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This Ordinance is a verbatim reproduction of the English Bills of Exchange Act of 1882
which is globally regarded as one of the best drafted statutes
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“where an instrument is by the custom of trade transferable like cash, by delivery, and is
also capable of being sued upon by the person holding it, it is entitled to the name of a
negotiable instrument, and the property in it passes to a transferee who has taken it for
value and in good faith
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No further evidence of transfer is required
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No notice need to be given to the debtor (that is the person who is liable to pay) in respect
of the instrument
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Since English
law applies, “Valuable consideration” which is not a requirement in Roman Dutch Law,
is a requirement in negotiable instruments
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A negotiable instrument is transferred “free of equities”
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For example, the transferee is not affected by defenses such as fraud
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Negotiability contrasted with Transferability
The term ‘negotiability’ and ‘transferability’ are often regarded as being synonymous
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In fact, to appreciate the concept of negotiability, it may be
contrasted with transferability
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While transferability refers to the process of passing title in an
instrument, negotiability usually refers to the quality of the title of the instrument that is passed
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The ownership of the watch can only pass from one person to another if there is the
element of intention
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The watch is a non-negotiable article; title does not
transfer by delivery alone; nor does it pass ‘free of equities’
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If the note is lost or stolen and comes
into the possession of a person who takes it in good faith and for the value and is innocent of the
defect in title of the transferor, he or she becomes the true owner of the banknote and no amount
of effort on the part of the person who lost the banknote will avail
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Both the watch and banknote are transferable, but only the banknote has the quality of
negotiability
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Money Orders
Postal orders
Fixed Deposit Receipts issued by Banks
Certificates of Deposit
Share Certificates
Letter of Credit
IOUs
Bills of Lading
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Bills of Exchange
Definition of Bills of Exchange
According to Section 3 of the Bills of Exchange Ordinance No
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A bill of exchange is an unconditional order in writing, addresses by one person to
another, signed by the person giving it, requiring the person to whom it is addresses 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 bearer
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An instrument which does not comply with these conditions, or which orders any act to
be done in addition to the payment of money, is not a bill of exchange
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An indication of a particular fund out of which the drawee is to reimburse
himself, or a particular account to be debited with the amount; or
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That it is not dated;
b
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That it does not specify the place where it is drawn, or the place where it is
payable
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A document reading “I should be pleased if you would pay” would not be a bill fo
exchange because those words would constitute not an order but a request
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Therefore, an order to pay out of a particular fundsuch as “Pay B Rs
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The reason is that
payment is made to depend upon the number 2 account having a minimum of Rs
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But if the order were to read – “Pay B Rs
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See Section 3(3)
The following judicial decisions further illustrate this requirement that “the order be
unconditional”
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The phrase “we hereby authorize
you to apply on our account to the order of …
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That phrase did not create a clear obligation to pay
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The order must unconditional
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It is not
an unconditional order to pay (Bavins Junior and Sims v London and South Western Bank Ltd
[1900] 1 QB 270)
If the drawer has requested the payee to do something without addressing such request to the
drawee, it will not make the bill a conditional order
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In that case a person drew
a cheque on a blank sheet of paper and wrote on it the words, “to be retained
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As the promise was not kept the payee presented the cheque for payment, and it
was dishonored
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The words “to be retained” were held to be a condition imposed by
the drawer on the payee and not on the drawee, the banker
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The word “in writing” includes what
is typed, printed or written
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Section 2
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It is sufficient,
however, if the bill is signed by some duly authorized person on behalf of the drawer
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So, forged cheques are not bills of exchange
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The term used is pay on “demand”, which means
“pay when asked or requested” (demanded)
According to section 10 (1) of the Bills of Exchange Ordinance a bill is payable on demand
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In which no time for payment is expressed
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A “determinable future time” may be a stipulated period after
a date, or after sight, or after the occurrence of some event which is certain to happen
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So a document
expressed to be payable “six days after the ship named “Sea Lion” leaves “Colombo Harbour” is
not a good bill of exchange because the specified event might not happen
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Section 10(2) says that where a bill is accepted or endorsed when it is overdue, it shall, as
regards the acceptor who so accepts, or any endorser who so endorses it, be deemed a bill
payable on demand
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At a fixed period after date or sight, or
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A bill which is payable on or before a given date is bad, because the date of payment may be any
date between the date of drawing and the last day for payment
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Section 11(2)
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Pearson v
Garrett (1689) 4 Mod
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With interest;
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By stated installments, with a provision that upon default in payment of any installment
