Topic 7

🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam.

Topic 7 covers the law of negotiable instruments — bills of exchange, promissory notes, and cheques — which are essential instruments of commerce that facilitate credit and payment transactions. Nigerian law on negotiable instruments derives from the Bills of Exchange Act 1877 (as amended) and the Cheques Act 1965, which apply the English common law principles to Nigeria.

Key Definitions:

• Bill of Exchange: 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 bearer
• Promissory Note: An unconditional promise in writing made 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 to bearer
• Cheque: A bill of exchange drawn on a banker payable on demand

⚡ Exam tip: The key distinction is: a bill of exchange is an order to pay (three parties: drawer, drawee, payee); a promissory note is a promise to pay (two parties: maker, payee); a cheque is a bill of exchange payable at a bank (three parties: drawer, banker, payee).

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🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

Parties to a Bill of Exchange:

1. Drawer: The person who draws (makes) the bill — orders the drawee to pay
2. Drawee (Acceptor): The person directed to pay — accepts the bill by signing it
3. Payee: The person to whom payment is to be made
4. Holder: The person in possession of the bill (payee or endorsee who holds the bill)

Types of Bills:

• Sight bill / Demand bill: Payable on demand or at sight
• Usance bill / Time bill: Payable at a future determinable time (e.g., 90 days after sight)
• Trade bill: Drawn in connection with a commercial transaction
• Accommodation bill: Drawn by one person (accommodation drawer) on another (accommodation acceptor) for the purpose of providing credit to the drawer — the acceptor is not a debtor but a surety

Acceptance:

Acceptance is the drawee’s signed engagement to honour the bill. The drawee writes “accepted” and signs across the face of the bill. Until acceptance, the drawee has no obligation to pay.

Types of Acceptance:

• General acceptance: Accepts the bill as drawn, without qualification
• Qualified acceptance: Accepts with a condition or qualification:
  • Conditional: Payment is subject to a condition being fulfilled
  • Partial: Accepts to pay only part of the amount
  • Local: Payment only at a specified place
  • Time: Accepts to pay at a different time than stated

Endorsement (Indorsement):

Endorsement is the payee’s (or holder’s) signature on the back of the bill, making the bill payable to the endorsee. Types:

1. Blank endorsement: Endorser’s signature only — makes the bill payable to bearer; any holder can enforce it
2. Special endorsement: “Pay [Name] or order” — specifies who can enforce; restricts negotiability
3. Restrictive endorsement: “Pay [Name] only” or “Pay [Name] for collection” — restricts further transfer

Rights of a Holder in Due Course:

A holder in due course is a person who:

1. Takes a complete, regular, properly stamped bill
2. Becomes holder before it is overdue
3. Takes it in good faith and for value
4. Had no notice of any defect in the title at the time they took it

Rights of a Holder in Due Course:

• Holds the bill free from any defect in the title of previous parties
• Can sue all prior parties (drawer, acceptor, endorsers) in their own name
• Takes the bill free from equities (defences) that would have been available between the original parties

Discharge of a Bill:

A bill is discharged when all liability on it ends. Methods:

1. Payment: The acceptor (or drawee) pays the holder in due course the amount due
2. Material alteration: Any material alteration of the bill discharges all parties who have not consented to the alteration (unless ratified)
3. Cancellation: Intentional cancellation by the holder discharges parties
4. Acceptor becoming holder: If the acceptor becomes the holder at or after maturity, the bill is discharged
5. Renunciation: The holder’s written renunciation of rights against the acceptor discharges the bill

Crossing of Cheques:

A cheque is “crossed” when two parallel lines are drawn across it. Crossing restricts payment:

• General crossing: Two parallel lines with no wording between them — the cheque can only be paid to a banker
• Special crossing: The name of a specific banker is written between the lines — the cheque must be paid to that banker

Effect of Crossing:

• A crossed cheque cannot be cashed over the counter
• The collecting banker must collect for the account of the payee
• If a crossed cheque is paid to an unintended recipient, the drawer can claim from the drawee bank

Who Can Enforce a Bill:

Person	Right to Sue
Drawer	Can sue acceptor for non-acceptance or non-payment
Payee	Can sue drawer and acceptor
Endorsee	Can sue the endorser who indorsed to them, and all prior parties
Holder in due course	Can sue all parties on the bill
General indorser (blank)	Any holder can sue the indorser

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🔴 Extended — Deep Dive (exam-level mastery)

For students preparing for top-rank selection.

