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he has disappeared or cannot meet his liability, then the drawer will have to bear the loss, and if he cannot be found or cannot meet the bill, then the earliest endorser able to meet it will have to do so, and will be unable to obtain redress for himself.
In relation to the liability of parties and this "course of action", the following points should be noted.
Order of Endorsements
Endorsements will be deemed to have been made in the order in which they appear on the bill, unless the contrary is proved. Note, however, the case of Macdonald v. Whitfield, in which three directors of a company endorsed a note together by way of surety for the company's debt. It was held that the three were liable equally to the holder and that the first of the three directors to sign the note was under no liability to the others.
Capacity
The Act provides that "capacity to incur liability as a party to a bill is co-extensive with capacity to contract" (S.22).
A corporation cannot render itself liable on a bill if to do so would be "ultra vires" (outside the powers of the particular corporation). As regards infants, it was held in Re Soltykoff (1891) that an infant is not liable on a bill either as acceptor, endorser or drawer, even though he has given it for the price of necessaries supplied. He may, however, be liable on the original contract.
The Act specifically provides that the intrusion onto a bill of a person not having the capacity to incur personal liability does not alter the rights of the holder against other parties to the bill.
Signature by Agent
Where an agent signs the bill clearly on behalf of another person, and is acting within the scope of his authority, then the agent will incur no personal liability and the principal will be liable. If, however, the agent does not clearly show that she is signing on behalf of a principal, even if she adds to her signature words that describe her as a type of agent, she will be personally liable. Distinguish "for and on behalf of J Jones, B Smith" and "B Smith, Secretary".
Where a bill of exchange is signed by an agent on behalf of her principal, the person taking the bill is "on enquiry" to satisfy himself that the agent is acting within the scope of her authority, and if she is in fact acting without authority, the principal will incur no liability, even against a person who would otherwise be a holder in due course.
Signature by Firm
The Act provides that:
(a)"Where a person signs a bill in a trade or assumed name, he is liable thereon as if he signed it in his own name." John Smith may carry on his business under the name of "The Corner Shop", and he may sign all his bills in this fashion, but nevertheless he is personally liable on them.
(b)The signature of the name of a firm by the person so signing is equivalent to the signature of the names of all persons liable as partners of that firm. In the case of a trading firm, each person has prima facie authority to endorse or accept bills of exchange on the firm's behalf, and if the bill gets into the hands of a holder in due course, the presumption of authority becomes absolute and the firm will be bound, whether the endorsement or acceptance was given for partnership purposes or not. In
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the case of a non-trading firm, however, the ordinary rules of agency apply and the firm will not be bound unless the partner was authorised to sign.
Consideration
It is not necessary that the holder of a dishonoured bill seeking to obtain redress from a prior party would have given consideration. Consideration must, however, have passed for the bill at some stage between the party to be sued passing on the bill and the holder receiving it.
Thus if the holder did not himself give consideration, he cannot sue the person from whom he received the bill, but if the latter gave consideration for the bill, the holder can sue any prior party. Conversely, a prior holder of the bill who negotiated it to another person without consideration cannot be sued by that person, but if the bill has been negotiated further and any of these subsequent transferees gave value, then that person and any subsequent holder can sue, even against the party who negotiated the bill, without receiving consideration.
Example
Acceptor – Drawer – Payee – A – B – C – D – E
(consideration given)
E can sue any prior party.
D cannot sue C – but she can sue B and any prior party (including A, in which case we would have the situation of a person who did not give consideration suing a person who did not receive consideration!).
C can sue any prior party.
B cannot sue A, but can sue the payee, drawer or acceptor.
It will thus be seen that bills of exchange provide an exception to the general rule that "consideration must move from the promisee". Two other features of consideration, already discussed, may conveniently be noted here:
(a)An antecedent debt or liability will constitute valid consideration. This is an exception to the general rule that "past consideration is no consideration".
(b)The law does not take account of the adequacy of the consideration given. This conforms with the general law of contract.