the whole shall become due;
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An order to pay a fixed sum “and all bank charges” or “and costs” is not a “sum certain”:
Standard Bank of Canada v Wildey (1919) 19 SW (NSW) 384
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A specified person; for example “Pay X”; or
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Bearer, for example, “Pay bearer” or “Pay X or bearer”
Of the above (1) and (2) are “order bills” and (3) is a “bearer bill”
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Here the payee and drawer
are one and the same person, as happens when a person draws a cheque payable to “self”
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This might occur where a person
indebted to his banker pays the bank by a cheque drawn on the bank
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Capacity of Parties
Capacity to incur liability as a party to a bill is coextensive with capacity to contract, Where such
capacity is to be determined by the law of Sri Lanka, it shall be determined by Roman Dutch law
as administered in Sri Lanka, subject to the provisions of the statute law
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Consideration
Valuable consideration for a bill may be constituted bya) Any consideration which by the law of England is sufficient to support a simple contract;
b) An antecedent debt or liability
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Section 27(1)
Generally the nature of the consideration is not mentioned on the fact of the bill
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Section 3(4)(b)
In this context, consideration means that a person issuing a bill of exchange or a cheque must
receive something in return for issuing such bill of exchange or cheque
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In that
case the plaintiff was the defendant’s brother’s mistress and had two children by him
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The defendant did not receive any consideration from his
brother for making this arrangement, and gave the note of his own accord and not at his brother’s
request
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For the defendant it was argued the since no valuable consideration passed
between the plaintiff and the defendant for the note, no action could be filed on the promissory
note for lack of consideration
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On the other hand it was argued for the plaintiff that the defendant;s liability had to be
determined according to the principles of Roman Dutch law and not English law and that under
Roman Dutch law the plaintiff need not prove that there had been valuable consideration for the
note
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Therefore, the plaintiff could not sue on the note because it was not given for valuable
consideration
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Drawer of the bill of exchange
The person who drew it
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Drawee
A drawee is the person on whom the bill is drawn
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Therefore, the drawee of a bill who
does not accept a bill (as provided for in the Ordinance) is not liable on it
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Therefore, a drawee who accepts the
bill is called an acceptor and is liable on the bill
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Section 54
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To endorse means to
write one’s signature or to sign on the back of a document and therefore give your approval or
sanction to that document
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Section 2 states ‘indorsement’ means indorsement completed by delivery
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How ‘endorsement’ of a bill occurs
Afer a bill is drawn other persons beside the drawer, may decide to make use of it an thereby
incur
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The payee of a bill drawn to order may wish to transfer it to some other
person, and thereby this is done by an “endorsement”
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There can be no endorser of a bearer bull because such bills are transferred by simple delivery
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Different types of ‘Holders’ of Bills of Exchange’
A ‘holder’ of a bill of exchange is the payee or endorser of a bill who is in possession of it or the
bearer thereof
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Any person in possession of a bearer bill is a holder of it, but to be a
holder of an order bill, the person in possession must also either be (i) the original payee or (ii) a
person to whom the bill has bee endorsed
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Section 29(1)
Before it was overdue – Section 36(2)
In good faith and for value – Section 92
Defective title – Secion 29 (2)
Presumption that ‘holder of a bill’ is a ‘holder in due course’ –Section 30
Holder for value – Section 27 (2)
Importance of the signature for liability on a bill of exchange
Section 23
Section 93(1)
Section 26
Negotiation of Bills of Exchange
The whole purpose of a bill of exchange is that it could be transferred from person to person in
settlement of debts
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While in the case of a bill payable to order,
negotiation is by endorsement of the holder completed with delivery, a bill payable to bearer is
transferred by delivery alone
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Requisites of a valid endorsement – Section 32
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It must be an endorsement of the entire bill
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When the bill is payable to more than one person all must indorse, unless the one
indorsing has authority to indorse for others;
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The payer may disregard any condition attached to the indorsement
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A bill with a blank
indoresemnt can be converted by a subsequent holder to a specially indorsed bill –
Section 34
A restrictive indorsement prohibits the further transfer of the bill
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–Section 67
Today, apart from its importance in the finance of international trade, the use of bills of exchange
is not very common in domestic banking
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Basically a
cheque is a bill of exchange drawn on a banker
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Although a promissory note is defined in
our Bills of Exchange Ordinance and certain parts of that statute is made applicable to them,
strictly speaking, promissory notes are not bills of exchange
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A promissory note must also be distinguished from a cheque A cheque must always be drawn on
a banker, while a promissory note need not involve a bank at all
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Section 85 defines a promissory note as follows;
A promissory note is –
a)
b)
c)
d)
e)
An unconditional promise in writing 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
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–Section 86
Where a note is payble on demand, it must be presented for payment within a reasonable
time
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In any
other case, presentment for payment is not necessary
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Section 89
The following provisions in the Bills of Exchange Ordinance do ont apply to promissory notes,
namely provisions relating to:
a)
b)
c)
d)
Presentation for acceptance
Acceptance
Acceptance supra protest
Bills in a set