and thus gives S little security; the latter constitutes a
binding undertaking which IB is not entitled to cancel, whether with or
without notice.
There are many different types of credit such as revocable and
irrevocable credits, mentioned above, unconfirmed and confirmed credits,
sight (or payment credits) and acceptance credits, straight (or specially
advised) credits and negotiation credits, transferable credits and back to
back credits, red clause and green clause credits, revolving credits,
deferred payment credits and standby or guarantee credits.
One of the primary functions of the letter of credit is to create
an abstract payment obligation
independent of and detached from the underlying contract of sale between S
and B and from the separate contract between B and IB.
It is thus a cardinal rule of documentary credits that the
conditions of the bank’s duty to pay are to be found exclusively in the
terms of the letter of credit and that the right and duty to make payment
do not in any way depend on performance by S of his obligations
under the contract of sale. In
general, therefore , a breach of those obligations by S e.g., by shipment
of goods which fail to correspond to the contract description, are
unmerchantable or fall short of the contract quantity, does not entitle B
to instruct the bank to withhold payment under the credit if the terms of
the letter of credit have been fully complied with.
Various ingenious theories have been advanced to explain the
binding nature of the bank’s undertaking within the framework of
traditional contract law. These
have not succeeded and some academics have returned to the principles of
mercantile usage to explain that a letter of credit emerged out of that
usage embodying an abstract promise of payment which is enforceable
without consideration.
Knowledge of these instruments and the basic rules surrounding them
and their use are vitally
important in order to be able to offer accurate advice to clients.
I have seen on many occasions, including in a case in which I am
currently involved, where aggrieved persons have launched hopelessly
futile actions because of a lack of basic understanding of these documents
and their purpose.
I hope that this review will stimulate interest in this challenging
and stimulating subject. References 1. Jacobs on Bills of Exchange, Cheques Etc., Third Edition. 2. Commercial Law by RM
Goode. 3. Bills of Lading and
Bankers Credits, Third Edition, by Paul Todd. 4. Bills of Exchange and
Documentary Credits, Third Edition, by William Hedley. 5. Interests in Goods,
Second Edition, by Palmer and McKendrick. 6. Bills of Exchange Act,
Cap 90:13, Laws of Guyana, Vol X111. Guyana Bar Association Law Conference: “The State of the Profession. The Way Forward” Le Meridian Pegasus Hotel: 25th – 26th November,
2000.
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