Section 27 of the Act effectively defines the term "holder for value" as follows:
"Where value has at any time been given for a bill, the holder is deemed to be a holder for value as regards the acceptor and all parties to the bill who became parties prior to such time."
"Where the holder of a bill has a lien on it, arising either from contract or by implication of law, he is deemed to be a holder for value to the extent of the sum for which he has a lien."
The first part of this definition has been explained. An example will make the second part clear. If a bank has bills of £500 pledged to it as security against an overdraft of £300, then the bank is a holder for value to the extent of £300 ("to the extent of the sum for which [it] has a lien").
Note also that, when a banker discounts a bill, he becomes a holder for value of that bill. On the other hand, when a customer lodges bills for collection with his banker, the latter is not a
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holder for value, but merely an agent charged with the duty of collecting the bills, and may exercise his right of lien.
Accommodation Bills
An accommodation bill is drawn, accepted, and put into circulation without any consideration passing.
An accommodation party to a bill is a person who has signed a bill as drawer, acceptor, or endorser, without receiving value therefore, and for the purpose of lending his/her name to some person.
An accommodation party is liable on the bill to a holder for value; and it is immaterial whether, when such holder took the bill, he/she knew such party to be an accommodation party or not.
Defects of Title
As we have already seen, a holder in due course takes the bill free of prior equities and can pass on a perfect title to a subsequent transferee, so that any person claiming through a holder in due course is unaffected by defects of title attaching to the bill prior to the holder in due course taking it. Thus if a person obtains a bill by fraud, so that her title to the bill is defective, in the event of her presenting the bill for payment and being refused, she cannot sue any prior party on the bill, but if she endorses the bill to a person who qualifies as a holder in due course, then that person and subsequent holder can sue all prior parties, regardless of the defect of title.
Example
Acceptor – Drawer – Payee – A – B – C – D – E
Fraud |
|
|
|
No |
|
|
|
consideration |
|
|
|
|
|
|
Both holders in due |
|
|
course |
E cannot sue D but can sue all prior parties, including A (from whom the bill was obtained by fraud), even though he is not himself a holder in due course.
C can sue all prior parties.
B cannot sue anyone, because of the fraud.
If E sues A, and prior parties are insolvent, A can sue B on the tort of conversion or deceit (as the case may be), but cannot sue C or any subsequent party, because C is a holder in due course.
If E presents the bill for acceptance and the acceptor pays in due course, everyone is happy except A, but A still has the right of action in tort against B.
If the current holder of the bill is not a holder in due course, and the bill has not passed through the hands of a holder in due course, the position will be somewhat different. E, on being refused payment by the acceptor, will not be able to sue any prior parties on the bill since he will have no title to the bill and will have to surrender it to A. He will, however, be able to sue B, C or D for “breach of warranty of title”, provided he gave consideration for the bill and had no notice of the defect of title. If B is insolvent and C
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has to pay, C will have to bear the loss as he cannot sue in conversion because he had no better title to the bill than later parties.
A, on recovering the bill, will either renegotiate it or hold it until maturity and then present it for payment. If, in the latter case, the bill is dishonoured, he will be able to sue any prior parties on the bill, or (if they are all insolvent) he will be able to sue any subsequent holder for conversion, with any person so sued having an action back down the line to B for breach of warranty of title.
This may sound very complicated, but try to follow it with the following three major points in mind:
(a)There can be three types of action involved:
Down the line "on the bill"
Down the line for breach of warranty of title.
Up the line in the tort of conversion.
(b)No action will be against a holder in due course, or any party claiming through such a person, since he/she has a good title to the bill.
(c)The final result should normally be that the loss falls on the person responsible for the fraud, or the first person taking after him/her who can meet the liability, but the intervention of a holder in due course can upset this.
G. RELEASE FROM LIABILITY
As we have said, any person who has put his/her name to a bill, in whatever capacity, will be liable to any subsequent holder in whose hands it is dishonoured or who has had to meet the bill. In certain circumstances, however, a person who has put his/her name to a bill may be released from liability.
