SIMON MOTSHWENI
Simon Motshweni ©
VHD 320| 2019
______________________
DISCLAIMER
Please take note of the fact that these notes may not be wholly comprehensive of the material required
to be covered for the entire course as contained in the prescribed syllabus which is reflected in the study
guide. There may be errors; omissions or shortcomings, accordingly, use these notes at your own
discretion.
ACKNOWLEDGEMENT OF SOURCES:
These notes were composed based on:
• Prof. Melanie Roestoff, Lecturer in the Department of Mercantile Law, University of Pretoria: VHD
320 (The Law of Payment Methods) 2019, Slides / Class Notes.
• VHD 320 Study Guide (2019) (University of Pretoria).
Please note:
These notes shall not be shared without the express consent of the author(s) thereof.
, SIMON MOTSHWENI
VHD 320 STUDY NOTES
2019
Prof. Melanie Roestoff
STUDY UNIT 1:
INTRODUCTION TO THE LAW OF NEGOTIABLE INSTRUMENTS
1. BACKGROUND
The law concerning bills of exchange deals with negotiable instruments (aka Commercial
Paper). This means, the document has a certain value, which is much higher than the intrinsic
value of the piece of paper itself as it embodies a personal right which can only be enforced
through possession of the document (eg. An entrance ticket to a cinema, or a cheque). But, not
all such documents are negotiable instruments as not all can be negotiated. (eg. Share
certificates, postal orders and bills of lading are not negotiable instruments), while bank notes,
share warrants, bills of exchange, cheques and promissory notes are negotiable instruments.
Thus, the concept “commercial paper” is wider that the concept “negotiable instrument”.
Negotiable instrument has a dual meaning:
Firstly, that the document and the rights it embodies may easily be transferred
from one person to another.
Secondly, that any subsequent holder of the document (transferee) who takes in
good faith and for value usually acquires all the rights evidenced by the
document, even though his predecessor had a defective title thereto – in such
instance, the nemo plus iuris rule does not find application.
▪ However, if the transferee had not been bona fide or not given value,
(a negotiation can be seen as the third requirement), he will acquire no
better title than his predecessor had [This means bona fide, value and
negotiation are requirements to be a holder in due course]. In such case,
the transfer will be subject to the nemo plus iuris rule (as in the case of
ordinary cession).
The primary source of law in respect of the three negotiable instruments which are important
for purposes of this discussion (namely; Bill of Exchange, Cheque and promissory note) is
provided for in the Bills of Exchange Act.
2. BASIC CONCEPTS AND DEFINITIONS:
(a) The Bill of Exchange, Cheque and Promissory note.
[1] Bill of Exchange
Section 2(1) defines a bill as: [These are the 8 NB validity requirements].
[i] an unconditional
[ii] order
, SIMON MOTSHWENI
[iii]in writing,
[iv] addressed by one person to another,
[v] signed by the person giving it,
[vi] requiring the person to whom it is addressed to pay on demand, or at a fixed
or determinable future time,
[vii] a sum certain in money
[viii] to a specific person or his order, or to bearer.
▪ An instrument which does not comply with these requirements (or in which
an order is given for an act to be performed in addition to the payment of
money, is not a valid bill in terms of Section 2(2) of the Act).
[2] Cheque
Section 1 defines a cheque as a bill drawn on a bank and payable on demand. Thus,
because a cheque is a bill, the provisions of the Act applicable to bills will also
apply to cheques. In addition, the Act also contains provisions specifically
applicable to Cheques only. Thus, the validity requirements for a Bill are relevant
for Cheques.
[3] Promissory note [Can expect a question on this definition – drafting an IOU].
The most significant difference between a bill and a note is that a bill contains an
order to pay while a note contains a promise to pay. The Act defines a promissory
note as an unconditional promise in writing made by one person to another, signed
by the maker and engaging to the pay on demand or at a fixed or determinable future
time, a sum certain in money, to a specific person or to his order, or to bearer.
Note: According to the Prescription Act, a debt in terms of a negotiable instrument,
it will only prescribe after six (6) years, if not a negotiable instrument, after three
(3) years. See article in 2013 (July) De Rebus 42 – can expect a question here.
[All these three important concepts, can thus be typified as a written contract? –
written, by one person to another with an order/promise to pay an amount of money]
Bills, cheques and notes: How can they be made payable?
There are three kinds of instruments that can be made payable…
[i] Bearer instruments
o In terms of the Bills of Exchange Act – if the word(s) or bearer is on the
Cheque, but it will not be a bearer instrument if there are words prohibiting
transfer (not transferable) as per the Impala Plastic case: Court held that if
the words bearer and not transferable appear = inter partes valid instrument =
section 6(5) of the rules of Exchange Act = A doc cannot be negotiated if it
contains words prohibiting transfer and it is banking practice.
o If the document is a an indorsement in blank it will be Bearer instrument. An
indorsement in blank differs from a special endorsement.
▪ An indorsement in blank is signing (the indorser) the document (eg. At
the back of the cheque). = Must be the only or latest.
, SIMON MOTSHWENI
▪ Special indorsement is if the name of the beneficiary appears = Not
regulated by the Bills of Exchange Act specifically. – Here, the name
of the beneficiary is included.
• Another question here for purposes of testing, is what is the
effect of a special indorsement at the back of a bearer
instrument?
o This is wrong. The document remains a bearer
instrument. While the Act doesn’t specifically regulate
this, there is case law (Pienaar v Maritz and Interlease
v Massyn cases) which held that it will remain a bearer
instrument as section 6 interpret that where the words
“or bearer” appear it will be a bearer instrument, and
also the initial instruction is that the document should be
payable to bearer and the payee does not have the
powers to change this instruction = Also, the viewpoint
of Prof. / retired Judge Malan (SCA), is that the
document will remain a bearer instrument and will not
be converted into an order instrument, as the banks
liability to pay if converted will be heavier and therefore
it must remain a bearer instrument.
▪ Bearer = payable to anyone in possession. But
order would be payable to ‘specified
individual?’.
o Prof. Nagal also says, that this doesn’t really make sense
as the indorsement is unnecessary and thus does not
change the kind of document.
o This work is NB.
o Will be a bearer instrument if payable to cash or order
▪ Previously, cheques payable to cash or order were invalid – as cash is
not the name of the person (no order to pay a specified person in terms
of section 2) but the legisl has allowed this stating that cheques payable
to cash or order are bearer instruments.
o Where it is a fictitious and non-existing payees it is a bearer instrument.
[ii] Order instruments
o If it is payable to order “pay C or order”.
o If it is payable to a specified person , but does not contain words
prohibiting transfer (Aboobaker, Volkskas v Johnson case) = then it is an
order instrument. [The words “order” needs not appear on the cheque for
it to be an order instrument – may just be “Pay C”.
o If the words bearer or / not transferable / Pay C only = then it will not be
an order instrument.
o What does this “order” mean [consequences] – means A may give an order
to the bank to pay to C?. – by adding a special endorsement = will remain