The Distinction between Assignment and Negotiation:

An assignment transfers existing rights; negotiation transfers a negotiable instrument so that the transferee gets better rights than the transferor:

• An assignee takes subject to equities (defences) that the debtor had against the assignor
• A holder in due course takes free from prior equities (with exceptions)

Forgery:

If a signature on a bill is forged, that signature is wholly inoperative. No rights can be derived through a forged signature. The bank that pays a cheque bearing a forged endorsement may be liable to the true owner — the bank has a warranty from the person presenting the cheque that the endorsement is genuine.

Material Alteration:

A material alteration (of the sum payable, date, parties, or time of payment) makes the bill void as against the altering party and those who subsequently become parties with knowledge of the alteration. The holder can still enforce the bill against the acceptor if the alteration was not made by the acceptor — the acceptor remains liable on the altered terms.

Presumption:

• All bills, notes, and cheques are presumed drawn, accepted, endorsed, etc. on the date stated
• The consideration is presumed to have been given
• The holder is presumed to be a holder in due course

Banker’s Liability for Payment:

A banker paying a cheque must check the drawer’s signature (as a warranty of the drawer’s authority) but is not bound to check the endorsements (unless the banker is on notice of irregularities). If the banker pays a cheque with a forged endorsement, the banker is liable to the true owner.

Cheque Truncation:

In Nigeria, the Cheques Act provides for cheque truncation — the electronic image of a cheque is transmitted to the paying bank rather than the physical cheque. This speeds up clearing but raises issues of forgery and alteration of electronic images.

Bills in a Set:

Bills of exchange are commonly drawn in a set of two or three to avoid the risk of loss in transit. The bill that is first presented and accepted is the valid one; if different parts are negotiated to different holders in due course, the holder of the first negotiating part has priority.

Protest:

A protest is a formal declaration by a notary public that a bill has been dishonoured. It is required for foreign bills (bills drawn or payable outside Nigeria) to preserve the drawer’s liability. Domestic bills do not require protest unless the bill expressly provides for it.

The Bank’s Duty of Secrecy:

The banker owes a duty of secrecy to its customers regarding their account information. Exceptions:

• Disclosure required by law (court order, regulatory authority)
• Disclosure in the bank’s own interest (to sue for unpaid cheques)
• Disclosure with the customer’s consent

The Relationship between Banker and Customer:

The relationship between a banker and customer is that of debtor and creditor (for current accounts) — the bank owes the customer a debt (not a fiduciary duty). For savings accounts, the relationship is also debtor-creditor.

The banker’s duties:

• To receive payments on behalf of the customer
• To honour customer’s cheques up to the credit balance (overdraft facilities are a separate contract)
• To keep the customer’s affairs secret

Forged Cheques:

If a cheque is altered (e.g., the amount is raised) after the drawer’s signature, the drawer is not liable on the altered cheque unless they were negligent in signing (Luker v. Dennis [1877]). However, the bank that pays the altered amount cannot debit the customer’s account for the altered amount — the bank can only debit for the original amount (Bank of England v. Vagliano Brothers [1891]).

NEET-Style Application:

• A bill drawn in Nigeria payable in London is a foreign bill — requires protest if dishonoured
• A blank endorsement turns a special bill into a bearer bill — anyone in possession can enforce
• A holder in due course takes free from the defence that the drawer was drunk when they drew the bill
• Crossing a cheque restricts its negotiability — it can only go through a bank account