Cancellation of Endorsement
Where the holder of a bill intentionally cancels the endorsement of any prior party, provided such cancellation is apparent on the face of a bill, that party and all intervening parties will be absolutely discharged from liability. It is not necessary that consideration should be given for such cancellation for it to be effective (S.63(2)).
Failure to Present Bill for Acceptance or Payment
Where the holder of a bill payable after sight fails either to present it for acceptance or to negotiate it within a reasonable time, the drawer and any prior endorsers are discharged from liability (S.40).
Where the holder of a bill fails to present it for payment on the date it falls due, the drawer and any prior endorsers are discharged from liability (S.45).
Holder Taking Qualified Acceptance
Where the holder of a bill takes a qualified acceptance, any prior party who does not assent thereto (or in the case of a partial acceptance, any prior party to whom notice is not given) is discharged from liability on the bill (S.44).
Failure to Give Notice of Dishonour
Where a bill is dishonoured, either by non-acceptance or non-payment, any person (other than the acceptor) to whom notice is not given will be discharged from liability. An exception
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is that, in the case of dishonour by non-acceptance, the rights of a subsequent holder in due course (and any person claiming through him/her) will not be affected (S.48).
Renunciation of Rights by Holder
The holder of the bill may, absolutely and in writing, renounce his/her rights against any party to the bill. Such renunciation will be effective, but the party in question will remain liable on the bill to any subsequent holder in due course without notice of the renunciation (S.62).
Negotiation Back
If a bill is negotiated back to the drawer or a prior endorser, all intermediate parties are discharged from liability vis-à-vis that holder. This is a very limited "release" and the reason for the provision is simply that otherwise there would be circuity of action (S.37).
Endorsement "Sans Recours"
This is not strictly a case of release from liability, in that a person so endorsing the bill never incurs liability on it. The addition of the words "sans recours" to an endorsement has the effect that no action of the bill can be taken against that party. Obviously, a holder will find it much harder to persuade someone to take the bill from her if she insists on so exempting herself from liability.
Alteration of Bill
Where a bill or acceptance is materially altered without the assent of all parties liable on the bill, the bill is discharged except as against
the party who has him-/herself made, authorised, or assented to the alteration; and
subsequent endorsers.
The alteration must be intentional and not accidental.
H. LIABILITY "OUTSIDE" THE BILL
Any person through whose hands a bill of exchange passes, but who does not put his name to it, cannot be made liable on the bill. He may, however, incur liability other than on the bill by way of breach of warranty of title. Thus the transferee of a bearer bill who passes it on without endorsement cannot be liable on the bill as he is not a party thereto, but, in passing on the bill, he is deemed to have warranted to the transferee that he has a good title to the bill. If, therefore, the title to the bill was defective and the transferee has to reimburse a subsequent holder, he will in turn be able to sue the transferor on this breach of warranty.
It should be noted, however, that liability in this case is limited to the immediate transferee, who must have given consideration for the bill.
I.FORGERIES
Effect of Forged Signature
Where an endorsement on a bill of exchange has been forged, no person taking the bill thereafter can acquire a good title to it. Thus there can be no holder in due course after a forged endorsement and the bill cannot be discharged (S.24).
The person holding the bill, including the acceptor if he/she has "met" the bill, must surrender it to the person whose endorsement was forged. The only redress of the holder is to sue for breach of warranty of title, but there must be consideration between the parties to
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support such action, and the line ends with the forgery, so that the person who took the bill immediately after the forgery will be left with no redress, except against the person responsible for the forgery, if he/she can be found.
In Kreditbank Cassel v. Schenkers Ltd (1927) Schenkers had a business which he carried on in London, having also a branch in Manchester. Schenkers left a manager, X, in charge of the Manchester branch. X without authority drew a number of bills of exchange on Schenker's behalf, signing them "X, Manchester manager". As the bills had been dishonoured, Kreditbank, a holder in due course, attempted to sue Schenkers as drawer.
HELD: As X drew the bills without authority, they amounted to forgeries; therefore, Schenkers was not liable to Kreditbank for the dishonour.
