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Summary VHD 320: Theme 2: Bills of Exchange
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THEME 2: BILLS OF EXCHANGETable of Contents
Study Unit 1: Introduction to the Law of Negotiable Instruments ....................................................... 2
1. INTRODUCTION: ................................................................................................................... 3
2. CAMBIAL CONTRACT AND UNDERLYING OBLIGATION:............................................................. 6
3. THE BILL OF EXCHANGE, CHEQUE AND PROMISSORY NOTE: .................................................... 7
4. TO A SPECIFIED PERSON OR HIS ORDER OR TO BEARER: .......................................................... 8
5. PARTIES INVOLVED IN BILLS, CHEQUES AND NOTES:.............................................................. 13
Study Unit 2: Negotiation............................................................................................................... 16
1. NEGOTIATION - GENERAL:................................................................................................... 17
2. METHOD OF NEGOTIATION: ................................................................................................ 17
3. PRACTICE QUESTIONS: THEME 2: STUDY UNIT 1-2 ................................................................ 20
Study Unit 3: Requirements for Validity .......................................................................................... 23
1. GENERAL:........................................................................................................................... 24
2. ORDER/PROMISE TO PAY:.................................................................................................... 25
3. UNCONDITIONAL:............................................................................................................... 25
4. IN WRITING:....................................................................................................................... 26
5. ADDRESSED BY ONE PERSON TO ANOTHER:.......................................................................... 26
6. SIGNED BY PERSON GIVING IT:............................................................................................. 27
7. ON DEMAND OR AT A FIXED OR DETERMINABLE FUTURE TIME:............................................. 33
8. SUM CERTAIN IN MONEY: ................................................................................................... 35
9. PRACTICE QUESTIONS - VALIDITY REQUIREMENTS: ............................................................... 36
Study unit 4: Holdership ................................................................................................................ 39
1. HOLDERSHIP - GENERAL: ..................................................................................................... 40
2. ORDINARY HOLDER:............................................................................................................ 40
3. HOLDER FOR VALUE:........................................................................................................... 42
4. HOLDER IN DUE COURSE: .................................................................................................... 44
5. HOLDER WHO DERIVES TITLE THROUGH HOLDER IN DUE COURSE: ........................................ 48
6. PRACTICE QUESTIONS – HOLDERSHIP:.................................................................................. 49
7. REVISION QUESTIONS (THEME 2: STUDY UNIT 3 & 4): ........................................................... 51
Page 1 of 52
, Study Unit 1: Introduction to the Law of
Negotiable Instruments
Textbook (Nagel Commercial Law (Fifth/Sixth edition) par 30.01–30.29; 30.61–
30.65; 30.71–30.75.
Study objectives
1. explain the concepts of commercial paper and negotiable instrument;
2. explain the attributes of negotiability;
3. explain why a bill, cheque or promissory note is typified as a written
contract;
4. distinguish between an order document, a bearer document and a
document valid inter partes;
5. discuss and explain the effect of a special indorsement on a bearer
document;
6. identify the drawer, promissor, drawee, payee, acceptor, indorser,
indorsee, holder and aval and explain each party’s legal position.
Compulsory reading
1. Impala Plastics v Coetzer 1984 2 SA 392 (W).
2. Aboobaker v Gableite Distributors 1978 4 SA 615 (D).
3. Volkskas Bpk v Johnson 1979 4 SA 775 (C) (headnote only)
4. Lawack-Davids 2012 SA Merc LJ 77: Reading Objective – South Africa is a
developing economy, and one of its problems is that of the 'unbanked': a
large segment of the population does not have bank accounts, and
'banking' happens through informal means. Yet recent figures show that an
increasing number of South Africans have mobile phones. The recent rise
in mobile banking, particularly by means of mobile phones, thus has
important legal and regulatory implications. Students must please note that
an essay type question may be given on this topic in the semester
test/examination.
Page 2 of 52
, 1. INTRODUCTION:
• The law concerning bills of exchange deals with negotiable instruments. Negotiable
instruments are otherwise known as commercial paper.
o This means that the document has a certain value which is much higher than the
intrinsic value of the piece of paper itself, because it embodies a personal right which
can ONLY be enforced through possession of the document, for example a movie ticket,
or a cheque.
• However, not all such documents are negotiable instruments because they cannot all be
negotiated.
o For example, share certificates, postal orders and bills of lading are not negotiable
instruments, while bank notes, share warrants, bills of exchange, chequ es and
promissory notes are negotiable instruments.
o The concept commercial paper is therefore wider than the concept negotiable
instrument.
• The law in respect of 3 negotiable instruments, namely the bill of exchange, cheque and
promissory note, is provided for in the Bills of Exchange Act 34 of 1964 (hereafter ‘the Act’).
• NB! The concept negotiable instrument has a dual meaning.
o Firstly, it means that the document and the rights it embodies may easily be
transferred from one person to another.
o Secondly, if the document is transferred to a person who is bona fide (acting in good
faith) and who has given value, he is a holder in due course. He will acquire all the
rights evidenced by the document, even though his predecessor had a defective title
thereto.
▪ In such an instance, the nemo plus iuris rule does NOT apply.
▪ Nemo plus iuris rule = no one can acquire more rights than his predecessor had.
o If the transferee had NOT been bona fide, had NOT given value and is NOT the holder
in due course, he will acquire no better title than his predecessor had.
o In such a case, the transfer will be subject to the nemo plus iuris rule, as in the
case of ordinary cession.
TO SUMMARISE:
✓ Bona fide + given value + holder in due course = npi rule DOES NOT apply (can obtain
more rights than his predecessor).
✓ NOT bona fide + NOT given value + NOT a holder in due course = npi rule DOES apply.
Page 3 of 52
, PRACTICAL EXAMPLE:
✓ Andy Abbott bought a laptop from Cacey Cassim. She has negotiated this cheque to Danny
Dhlamini.
✓ Identify the different contractual relationships on the cheque:
o A and Cacey = underlying agr (contract of sale)
o Cacey & Danny there is also an underlying agr (Cacey needs to pay Danny for the cell
phone) and also a cambial contract on the cheque itself.
o Contractual relationship between Andy and the bank (bank-client contract).
✓ If Danny has been bona fide and if he has given value, Danny will be a holder in due course.
o Npi rule does NOT apply (Thus he has very NB rights + he is in a very special possession) –
he will be able to acquire more rights than his predecessor had (which is Cacey).
o ‘has given value’ – he did give something in return, he sold a cell phone to Cacey + he
needs to be paid for the cell phone.
Page 4 of 52
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