The person whose signature was forged, on recovering the bill, can present it for payment, and if the acceptor defaults she can sue prior parties on the bill. She has, indeed, a further remedy in that in the event of none of the prior parties to the bill being able to pay, she can sue any person who took the bill subsequent to the forgery in the tort of conversion.
Example
Acceptor – Drawer – Payee – A – B – C – D – E
X steals the bill and forges B's endorsement to pass the bill to C
B can reclaim the bill from E and present it for acceptance.
If the acceptor pays, E will sue D, who will sue C – in each case, for breach of warranty of title, and in each case subject to there being consideration between the parties. C will sue X, if he can be found.
If the acceptor fails to pay, B can sue A or the payee or drawer of the bill. If A has to pay, she can recover from the payee or drawer. Meanwhile, E having had to give up the bill, action will lie back along the line for breach of warranty of title.
Although in general the forgery of the signature of a party to a bill will thus invalidate the bill for subsequent holders, we may note here that the forgery of the drawer's signature as drawer (unlike a signature as payee by way of endorsement, if the bill is payable to drawer's order) has no effect on the bill.
Where a person signs his/her own name as agent of the payee, but without his/her authority and with intention to defraud, this will constitute a forgery of the payee's signature.
Note also that it is not possible to ratify a forged signature, though an unauthorised signature not amounting to a forgery may be ratified.
In Brooke v. Hook (1871) A forged H's signature to a promissory note for £20. Before the note matured, the holder discovered that H's signature was a forgery and threatened to prosecute A. In order to prevent a prosecution, H gave the holder a memorandum to the effect that he held himself responsible for the note for £20 bearing his signature. It was held that the ratification was invalid, and that H was not liable on the note.
Fictitious Payee or Endorsee
An interesting point arises where a bill may be drawn payable to or endorsed in favour of a fictitious or non-existent person. On the face of it, the attachment to the bill of the "signature" of this "person" would constitute a forgery and no party taking the bill thereafter would acquire a title to the bill. In fact, the Act provides that in such a case the bill may be treated as payable to bearer, and, since in this case no endorsement is required, the "forged endorsement" is superfluous and ineffective, and will be disregarded.
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Where the drawer of a bill is induced by fraud to sign it but the person named therein as the payee is non-existent in that the drawer knows no one of that name, then the bill will be treated as a bearer bill (Clutton v. Attenborough (1897)). But where the payee named in the bill is someone known to the drawer, though the bill is fraudulently prepared, this is not a case of fictitious payee, and the forgery of such payee's signature will be operative as a forgery.
In Vinden and Rogers v. Hughes (1905) cheques were drawn by a fraudulent clerk payable to actual customers for sums which were not in fact owing. As the principal who signed the cheques actually intended that the named payees should have the money, those payees were held not to come within the definition of "fictitious or non-existing persons".
If the drawer's signature is forged in order to obtain the acceptance of the drawee and the payee's signature is then forged, this will again come under the heading of fictitious payee on the grounds that the "drawer" never intended the payee to receive payment.
In Vagliano Brothers v. The Bank of England (1891) the Vagliano Brothers were in the habit of dealing with two clients whom we will call “A” and “X and Co.” A dishonest clerk in the employ of Vagliano Brothers forged the signature of A and brought to his employers, for signature as acceptors, bills purporting to be drawn by A payable to the order of X and Co. The clerk obtained the acceptance of Vagliano Brothers and then forged the endorsement of X and Co. The bills were subsequently presented by the clerk to the Bank of England for payment, and, as the acceptances were genuine, the bills were paid by the Bank. The first point considered by the Court was that the endorsement of the payee was forged, and upon this ground the Bank of England would not have been able to charge Vagliano Brothers with the amount of the bills. The defence was raised, however, that as it had never really been intended that the payee, X and Co., should obtain the money and their name had been inserted by way of pretence only, it was a fictitious payee, the bills consequently being payable to the bearer. On this ground the Bank of England was successful in its claim and was permitted to charge the bills to the account of the claimants, Messrs.Vagliano Brothers.
J. DISHONOUR OF A BILL
A bill may be dishonoured either by non-acceptance or by non-payment.
We have already examined the question of acceptance and have seen that if the holder of a bill presents it to the drawee for acceptance and is refused, then he/she may treat the bill there and then as dishonoured. In the previous study unit we noted the requirements for valid presentment, the requirements for valid acceptance and the circumstances where presentment may be dispensed with.
Even if the drawee does accept the bill and undertakes to pay it when it falls due, he/she may in fact fail to meet it when presented for payment. Here, too, the bill is dishonoured.
Requirements for Valid Presentment
The presentment must be made by the holder or by some person authorised to receive payment on his behalf.
Presentment must be at a reasonable hour, on a business day, and before the bill is overdue.
Presentment must be made to the person designated by the bill as payer, or to some person authorised to pay or refuse payment on his behalf.
Presentment must be made at the place specified, if any; otherwise at the address of the acceptor, if shown; otherwise at his business address, if known; and, if not, at his residence, if known. If none of the aforementioned addresses is known, the
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presentment can be made to the acceptor wherever he can be found, or at his last known place of business or residence.
Where the bill is drawn on, or accepted by, two or more persons who are not partners, and no place of payment is specified, presentment must be made to them all.
Where the acceptor is dead, and no place of payment is specified, presentment should be made to the acceptor's personal representative.
Where authorised by agreement or usage, a presentment through the post office is sufficient.
Excuses for Non-presentment for Payment
In certain circumstances, the bill can be treated as dishonoured by non-payment;
Where, after the exercise of reasonable diligence, presentment cannot be effected.
Where the drawee is a fictitious person.
As regards a drawer, where the drawee or acceptor is not bound as between him- /herself and the drawer to accept or pay the bill, and the drawer has no reason to believe that the bill would be paid if presented.
As regards an endorser, where the bill was accepted or made for the accommodation of that party, and he/she has no reason to expect that the bill would be paid if presented.
Notice of Dishonour
On a bill being dishonoured, either by non-acceptance or by non-payment, the holder must at once give notice of the dishonour to all prior parties if he/she is to have any rights against them.
The following points should be noted regarding the notice to be given:
Notice may be given either by the holder or by any endorser who, at the time of giving such notice, was him-/herself liable on the bill.
The notice may be given verbally or in writing. The return of a dishonoured bill to the drawer or an endorser is itself a sufficient notice of dishonour, but normally the holder should state how the bill has been dishonoured and for what reason.
The notice must be given within a reasonable time of the bill being dishonoured. Normally, notice must be actually communicated or posted on the day that the bill is dishonoured or the day after, but failure to meet this time may be excused if caused by circumstances beyond the holder's control: see The Elmville (1904).
In Eaglehill Ltd v. J Needham Builders (1972) a notice of dishonour posted prior to actual dishonour, which arrived after such time and was false in its information, that a bill had been dishonoured at the time of posting, was transformed in the Court of Appeal into a valid notice as its message was a true statement of the facts upon arrival. The notice is taken to speak from when it is opened in the ordinary course of business, or would be opened if the ordinary course of business was followed.
Where a notice of dishonour is duly addressed and posted, it will be effective even if never delivered to the addressee.
If the holder gives notice to any party, that party will be liable to anyone else between himself and the holder if the latter elects to sue the more immediate party. If the holder gives notice to party D but does not give notice to party C (who became a party to the bill before D), then D should himself give notice to C as soon as he is himself given
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notice, if he is to be able to sue C in his turn; in such event, the notice given by D to C will enable the holder to sue C direct.
Where Notice Is Unnecessary
Notice of dishonour may be dispensed with in certain circumstances, as follows:
(a)As regards any party, where:
After the exercise of reasonable diligence, notice cannot be given or does not reach the party.
Notice is waived by the party.
(b)As regards any endorser; where:
The drawee is a fictitious person, or a person not having the capacity to contract, and the endorser was aware of this fact at the time he/she endorsed the bill.
The endorser is the person to whom the bill was presented for payment.
The bill was accepted or drawn from the accommodation of the endorser.
(c)As regards the drawer, where:
The drawer and the drawee are the same person.
The drawee is a fictitious person, or a person not having the capacity to contract.
The drawee is the person to whom the bill is presented for payment.
The drawee or acceptor is, as between him-/herself and the drawer, under no obligation to accept or pay for the bill.
The drawer has countermanded payment.
K. CONSEQUENCES OF DISHONOUR
Noting and Protesting
"Noting" and "protesting" of a bill occur in the event of a bill of exchange being dishonoured.
Noting the bill is the making of a minute by a Notary Public who has to present the bill either at the acceptor's office, if it is made payable there, or, if made payable at a bank, to that bank, and obtains the answer given for non-payment of the bill. Then she affixes to the bill a slip of paper which has briefly typed (or written) on it the fact that she presented this bill to "...” and that it was dishonoured by non-payment with answer (specified). She then appends her signature and affixes a stamp, this being the stamp required on a notarial document.
Protest is more formal than noting; in fact, it is a more elaborate execution of noting procedure. A protest must contain the following:
An exact copy of the bill.
A statement of the parties for whom and against whom the bill is protested.
The date and place of the protest.
A statement that acceptance of payment was demanded by the notary, the terms, if any, of the answer, or a statement that no answer was given or that the drawee or acceptor could not be found.
A reservation of rights against parties liable
The subscription and seal of the notary.
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It is not normally necessary to have an inland bill noted or protested on dishonour. When a foreign bill is dishonoured, however, it must at once be noted and protested in order to preserve recourse against the drawer and endorsers (this brings the English legal position into line with numerous foreign systems which make protesting essential). The bill must be noted on the actual day of dishonour, but the protest may be completed subsequently. If a foreign bill is noted and protested on dishonour, the drawer and prior endorsers are discharged from liability on the bill.
In every case, of course, notice of the dishonour must be given to all prior parties.
Where a dishonoured bill is required to be noted and the services of a notary cannot be obtained at the place where the bill is dishonoured, Section 94 of the 1882 Act provides that "any householder or substantial resident of the place may, in the presence of two witnesses, give a certificate, signed by them, attesting the dishonour of the bill, and the certificate shall in all respects operate as if it were a formal protest of the bill". This is known as a "householder's protest", and a form of certificate to be given is provided in Schedule 1 to the Act.
Referee in Case of Need
The drawer of a bill and any endorser may put on the bill the name of a person to whom the holder of the bill may resort in the event of the bill's being dishonoured.
The holder has the option whether or not he/she will obtain payment from the referee in case of need, but if he/she does so the bill must be noted before action is taken.
When the drawer of a bill refuses to accept a bill of exchange, some other person may step in and offer to accept the bill in his/her place for the honour of the drawer or an endorser. This can be done only if the following conditions are satisfied:
The holder agrees to such acceptance.
The bill is not overdue.
The person accepting "for honour" is not already a party to the bill.
The bill is first noted and protested.
The acceptance must show clearly that it is an acceptance for honour and should indicate the person for whose honour it is accepted. If no person is named, it is presumed to be for the drawer's honour.
The acceptor for honour agrees that she will, on due presentment, pay the bill according to the tenor of her acceptance if it is not paid by the drawee, provided that it has been duly presented for payment, and protested for non-payment, and that she receives notice of these facts. She is liable to the holder of the bill and to all parties to the bill subsequent to the party for whose honour she has accepted.
If an acceptor for honour pays, her rights are as those of a payer for honour (see below).
When a bill is dishonoured by non-payment, any person may intervene and pay it supra protest for the honour of any party liable thereon. Before such payment is made, the bill must be noted and protested and the protest must be attended by a declaration on the part of the person making payment that he is paying the bill for honour and for whose honour he is paying.
Where the bill is paid for honour in this way, all parties subsequent to the party for whose honour the bill is paid are discharged, but the person making payment for honour is subrogated to the holder (i.e. stands in his place, with the same rights and duties) as regards the party for whose honour he has paid and all prior parties liable to that party.
